Depositors` protection scheme : assessing the effectiveness of Islamic Deposit Insurance system in Nigeria

Abstract

Deposit Insurance Scheme (DIS) is one of the financial safety-net instruments used by governments to ensure the stability of the banking systems and protect depositors from incurring large losses due to bank failures. The role of Islamic Deposit Insurance (IDI) as a Shariah compliant version of a conventional deposit insurance scheme is to create a level playing field between Islamic and conventional banks. Apart from maintaining a foundation for public confidence in the banks, it is also to reinforce the consumer protection aspects that are inherent in Islam. In Nigeria, Non-Interest (Islamic) Deposit Insurance Scheme (NIDIS) was introduced for the Non-interest (Islamic) banks by the Nigeria Deposit Insurance Corporation (NDIC), to cater for their customers who are as much in need of this protection, assurance and sustenance of confidence produced by the scheme as their conventional counterparts. The introduction of IDI generated several controversies among scholars over its structure and implementation as well as its compatibility with the operations of Islamic banks. This study attempts to assess how effective is the depositor’s protection scheme in Nigeria in terms of the operations of IDI under the deposit insurance scheme, and the overall extent at which it achieved its desired objectives or mandates. The study employs mixed method both in data collection and analysis. For data collection, the research uses internal documents, in-depth interviews and a questionnaire survey, each addressing research objectives one, two and three respectively. These were supplemented with a Focus group discussion and the findings were triangulated. To facilitate the analysis and interpretation of the data a bespoke theoretical framework was adopted which includes set of benchmarks and success indicators. The finding of this research shows that the corporation has a structure in place for the administration of depositor’s protection scheme in Nigeria and that the awareness of the scheme influences depositors’ confidence in the financial system, hence the potential of encouraging financial system participation. However, some of the scheme’s operations and provisions of the law seems inimical to the principles and philosophy of Islamic banks, and also may not be consistent with some Shariah rulings. In addition, the records of the corporation, over the years, showed a very low turnout of depositors during various pay out exercises of the insured deposits, the amounts paid out from inception to 2015 indicated a very low percentage of the total amount paid to the depositors of failed banks, compared to the total deposits liabilities against the banks as at the time of their liquidation. This augmented the findings from the questionnaire survey conducted on banks retail depositors. They indicated very low awareness and understanding of the activities and operations of the scheme. This has led to the conclusion that despite the strategies put in place, the most important mandate of compensating depositors of failed banks by the scheme has not been effectively achieved. The research, therefore, among others suggests a Hibah model for a dual window deposit insurance scheme, and also a change of nomenclature from deposit insurance scheme to depositors’ protection scheme, that will reflect the actual purpose of the scheme.