The Nigerian Deposit Insurance Corporation (NDIC) received a payment of N166.4 billion from nine publicly traded commercial banks in 2023 as deposit insurance premiums, a 29.3% increase over the N128.7 billion recorded in the year prior.
This comes after total bank deposits increased by 69.9% to N84.29 trillion in the review year from N49.59 trillion in 2022.
As a result, the nine banks under consideration paid a deposit insurance premium that amounts to approximately 0.197% of total deposits, as opposed to 0.26% in 2022.
Data taken from the banks’ audited financial accounts that are posted on the Nigerian Exchange (NGX) support this.
Deposit insurance is necessary because of the significance of the financial services industry, which handles public monies. In the event of a bank failure or liquidation, these funds must be protected by buffers.
One of the numerous safeguards put in place to save public money and guarantee the stability of the banking industry is deposit insurance. The AMCON Sinking Fund and the bank resolution fund are a couple more.
Deposit Insurance Premium: Deposit-taking banks are required by law to pay this premium, which assures that, if an insured financial institution fails, NDIC, as the insurer, will pay deposits up to the maximum amount (currently N5 million) in compliance with its statute.
In terms of actual amounts, banks with the biggest deposits usually pay the highest premium to the NDIC. On the other hand, some banks use a pricing system to pay more concerning their deposits.
How much insurance premiums are charged at banks
The Differential Premium Assessment System (DPAS), which distinguishes premiums due by financial institutions based on their risk profiles, determines how banks are charged.
The NDIC states that the pricing of risk-adjusted deposit insurance is based on the idea that the coverage level and deposit insurance premium should not put an excessive burden on the banking system or need a considerable amount of public money.
Deposit insurance pricing in the DPAS pricing template is done in two steps: first, a Base Premium Rate for banks in the best risk category is determined; second, add-ons are determined based on each bank’s risk profile, taking into account both quantitative and qualitative considerations.
The add-ons examine six parameters with different weights and are a function of the Composite Risk Rating Computation. In other words, the following are weighted: 20% for capital adequacy, 15% for asset quality, 20% for earnings and profitability, 15% for liquidity and fund management, 5% for sensitivity to market risk, and 25% for management and corporate governance.
The News Chronicles’ research team assessed the commercial banks for 2023 according to their ratio of insurance premiums to customer deposits. Given that it indicates the degree of risk associated with each bank’s deposit collection, the ratio is a crucial statistic. The calculation involves dividing the total client deposits as of the period by the deposit insurance premium.
A bank is thought to bear more risk the higher the ratio. It is noteworthy that, in comparison to the prior year, the deposit risk ratio decreased for every bank in 2023.
- FBN Holdings – 0.23%
- FCMB – 0.26%
- Wema Bank – 0.27%
- Fidelity Bank – 0.28%
- Stanbic IBTC – 0.29%
NDIC raises the upper limit of coverage
Recall that the NDIC announced in May 2024 that the maximum deposit insurance for different types of financial organizations that accept deposits would be reviewed and increased. 98.98% of all depositors and 25.37% of all deposits are now covered by the Corporation’s expanded maximum deposit insurance coverage for commercial banks, which was previously set at N500,000.
This implies that the NDIC will provide quick funding to depositors who have less than or equal to N5 million in their accounts at the time of the liquidation in the event of a bank failure.
For instance, the NDIC declared that it will pay 99.9% of the bank customers with balances under N5 million in the case of Heritage Bank, whose license was recently revoked by the CBN, even though 4,000 depositors, or 0.1% of the total, had balances over N5 million.
