Prime Business Africa EditorialWith their varied charges and interesting games that Nigerian banks play, there is no gainsaying the fact that regulation remains central to the general economic well-being. But when weighed in a balance, how much good or damage do the Asset Management Corporation of Nigeria (AMCON) and the Nigeria Deposit Insurance Corporation (NDIC) do to sustainability of financial institutions in Nigeria?
From Europe to America, Asia and back home in Africa, banks and other financial institutions are strictly regulated to protect the sanctity of the system and uphold confidence of depositors and other stakeholders, whose trust is critical to keeping the economy running. The collapse of the financial system will trigger economic crisis, a circumstance which every government seek to avert. That is exactly why every country strictly regulates its banking system, perceived as the mother of the financial system, especially in Africa, where other segments of the financial system are still a fragment of the banking sector.
Part of that regulation is insurance, a safeguard often required for all banks to take against deposits. Insurance is often reserved for the exclusive underwriting of a sovereign institution, hoped to be capable of indemnifying depositors in the extreme event of a bank’s failure. In the United States, it’s the Federal Deposit Insurance Corporation (FDIC), the Britain calls it Financial Services Compensation Scheme (FSCS); the Europeans tag it Deposit Guarantee Schemes (DGS) while for the Chinese which only launched the equivalent of FDIC in May 2015, it is the Deposit Insurance Fund Manager, under the control and administration of the Financial Stability Bureau of the People’s Bank of China (PBOC).
So, while coverage of insurance deposits may vary from country to country, many economies have found the salient need to have insurance deposits.
In Nigeria, NDIC covers up to N200,000 and N500,000 (between 300 and 500 USD) of depositors’ funds in microfinance banks and commercial banks/primary mortgage institutions respectively. In Europe, the DGS protect depositors’ savings by guaranteeing deposits of up to €100,000 (some N59 million equivalent); The FDIC in the United States covers up to $250,000 (N125 million equivalent); while the coverage in China is RMB500,000 (N38 million equivalent).
A common denominator is that banks across the world buy insurance on deposits, a fundamental element of banking that enhance the trust and confidence of depositors, especially as the underwriter is often a sovereign entity, with the capacity to indemnify depositors in the event of a bank failure.
How much is the insurance premium and who pays?
Generally, depositors are immune from the premium, the cost of insurance; so, it is seen as part of the cost of funds for banks, which pays the premium to the underwriter. The cost also varies across countries, but it is often a relatively very small faction of the operating expenses of banks. For instance, in China, it is a range of 0.01 per cent and 0.02 per cent of the insured deposits. Even so, the precise premium paid by each institution is based on a flat rate and a variable risk-based differential rate determined by factors, including the business management and risk conditions of the insured financial institution.
While the NDIC has also adopted the differentiated premium assessment system, banks still pay between 0.35 per cent and 0.5 per cent of insured deposits as premium, hence explaining the huge cost to Nigerian banks, as NDIC premium represents between 5% and 7% of an average Nigerian bank’s operating expenses.
Notably, the NDIC premium is between 30% and 40% of the interest that Nigerian banks pay to savings and current account depositors, a fact which suggest that the depositors are indirectly losing value to the underwriter.
Putting the cost in perspective, NDIC premium undermines not only the profitability of banks and value accretion to shareholders, but also undercuts potential returns to depositors, who only get interest on savings account when there is less than three withdrawals from the account within the month.
Notwithstanding the significance of insurance premium as a safety net for depositors, in other climes, where the coverage is higher, premium charges are not as value-eroding as it is in Nigeria, especially when the size of the coverage is put in perspective.
The main erosion comes from the unending AMCON levy
The Asset Management Corporation of Nigeria (AMCON), which was introduced in 2011 to recover the bad loans in the banking system charges 0.5% of every banks’ total assets, including off-balance sheet assets, even so it started at 0.35% levy.
With a total banking sector asset of N46 trillion, AMCON earned some N230 billion in levies in 2020, a cost which many shareholders believe is an erosion to their value. It is more worrisome for shareholders of banks which neither participated in the sale of eligible non-performing loans to AMCON nor buy any of the “bad banks” at discounted prices, especially new banks which are being subjected to the cost of the wrath that happened in the sector, years before their establishment. It’s like a “son paying for the father’s sins”.
Notably, AMCON levy is more than 75% of the total dividends paid by banks to shareholders for 2020 financial year, reinforcing the erosion of shareholder value, on the back of this unending cost.
We align with the view that this AMCON levy is no longer necessary, especially as AMCON acquired the bad loans at a significant discount to the book value.
Beyond banks’ payment to AMCON, the central bank of Nigeria (CBN) also contributes N50 billion annually to the AMCON resolution trust fund, hence underscoring the perception of shareholders that a continued levy on banks may inadvertently become a moral hazard for AMCON in the recovery of the loans, especially as the Corporation is yet to resolve some of the bad loans it acquired over a decade ago.
Our investigation on this matter revealed that shareholder associations believe that AMCON levy should be discontinued on grounds that it has outlived its usefulness and currently an undue drain on banks’ operating expenses, especially as it is the second largest operating cost of banks after employee cost, accounting for between 10% and 13% of every Nigerian bank’s total operating cost.
Prime Business Africa data shows that the top five banks in the country (often called FUGAZ) – FirstBank, UBA, GTBank, Access and Zenith – paid several billions of naira to AMCON in 2020 alone, representing a huge percentage of their operating cost. Consolidating NDIC levy, puts these regulatory costs at a much more uncomfortable level relative to their total operating expenses, a fact which reinforces the call to stop the AMCON levy or suspend that of the NDIC premium. Both costs are considered to serve the same purpose.
More so, AMCON has continuously shielded NDIC from its responsibility of indemnifying depositors of “failed banks,” even so NDIC does not make any payment to AMCON.
Prime Business Africa believes that the continuous payment of AMCON levy is unfair for all banks, especially when done simultaneously with the NDIC premium. More worrisome is that, healthy or unhealthy, and whether they benefited from AMCON activities or not, all banks are forced to pay the same rate to AMCON for a service that a private entity would have possibly done at a profit, if given the statutory backing that AMCON has.
More so, the relatively riskier financial institutions that exposed the system to the risk and this burdensome cost are either no more or they are contributing less to AMCON, given their size, while the relatively sound banks that ensured proper governance (even at the expense of growth and profitability potentials) now pay higher levies or premiums.
.We call on the National Assembly to thoroughly investigate the processes that led to this aberration and strengthen the hand of the President Muhammadu Buhari-led Executive to beat a retreat.
This abnormal regime of ‘tax collection’ from banks must end for the economy, albeit the real sector, to experience the much-needed intervention from the financial services sector for real job creation.
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