The aims of this paper is to appraise the Nigerian Deposit Insurance Corporation (NDIC) liquidation activities in failed banks, claims settlement; amount and number of depositors so far paid; reason behind the abandonment of deposits by some depositors; level of liquidation proceeds realized and how it has been managed fairness of bad debt litigation disposition and the adequacy of the insurance deposit.
To achieve the above objective I relied on questionnaire, personal interviews and visit to the site; for primary data; from past literature, journals and dailies for the secondary data. The statistical tools used in the analysis are the simple percentages, tables, pie charts and bar charts.
The study revealed the following”
TABLE OF CONTENTS
1.1 Background of the study
References
2.1 Overview of bankruptcy and liquidation of firms
in selected countries of the major continents
3.1 Sources of data
4.1 Overview
5.1 Discussion of findings
Bibliography
Appendices
CHAPTER ONE
1.0 & 1.1 INTRODUCTION AND BACKGROUND OF THE STUDY
The banking system as noted by Schempeter (1934) is regarded as a key agent in the process of development, because all other industries rely on it for working capital. But, the Nigerian banking system in caught in systematic turmoil, there has been a rapid increase in the number of bank failures and the magnitude of the problem has reached an unprecedented level; the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities, the bankers, the general public and the international financial institutions such as the World Bank and the International Monetary Fund (IMF).
Distress in the Nigerian banking system dates back to the 1950’s when about 51 banks were forced out of the system following the introduction of the very first banking law in Nigeria. The Banking Ordinance of 1952, the above ordained and the Central Bank of Nigeria Act of 1958 brought some element of sanity into the system. The second phase of distress was experienced in the system after the era of Structural Adjustment Programme (SAP), which deregulated the economy; as a result led to the influx of the system with both efficient and inefficient banks, owing to the fact that banks licensing was liberalized. Thus increasing the number of banks in the country from 42 in December 1991 (Oleyemi 1995:50) when SAP was put to an end following the enactment of Bank and Other Financial Institutions (BOFI) Decree N0. 25 of 1991. The above represents an increase by about 186 percent in less than a decade.
In order to cushion the effect of further bank failure, the Nigeria Deposit Insurance Corporation (NDIC) was established under the NDIC Decree N0. 22 1988.
The major reason for the establishment of the Nigeria Deposit Insurance Scheme is not only to prevent or minimize the incidence of bank failure but also to handle bank failures and liquidate failed bank’s assets in an orderly, inexpensive and non-disruptive manner as provided by the NDIC Decree N0. 22 1988 and section 36 of Bank and Other Financial Institutions (BOFI) Decree N0. 25 1991, in addition to acting as acting as a second line regulatory body to the CBN.
Despite the establishment of the above mentioned strategic institutions, the rate of bank failure in Nigeria has risen sharply in recent years, and if not checked could jeopardize any political, social and above all economic policies.
Following the above, it became imperative that utmost diligence and restraint must be exercised in evolving a resolution option to put an end to distress in the banking sector. At last, liquidation option was adopted by the authorities in the bid to finding a lasting solution to distress. The liquidation option was regarded as the single dose treatment to distress and was aimed at bringing to an end the distress in the system (Adeniyi, 1998:7).
Having exhausted all possible means of resolving the distressed conditions of some banks between 1994 and 1995, the licenses of three merchant banks and two commercial were revoked. Again in January 1998-2002, another batch of 30 failed banks (Is merchant and 15 commercial banks) had their licenses revoked.
NDIC has so far liquidated 33 banks across the country due to their insolvency and general unhealthy financial status.
Two other banks, Rins Merchant Bank and Savannah Bank of Nigeria Plc, presently have their liquidation suspended consequent upon contest injunctions restraining the corporation from proceeding with the banks waiting up-exercise.
It is worth noting that prior to the liquidation option, other measures have been put in place to check the omen in the name of distress, such measures include holding action, which involves the assumption of management and control of the ailing banks by the CBN, this measure was adopted in Alpha Merchant Bank Limited (AMB) and National Bank of Nigeria (NBN) Plc; other measures that were put in place are moral suasion and the extension of financial facilities to banks that have liquidity problems among others.
The liquidation activities of NDIC have witnessed both praises and criticism over that lost ten years. While some people have appreciated their effort in trying to see that liquidation of the failed banks are carried to do logical conclusion, effectively and efficiently, others have out rightly criticized all their actions and policies. It thus becomes imperative at this point in our economic history to take an objective appraisal of the NDIC liquidation activities so as to have an in depth knowledge of the process and also see some of their strengths and weaknesses.
The major activities in any bank liquidation include settlement of insured and uninsured depositors from premium fund and liquidation proceeds respectively, physical asset valuation and disposal and loan asset realization. These activities, world over have been agreed to be a difficult task as each of the activities gives rise to some problems that tend to undermine the success of bank liquidation. In Nigeria, for instance after over many years that NDIC has executed this task, certain controversial issues have emanated which need redressing for future effective performance.
Paramount among them is the delay being witnessed in the operation by NDIC. It is not strange to hear that some depositors of the firsts banks have been in liquidation are yet to be fully settled by the NDIC. This issue was clearly observed by one depositor, Mr. Ayanyemi who wondered how long it would take NDIC to pay depositors of the recent 30 banks in liquidation; if depositors of the previous banks have not yet been settled up till now (Bello, 1998:6). Another area of concern is the actual number of depositors so far paid and the class they belong to. It has been noted that only small proportion of the total depositors have so far been paid; and worst still majority of thoese unpaid belong to the small depositors class. This is serious because they represent a greater percentage of bank depositors.
Another serious issue is about the level of proceeds realized so far from liquidation how it has been used by NDIC; naturally, liquidation proceeds which come from sale of failed banks fixed assets and recovery of debts are supposed to be used in paying dividend to uninsured depositors. However, there have been bitter complaints by the uninsured depositors about the smallness of the dividend paid despite the huge amount realized from liquidation process by NDIC; others have also complained about improper disposal of failed banks fixed assets at a give away price.
Again, another liquidation activity that has raised serious concern is the case of litigation that arises in debt recovery.
There is this strong feeling among some quarters in Nigeria that NDIC has not been disposing its cases fairly. This has led to the prosecution of some innocent people and leaving others who probably are friends of the NDIC officials.
Finally, the inadequately and less maximum coverage by NDIC constitutes another serious as the NDIC Decree provides for a maximum payment of N50,000 per depositor in the event of bank liquidation. Just like the principle of deposit insurance allows the deposit insurance institution to close down a failed bank and dispose of the banks assets if provides also for the insured deposit to be high enough. In other words the payment of both the insured deposits from insured reserve fund of deposit insurance. Institution and payment of proceeds from the sale of failed banks assets will guarantee that a depositor is not hurt when a bank fails. In the same vein, a bank depositor need not be bothered about banks capital inadequacy because existence of depository financial institutions to operate with lower capital/asset ratio and also hold somewhat more risky assets. But in the recent past, there has been a lot of criticisms that the maximum coverage was low on the ground that the government engenderering inflation, running at over 50 percent a year has led to further devaluation of the naira. While some have argued that the amount does not qualify as insurance coverage.
The above problem will form the backdrop of this study.
The overall objective of the study is to appraise the NDIC liquidation activities in failed banks. Specifically, the study seeks;
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