FAILED BANKS LIQUIDATION ACTIVITIES OF THE NIGERIAN DEPOSIT INSURANCE CORPORATION (NDIC) AN EMPIRICAL ANALYSIS
ABSTRACT
The aims of this paper is to appraise the Nigerian Deposit Insurance Corporation (NDIC) liquidation activities in failed banks, claims settlement; amount and number of depositors so far paid; reason behind the abandonment of deposits by some depositors; level of liquidation proceeds realized and how it has been managed fairness of bad debt litigation disposition and the adequacy of the insurance deposit.
To achieve the above objective I relied on questionnaire, personal interviews and visit to the site; for primary data; from past literature, journals and dailies for the secondary data.  The statistical tools used in the analysis are the simple percentages, tables, pie charts and bar charts.
The study revealed the following”
1.                  NDIC has been delaying in settling both the inured and the uninsured depositors, the delay was found to be attributed to:
a.                   The inadequate preparation by the NDIC in both human and material resources.
b.                  The inability of the depositors to put forward their claim on time for verification.
2.                  Rigorous claim filing process adopted by NDIC, lack of proper awareness on the side of depositor were found to be chief reason for the abandonment of claims by depositors.
3.                  A sizeable amount has been realized from sale of fixed assets, not much from debt recovery.
4.                  The amount realized has not been managed to the interest of depositors, as some amount were not accounted for, while a huge sum was written off as expense.
TABLE OF CONTENTS
CHAPTER ONE
1.0              Introduction
1.1       Background of the study
1.2              Statement of the problem
1.3              Objective of the study
1.4              Research questions
1.5              Significance of the study
1.6              Scope of the study
1.7              Limitations of the study
1.8              Definition of terms
References
CHAPTER TWO
2.0              Literature review
2.1       Overview of bankruptcy and liquidation of firms
2.2              Liquidation of firms in bankruptcy
2.3              Origin or banking distress in Nigeria
2.4              Causes of banking distress in Nigeria
2.5              Implication of bank distress in the Nigeria economy
2.6              Historical preview of NDIC and its role in the banking industry
2.7              Functions of the NDIC
2.8              Controversial issues surrounding NDIC operation
2.9              Empirical distress resolution options
2.10          Comparative analysis of bank distress resolution options
in selected countries of the major continents
2.11          The legal frame work of bank liquidation
2.12          Liquidation activities in failed banks
CHAPTER THREE
3.0              Research methodology
3.1       Sources of data
3.2              Design of questionnaire
3.3              Sample procedure and determination of sample size
3.4              Techniques of data analysis
CHAPTER FOUR
4.0              Data presentation, analysis and interpretation
4.1       Overview
4.2              Presentation of data
4.3              Primary data analysis
4.4              Test of hypothesis
4.5              Interpretation of results
CHAPTER FIVE
5.0              Findings
5.1       Discussion of findings
5.2              Conclusion
5.3              Recommendation
Bibliography
Appendices
CHAPTER ONE
1.0 & 1.1         INTRODUCTION AND BACKGROUND OF THE STUDY
The importance of a banking sector in any economy derives from its role of financial intermediation; provision of an efficient payment system and facilitating the implementation of monetary policies.  Hence, an efficient and effective banking sector is essential not only for the promotion of efficient intermediation but also for the protection of depositors, encouragement of healthy competition, maintenance and protection against systematic risk.
 The banking system as noted by Schempeter (1934) is regarded as a key agent in the process of development, because all other industries rely on it for working capital.  But, the Nigerian banking system in caught in systematic turmoil, there has been a rapid increase in the number of bank failures and the magnitude of the problem has reached an unprecedented level; the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities, the bankers, the general public and the international financial institutions such as the World Bank and the International Monetary Fund (IMF).
Distress in the Nigerian banking system dates back to the 1950’s when about 51 banks were forced out of the system following the introduction of the very first banking law in Nigeria.  The Banking Ordinance of 1952, the above ordained and the Central Bank of Nigeria Act of 1958 brought some element of sanity into the system.  The second phase of distress was experienced in the system after the era of Structural Adjustment Programme (SAP), which deregulated the economy; as a result led to the influx of the system with both efficient and inefficient banks, owing to the fact that banks licensing was liberalized.  Thus increasing the number of banks in the country from 42 in December 1991 (Oleyemi 1995:50) when SAP was put to an end following the enactment of Bank and Other Financial Institutions (BOFI) Decree N0. 25 of 1991.  The above represents an increase by about 186 percent in less than a decade.
In order to cushion the effect of further bank failure, the Nigeria Deposit Insurance Corporation (NDIC) was established under the NDIC Decree N0. 22 1988.
The major reason for the establishment of the Nigeria Deposit Insurance Scheme is not only to prevent or minimize the incidence of bank failure but also to handle bank failures and liquidate failed bank’s assets in an orderly, inexpensive and non-disruptive manner as provided by the NDIC Decree N0. 22 1988 and section 36 of Bank and Other Financial Institutions (BOFI) Decree N0. 25 1991, in addition to acting as acting as a second line regulatory body to the CBN.
Despite the establishment of the above mentioned strategic institutions, the rate of bank failure in Nigeria has risen sharply in recent years, and if not checked could jeopardize any political, social and above all economic policies.
Following the above, it became imperative that utmost diligence and restraint must be exercised in evolving a resolution option to put an end to distress in the banking sector.  At last, liquidation option was adopted by the authorities in the bid to finding a lasting solution to distress.  The liquidation option was regarded as the single dose treatment to distress and was aimed at bringing to an end the distress in the system (Adeniyi, 1998:7).
Having exhausted all possible means of resolving the distressed conditions of some banks between 1994 and 1995, the licenses of three merchant banks and two commercial were revoked.  Again in January 1998-2002, another batch of 30 failed banks (Is merchant and 15 commercial banks) had their licenses revoked.
NDIC has so far liquidated 33 banks across the country due to their insolvency and general unhealthy financial status.
Two other banks, Rins Merchant Bank and Savannah Bank of Nigeria Plc, presently have their liquidation suspended consequent upon contest injunctions restraining the corporation from proceeding with the banks waiting up-exercise.
It is worth noting that prior to the liquidation option, other measures have been put in place to check the omen in the name of distress, such measures include holding action, which involves the assumption of management and control of the ailing banks by the CBN, this measure was adopted in Alpha Merchant Bank Limited (AMB) and National Bank of Nigeria (NBN) Plc; other measures that were put in place are moral suasion and the extension of financial facilities to banks that have liquidity problems among others.
 The liquidation activities of NDIC have witnessed both praises and criticism over that lost ten years.  While some people have appreciated their effort in trying to see that liquidation of the failed banks are carried to do logical conclusion, effectively and efficiently, others have out rightly criticized all their actions and policies.  It thus becomes imperative at this point in our economic history to take an objective appraisal of the NDIC liquidation activities so as to have an in depth knowledge of the process and also see some of their strengths and weaknesses.
 1.2              STATEMENT OF PROBLEM
The major activities in any bank liquidation include settlement of insured and uninsured depositors from premium fund and liquidation proceeds respectively, physical asset valuation and disposal and loan asset realization.  These activities, world over have been agreed to be a difficult task as each of the activities gives rise to some problems that tend to undermine the success of bank liquidation.  In Nigeria, for instance after over many years that NDIC has executed this task, certain controversial issues have emanated which need redressing for future effective performance.
Paramount among them is the delay being witnessed in the operation by NDIC.  It is not strange to hear that some depositors of the firsts banks have been in liquidation are yet to be fully settled by the NDIC.  This issue was clearly observed by one depositor, Mr. Ayanyemi who wondered how long it would take NDIC to pay depositors of the recent 30 banks in liquidation; if depositors of the previous banks have not yet been settled up till now (Bello, 1998:6).  Another area of concern is the actual number of depositors so far paid and the class they belong to.  It has been noted that only small proportion of the total depositors have so far been paid; and worst still majority of thoese unpaid belong to the small depositors class.  This is serious because they represent a greater percentage of bank depositors.
Another serious issue is about the level of proceeds realized so far from liquidation how it has been used by NDIC; naturally, liquidation proceeds which come from sale of failed banks fixed assets and recovery of debts are supposed to be used in paying dividend to uninsured depositors.  However, there have been bitter complaints by the uninsured depositors about the smallness of the dividend paid despite the huge amount realized from liquidation process by NDIC; others have also complained about improper disposal of failed banks fixed assets at a give away price.
Again, another liquidation activity that has raised serious concern is the case of litigation that arises in debt recovery.
There is this strong feeling among some quarters in Nigeria that NDIC has not been disposing its cases fairly.  This has led to the prosecution of some innocent people and leaving others who probably are friends of the NDIC officials.
Finally, the inadequately and less maximum coverage by NDIC constitutes another serious as the NDIC Decree provides for a maximum payment of N50,000 per depositor in the event of bank liquidation.  Just like the principle of deposit insurance allows the deposit insurance institution to close down a failed bank and dispose of the banks assets if provides also for the insured deposit to be high enough.  In other words the payment of both the insured deposits from insured reserve fund of deposit insurance.  Institution and payment of proceeds from the sale of failed banks assets will guarantee that a depositor is not hurt when a bank fails.  In the same vein, a bank depositor need not be bothered about banks capital inadequacy because existence of depository financial institutions to operate with lower capital/asset ratio and also hold somewhat more risky assets.  But in the recent past, there has been a lot of criticisms that the maximum coverage was low on the ground that the government engenderering inflation, running at over 50 percent a year has led to further devaluation of the naira.  While some have argued that the amount does not qualify as insurance coverage.
The above problem will form the backdrop of this study.
1.3              OBJECTIVES OF THE STUDY
The overall objective of the study is to appraise the NDIC liquidation activities in failed banks.  Specifically, the study seeks;
a.                   To identify the activities involved in bank liquidation
b.                  To discover why there has been so much delay in settlement of depositors by NDIC.
c.                   To discover the amount and number of depositors so far paid by NDIC so as to ascertain the commitment of the corporation to depositors.
d.                  To know the reason behind the abandonment of deposits by some insured depositors with NDIC.
e.                   To ascertain the level of liquidation proceeds realized by NDIC and how it has managed the proceeds to the interest of the uninsured depositors.
f.                   To make an empirical analysis of case disposition so as to know how fair NDIC handles its cases.
g.                  To evaluate the size of the maximum insured deposit paid to the insured depositors when a bank fails with a view of determining its adequacy.
h.                  To make recommendation based on the above findings.
 1.4              RESEARCH QUESTIONS
a.                   What factors are responsible for the delay in claim settlement by NDIC?
b.                  What is the current level of amount and number of insured depositors paid so for by NDIC?  Is the level reasonable enough?
c.                   What is the level of dividend declared and paid so far?  How adequate is the level?
d.                  How far has NDIC gone in debt recovery from the debtors of the firsts banks in liquidation?  What is the level of proceeds so far realized from the liquidation and how has it been managed to the interest of the uninsured depositors?
e.                   Why has some depositors of failed banks appear to have abandoned their insured deposit with NDIC?
f.                   How fair has the NDIC been in the disposal of fixed assets of banks in liquidation?
g.                  How just is the NDIC in the discharge of its initiation matters?
h.                  How adequate is the unit of insurance coverage?
1.5              SIGNIFICANCE OF THE STUDY
Liquidation activities as earlier observed has become a controversial issue since its inception in 1994.  a lot of people have different views regarding the role and performance of NDIC in this direction.  Thus it is expected that a thorough this direction.  Thus it is expected that a thorough appraisal of the activities will be of immense benefit to the following interest groups:
a.                   The Federal Government of Nigeria which established the corporation, as it will enable them have an in-depth knowledge of how the NDIC has been carrying out their liquidation activities in the failed banks so also toe enable them know where to make amends or give additional support.
b.                  The depositors whose funds are tripped in the failed banks as it would give than an insight on the effort of the NDIC to settle them.
c.                   The banking public which include bankers, shareholders, creditors, analysts and prospective depositors as it would reveal to them in great detail a lot of information they need to know about the banks in liquidation and the position of our banking industry.
d.                  The NDIC officials, as it would enable them not only to know how their policies and actions as it affects liquidation are evaluated but also help them know which area of their operation they are living up to expectation and where they are not.
e.                   Finally, it would also serve as a starting point to other students, that students would like to carry out further research on this important topic in future.
 1.6              SCOPE OF THE STUDY
This paper has been programmed to cover the major appraisal of the NDIC bank liquidation activities, which will be directed mainly on the banks in liquidation.
 1.7              DEFINITION OF TERMS
A brief definition of some of the terms and concepts used in this study will be useful here for better understanding of this work.
a.         Depositors:-    These are “persons” who deposit money in a bank.  While insured depositor are the depositors that have their deposits covered to the tune of N50,000 by the NDIC and are entitled to a maximum of the amount in case of liquidation.  Uninsured depositors are those depositors who have deposit in excess of N50,000.
b.         Interim dividend:      This is the gradual periodic amount paid to the uninsured depositors from the proceeds accruing from sale of failed banks asset.
c.         Distress:          This connotes unhealthy situation or state of inability or weakness, which prevents the achievement of set goals and aspirations.  In the banking system, distress is defined as different manifestation of problems and differing degree of operating difficulties which range from temporary liquidity to terminal insolvency.
d.         Insolvency:     A bank is said to be insolent when its total liability exceeds its total assets.
e.         Terminally distressed: A case of chronic liquidity and insolvency with liquidation as the only meaningful option.
f.          NDIC premium:        According to the NDIC Decree (1988: see 21).  It is the 15/16th of 1 percent per annum of 1 per annum of the total deposit liabilities standing in the books of insured banks as at 31st December of the proceeding year, duly certified by approved auditors.
g.         Bank failure/failed banks:    Bank failure according to George J. Benson et al (1986), means a complete (or close to complete) loss to shareholders, combine with a cessation of independent operation, continuance only by virtue of financial assistance from a deposit insurance institution (Alashi, 1993:22), and a bank is said to have failed when it cannot be revived by any means.
h.         Resolution option:     The choice made by the authorities (CBN/NDIC) to resolve bank failure.
i.          Liquidation:   Dissolution of an insolvent firm (bank) through the sale of its assets and the distribution of proceeds base on priority of claims.