Academic journal article Journal of Legal, Ethical and Regulatory Issues

Deposit Insurance, Consolidation and the Banker's Ombudsman in the Modern Law of Banking in Nigeria: A Critical Perspective

Academic journal article Journal of Legal, Ethical and Regulatory Issues

Deposit Insurance, Consolidation and the Banker's Ombudsman in the Modern Law of Banking in Nigeria: A Critical Perspective

Article excerpt

INTRODUCTION

The internationalization of the concept of Deposit Insurance in banks came in the wake of the formation of the International Association of Deposit Insurance (IADI) in Basle, Switzerland in May 2002. Nigeria was one of the foundation members. Since then, the concept has grown worldwide with the participation of nearly 69 Deposit Insurers out of the nearly 210 countries and territories in the world1 Nigeria has recorded quite some appreciable successes since the constitution of its own Deposit Insurance Corporation known as and called the Nigeria Deposit Insurance Corporation with the acronym of NDIC2. These successes are mainly in the areas of the eradication of the collection of deposits by non-bank institutions and unlicensed ventures known in the local parlance as "Wonder-Banks," improved Disciplinary and Penal provisions in the emerging Regulations, consolidation and improved capitalization of banks, a remarkable reduction in the number of participating corporate bodies in the banking business, and of course the payment of some dividends to depositors of some of the failed banks3. Notwithstanding these apparent successes, it is clear that challenges still exist in the continued efforts at protecting depositors' funds in banks worldwide. This work is a Nigeria perspective of new safety net device and its continued challenges. The work briefly examines the antecedents to this new era and the consolidation of banks that took place with the emergence of the new legal regime. Its actual and potential problems are analyzed with recommendations for possible improvement.

Brief Antecedents to the Banking Innovation Brought About By the Emergent Law on Deposit Insurance in Nigerian Banks

Prior to 1990, banking business in Nigeria did not involve any form of insurance of funds placed in banks. This was because the two main stream statutes4 that regulated the industry at the time did not provide for any such insurance. The Central Bank of Nigeria Act5 apart from governing the operations of the Central Bank6 and empowering the institution to generally supervise and oversee the activities of the commercial banks, did not require that deposits in banks be insured in any form and to any degree or extent whatsoever. Of course, the Banking Act of 19697 was a relic of the Civil War that took place in the country and was principally aimed at converting the nomenclature of the Nigerian currency or legal tender from "Pounds" to a new name coined from the Country's name i.e. "Naira". The Nigerian Currency or legal tender notes still bear that name till date.

Apart from the existing laws at the time not requiring deposits placed in banks to be insured, they did not also have the provisions and mandate to impose limits in the number of corporate bodies8 that went into the banking business. Such limitation being achievable by statutory requirements pegging minimum cash deposits to secure payments of some dividends to depositors in the event of liquidation, and the outright rejection of applications for participation in the industry on grounds of inadequate safety net requirements to prevent failures or bankruptcy. The point must also be made that the Bills of Exchange Act9 did not and could not have provided for any such structural regulation of participating institutions in the money market10 as the law dealt solely with operational instruments in the market, i.e. bills of exchange and negotiable instruments as the title depicts11.

THE ABUSES

Now, banking business is statutorily defined as follows in Nigeria12;

"Banking business" means the business of receiving deposits on current account, savings account or other similar account, paying or collecting checks drawn by or paid in by customers, provision of finance or such other business as the Government may, by order published in the Gazette designate as banking business.

The net result of all of the above legal provisions before the enactment of the law on deposit insurance is that banking or banking business became nearly an all comer's affair. …

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