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The Future of Deposit Insurance in Nigeria: Challenges and Opportunities in a Digital Age

 

Nigerian 500 Naira

Introduction

In the first quarter of 2023, the NDIC paid ₦377.94 million to 25 insured depositors and ₦205.62 million to uninsured depositors of 49 liquidated Deposit Money Banks (DMBs). Over 443,984 insured depositors received ₦8.268 billion, while uninsured depositors of shuttered DMBs received ₦101.656 billion. Beyond that, the NDIC broadened its reach by distributing funds to microfinance banks (MFBs) and central mortgage banks (PMBs) in need, demonstrating its commitment to financial stability and promoting trust in Nigeria's banking industry.  

The financial environment is rapidly evolving in today's digital era, which is distinguished by technological developments and shifting customer tastes. The advent of digital banking, FinTech advances, and broad acceptance of digital payment methods are changing how society access and provides financial services. This digital development creates a fundamental obligation for the Nigeria Deposit Insurance Corporation (NDIC) to successfully adapt and modernize to safeguard deposits in this new era. The NDIC must embrace digital technologies to improve its supervision, risk management, and deposit protection capacities, tackling new cyber dangers while maintaining depositor confidence in changing financial dynamics. This modification is required to maintain the integrity and efficacy of deposit insurance amid the digital banking and finance revolution.


The Evolving Financial Environment

The Rise of FinTech has significantly influenced traditional banking methods, offering new and user-centric financial services. FinTech businesses provide solutions such as peer-to-peer lending, digital payments, robo-advisors, and mobile banking apps, frequently more convenient and cost-effective than traditional options. In Nigeria, mobile money growth has been driven by both (mobile MNO-led and non-MNO-led operators operating under various licenses. The introduction of the Payments Service Bank (PSB) license in 2018, allowed MNOs such as Glo, 9Mobile, Airtel (SmartCash PSB), and MTN (MoMo PSB) by the Central Bank of Nigeria (CBN) to provide financial services through specialized subsidiaries. By mid-2023, MoMo PSB had 20 million registered subscribers and over 3.1 million monthly active users. Non-MNO-led companies, such as OPay and PalmPay, which operate under Mobile Money Operator (MMO) licenses, have also made substantial progress. By October 2023, OPay had over 30 million users, 500,000 agents, and 300,000 merchants, making it Nigeria's most downloaded app. Source: GSMA Intelligence.

This development has led to increased financial inclusion; however, worries about potential fraudulent behaviour spurred regulatory intervention, with the CBN demanding the revalidation of customer identification numbers by January 2024 to improve security and compliance in the mobile money ecosystem. These advancements have driven financial inclusion, although regulatory actions were taken to address concerns around potential fraudulent activities, highlighting the transformative impact of FinTech on the accessibility and delivery of financial services. Additionally, the disruptive potential of FinTech, particularly introducing cryptocurrencies such as Bitcoin and Ethereum, poses difficulties to traditional deposit insurance arrangements. Cryptocurrencies exist outside conventional financial institutions, with limited regulatory control and stability, complicating risk assessment and management for deposit insurers in the face of emerging digital trends.


Challenges for the NDIC in a Digital Age

Insuring Deposits in Non-Traditional Institutions: Deposits maintained on FinTech platforms and digital wallets pose substantial issues owing to their non-traditional character. Unlike traditional banks, FinTech platforms and digital wallets could be exempt from being subject to the same regulatory frameworks or deposit insurance systems. This raises concerns regarding the coverage and safety of resources kept in alternative financial services. Deposit insurance is frequently solely available to licensed banks, leaving non-bank savings potentially unsafe. The rapid development and innovation of the FinTech sector present shortcomings for regulators in identifying and managing the risks connected with these new financial models.

Cyber security Threats: Cyber security threats represent a substantial danger to Nigeria's digital financial institutions, affecting FinTech platforms and traditional banks. As online and mobile banking become more popular, depositors become more exposed to data breaches, hacking, and cyber-attacks. Such incidents could lead to identity theft or unlawful transactions, eroding depositor trust and potentially affecting deposit insurance companies such as the Nigeria Deposit Insurance Corporation (NDIC). Financial losses from illegal banking activities totalled N193.5 billion ($544 million) in 2021 and increased to N273 billion ($762 million) in 2022, exceeding N300 billion ($833 million) by the end of 2023. This disturbing trend highlights the critical necessity for robust cyber security measures. The NDIC must collaborate closely with financial institutions and regulators to create robust safeguards and contingency plans that strengthen cyber security resilience and protect depositor money in the face of emerging cyber threats. Source: Business Day

Evolving Risk Landscape: The development of cryptocurrencies presents issues for risk assessment and deposit insurance calculations since these assets operate outside of traditional banking institutions, with considerable volatility and regulatory uncertainty. The Nigeria Deposit Insurance Corporation (NDIC) may require new procedures to account for cryptocurrency risks, such as price swings and liquidity problems, to guarantee correct coverage in a changing financial environment.

Regulatory loopholes: The current legislation regulating FinTech and digital financial services in Nigeria can include loopholes that prevent complete coverage by deposit insurance schemes like the NDIC. Differences in licensing and regulation between FinTech and traditional banks result in consumer protection and risk management discrepancies. The NDIC needs broader legislative assistance to solve these deficiencies and improve regulatory frameworks for FinTech, assuring proper security for depositors.


Opportunities for the NDIC in a Digital Age 

Opportunities for the Nigeria Deposit Insurance Corporation (NDIC) in a digital age abound in several strategic initiatives.

Leveraging Technology for Efficiency: The Nigeria Deposit Insurance Corporation (NDIC) can improve its operations in the digital age by adopting new technologies. Implementing digital claims processing will streamline processes and minimize processing times, resulting in increased customer satisfaction. Data analytics provides effective risk management by examining financial data and market trends to make proactive decisions. Using digital communication channels will increase transparency and create confidence with depositors by providing real-time information and instructional resources. Adopting technology in these areas would modernize the NDIC's operations, increase efficiency, and promote depositor involvement, allowing it to carry out its purpose more effectively in the digital age.

Collaboration with FinTech: Enhancing the financial system can be achieved through collaboration between FinTech businesses and the Nigeria Deposit Insurance Corporation (NDIC). Collaborative projects can inform customers about digital financial products, fostering financial literacy and enabling informed decision-making. The CBN's recent strategy to four Fintech companies—OPay, Palmpay, Kuda Bank, and Moniepoint to halt onboarding new users owing to claims of illegal foreign currency transactions illustrates regulatory efforts to combat financial crime in the digital financial industry. This action emphasizes the significance of strong regulatory monitoring in ensuring transparency, security, and compliance with anti-money laundering (AML) and know-your-customer (KYC) rules. Collaboration between regulatory agencies and Fintech businesses is critical for strengthening cyber security measures, improving consumer protection, and promoting best practices, resulting in a more secure and trustworthy financial sector in Nigeria.

Adapting Insurance Models: The Nigeria Deposit Insurance Corporation (NDIC) can expand its deposit insurance models to include new financial instruments by investigating structured coverage based on risk profiles and establishing limitations for specific digital assets. This entails classifying various financial goods and services according to risk levels and determining the necessary insurance coverage for each group. For example, the NDIC may consider providing more extensive coverage limitations for traditional bank deposits than deposits in new digital assets such as cryptocurrencies or digital wallets. By adjusting insurance coverage to match the risk associated with diverse financial instruments, the NDIC ought to effectively safeguard depositors while adapting to the changing world of digital finance.

Advocacy for Regulatory Clarity: The NDIC can advocate for comprehensive and unambiguous regulations governing FinTech and digital financial services to foster innovation while protecting depositors. This involves collaborating with policymakers, regulators, industry stakeholders, and FinTech businesses to create and execute regulatory frameworks that meet new issues and possibilities in the digital financial sector. By advocating for regulatory clarity, the NDIC can contribute to developing recommendations for risk management, consumer protection, data privacy, and cyber security in the FinTech sector. Effective laws encourage innovation and increase depositor trust by assuring openness and responsibility in delivering digital financial services.


Global Exemplary Standards

Nigeria's NDIC could derive significant lessons from deposit insurance institutions in other nations, such as the FDIC in the United States, which are adjusting to the digital era amidst changing financial landscapes. For instance, in 2023, the US banking industry recorded a full-year net income of $256.9 billion, down $6 billion (2.3 per cent) from the previous year but still exceeding the pre-pandemic average of $193.5 billion. This decrease was caused by higher noninterest expenses (up $52.2 billion or 9.7 per cent), increased provision expenses (up $34.7 billion or 67.2 per cent), and higher realized losses on securities (up $7.6 billion or 194.3 per cent), which offset growth in net operating revenue (up $79.4 billion or 8.6 per cent). Despite these problems, the industry's net interest margin has climbed to 3.30 per cent, and the return-on-assets (ROA) ratio decreased slightly to 1.10 per cent. Source: FDIC. Amidst this financial landscape, cyber security concerns remain a major worry for both digital financial systems and traditional institutions. The sector encountered rising noninterest and provision expenditures, fueled primarily by central banks' particular, nonrecurring noninterest expenses. This emphasizes the vital necessity for comprehensive risk management and cyber security frameworks. With a surge in data breaches and cyber-attacks, depositors are becoming more vulnerable to identity theft and unlawful transactions, eroding depositor trust and providing issues for deposit insurance agencies such as the FDIC. To overcome these problems, the FDIC collaborates with FinTech businesses to gain insight into their business models and identify possible hazards. Pilot projects are run to evaluate novel deposit insurance models for digital assets, and consumers are given instructional materials about deposit insurance coverage in the digital age. These activities are critical to sustaining a safe and inclusive financial system as the financial environment evolves. Nigeria's NDIC could employ similar measures to improve depositor safety and boost trust in its financial system throughout the digital transition.


Conclusion

The Nigeria Deposit Insurance Corporation (NDIC) confronts issues in insuring deposits in non-traditional institutions, including combatting cyber dangers in the digital era. However, there is potential for the NDIC to use technology, work with FinTech enterprises, modify insurance models, and lobby for regulatory clarity to improve depositor safety. The NDIC is crucial to sustaining financial stability and is well-positioned to adapt and grow in the face of fast digital innovation, ensuring public trust in Nigeria's banking sector.

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