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Strengthening Deposit Insurance Reserve Targeting in Nigeria

Project Development Objective (PDO)

The project aims to assist the Nigeria Deposit Insurance Corporation (NDIC) in developing a target fund ratio framework and capacity to manage the reserve fund in order to build public confidence and financial stability.

Background

Together with the Central Bank of Nigeria, the NDIC has the power to conduct on-site examinations of insured institutions, undertake enforcement actions, and implement resolution and liquidation measures for troubled or failed banks. The NDIC administers the deposit insurance scheme, supervises banks, and is the resolution and liquidating authority. 

In December 2011, with the assistance of the FIRST Initiative and an international team of facilitators, the NDIC completed a guided self-assessment of its operations using the Core Principles for Effective Deposit Insurance Systems as a benchmark. As a result, certain shortcomings in the NDIC’s operations were identified, including the absence of a target fund ratio for the deposit insurance fund (Core Principle 11). An expert third-party evaluation is needed to develop an insurance fund–targeting framework for the NDIC in line with international best practices and to recommend an appropriate target. There is also a need to evaluate the adequacy of the NDIC’s existing fund and to determine if any measures are needed (such as special assessments or adjustment of assessment rates). Once the target fund ratio is established, the NDIC would need to examine all its sources of funding in order to determine how best to reach its target and over what period.

This project seeks to help the NDIC establish a framework for determining the adequate fund level necessary to provide against contingencies in member banks and other institutions taking insured deposits. This activity is supported by the Core Principles for Effective Deposit Insurance Systems and is consistent with advice provided in the recent Financial Sector Assessment Program and in the World Bank Group’s Country Partnership Strategy for 2010–13.

Activities

This project encompasses the following:

1.  Assisting the government in determining the appropriate level of funding for the deposit
     insurance agency, taking into account the health of the financial sector and the resources
     available to the fund from all institutions covered by the NDIC

2.  Carrying out an analysis of the full range of approaches used to determine an appropriate target
     fund and to present options 

3.  Producing a framework for determining the target fund ratio and creating training for staff in the
     way to implement the framework

4.  Reviewing the current level of the fund

5.  Assessing the viability of certain measures to ensure the adequacy of the fund if necessary (that
     is, changes in the NDIC’s investment policy, a premium increase, or cost savings)

6.  Proposing a methodology for estimating the adequacy of the insurance reserves

7.  Recommending how to increase funds available to NDIC, if necessary

Expected Outcomes

The expected outcomes of this project are as follows:

1.  Establishing a target funding mechanism in the NDIC

2.  Having the NDIC staff capable of using the internationally accepted deposit insurance
     methodology