DEPOSITORS’ PROTECTION SCHEME: ASSESSING THE EFFECTIVENESS OF ISLAMIC DEPOSIT
INSURANCE SYSTEM IN NIGERIA
BY
SALISU HAMISU
A thesis submitted in fulfilment of the requirement for the degree of Doctor of Philosophy in Islamic Banking and
Finance
IIUM Institute of Islamic Banking and Finance International Islamic University Malaysia
APRIL 2018
ii
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.
iii
ثحبلا ةصلاخ
ABSTRACT IN ARABIC
عئادولا ىلع ينمأتلا ماظن برتعي )
DIS ) عاطقلا في نيرمثتسلماو ينعدولما كلهتسلما ةياملح ططخمك ايلماع
لودلا داصتقا نم فيرصلما .
تاموكلحا اهمدختست تيلا ليالما ناملأا تاكبش تاودأ ىدحإ جمانبرلا اذه لثيمو
ةيفرصلما مظنلا رارقتسا نامضل فيرصلما لشفلا ببسب ةيربك رئاسخ دبكت نم ينعدولما ةياحمو
. ينمأت رود نإ
ءاشنلإ وه ةيديلقتلا عئادولا ينمأت نم ةخسن ةيملاسلإا ةعيرشلا ماكحأ عم ةقفاوتم ةغيصك ةيملاسلإا عئادولا ةيديلقتلا كونبلاو ةيملاسلإا فراصلما ينب ةئفاكتم ىوتسم .
ساسأ ىلع ظافلحا نع رظنلا فرصبو روهملجا ةقث
ملاسلإا في ةلصأتلما كلهتسلما ةياحم بناوج ززعي هنإف ،فراصلما في .
عدولما ةياحم ةيلوؤسم ،اييرجين فيو
يزكرلما كنبلا ىلع عقت كلهتسلما (
CBN ) كلهتسلما ةياحم سلمجو ، (
CPC ) ىلع ينمأتلا ةسسؤمو ،
اييرجين في عئادولا .
ولا ينمأت ماظن ريدت ةسسؤلما نإف ،كلذ عمو طقف طقف عئاد
( NDIC )
ماظن وهو ،
ليالما ماظنلا رارقتسا نامضو ينعدولما ةياحم نع لوؤسم .
تماق ،دلابلا في ةيملاسلإا فراصلما لاخدإ عمو
ةيملاسلإا يرغ عئادولا ىلع ينمأتلا ماظن قيبطتب ةسسؤلما (
NIDIS )
ةيديلقتلا كونبلل ( )
تاجايتحا ةيبلتل
ةياملحا هذه لىإ ةجالحا في ءلامع )
ينيديلقتلا مهئارظن ططخلما اهجتني تيلا ةقثو نامضو ، .
هذه لواتحو
وأ هفادهأ قيقتح في هحانج ىدم لىإو هليغشت ثيح نم اييرجين في عدولما ةياحم ماظن ةيلاعف ىدم مييقت ةساردلا ةدوشنلما هتيلاو .
اهليلتحو تانايبلا عجم في جودزم ةقيرط ةساردلا مدختستو .
تسا ،تانايبلا عملجو ثحابلا مدخ
نايبتسلاا حسمو ،ةقمعتلما تلاباقلما و ،ةيلخادلا قئاثولا .
ةيعاجم عم تاشقانلما هذه ثحابلا لمكتسا دقو
جئاتنلا ثيلثت ىرجو ةزكرم .
نمضتي لصفم يرظن راطإ ىلع ثحابلا دامتعا ،اهيرسفتو تانايبلا ليلتح ليهستلو
حاجنلا تارشؤمو يرياعلما نم ةعوممج .
ذه جئاتن ينبتو ةياحم ةطخ ةرادلإ لاعف لكيه دوجو نأ ثحبلا ا
ثم نمو ،ليالما ماظنلا في ينعدولما ةقث ىلع رثؤي ططخلماب يعولا نأو اييرجين في ةلوؤسلما ةسسؤلما ىدل ينعدولما ليالما ماظنلا ةكراشم عجشت .
ةفسلفو ئدابم ةفولأم يرغ ودبت هماكحأو ططخلما تايلمع ضعب نإف ،كلذ عمو
سلإا فراصلما ةيعرشلا ماكحلأا ضعبل ةفلامخ نوكت دق امك ،ةيملا
. ،ةسسؤلما تلاجس ترهظأ ،لياتلابو
،اهيلع نمؤلما عئادولا نم ةفلتخلما عفدلا تايلمع للاخ يننسلا رم ىلع عدولما ىلع لابقلإا ةبسن ضافنخا ماع ةيادبلا نم ةعوفدلما غلابلما تراشأو 5102
لابلما لياجمإ نم ادج ةضفخنم ةبسن لىإ يعدوم لىإ ةعوفدلما غ
ةيفصتلا تقو كونبلا نم تابولطلما عئادولا عومجبم ةنراقم ةلشافلا كونبلا .
جئاتنلا ةدايز لىإ كلذ ىدأو
فراصلما يعدوم ىلع يرجأ يذلا نايبتسلاا حسم نم ةدمتسلما .
نع مهفلاو يعولا ضافنخا لىإ ةباجلإا راشأو
جمانبرلا تايلمعو ةطشنلأا .
لىإ كلذ ىدأ دقو نإف ،ةعوضولما تايجيتاترسلاا نم مغرلا ىلع هنأ جاتنتسا
ايلعف ققحتت لم ططخلما لبق نم ةلشافلا فراصلما نع ينعدولما ضيوعتل ةيهمأ رثكلأا ةيلاولا .
،ثحابلا حترقيو
ططمخ نم تايمستلا يريغت كلذكو ، عئادولا ماظن ينمأتل ةجودزلما ةذفانلل ةبه اجذونم ،ىرخأ رومأ ينب نم
ينمأت
طخلما نم يلعفلا ضرغلا سكعي امم ،ينعدولما ةياحم ماظن لىإ عئادولا
iv
APPROVAL PAGE
The thesis of Salisu Hamisu has been approved by the following:
_____________________________
Rusni Hassan Supervisor
_____________________________
Abideen Adewale Co-supervisor
____________________________
Dzuljastri bin Abdul Razak Internal Examiner
_____________________________
Nor Hayati Ahmad External Examiner
_____________________________
M. Shabri Abd. Majid External Examiner
_____________________________
Wahabuddin Ra’ees Chairman
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DECLARATION
I hereby declare that this thesis is the result of my own investigations, except where otherwise stated. I also declare that it has not been previously or concurrently submitted as a whole for any other degrees at IIUM or other institutions.
Salisu Hamisu
Signature... Date...
vi
COPYRIGHT PAGE
DECLARATION OF COPYRIGHT AND AFFIRMATION OF FAIR USE OF UNPUBLISHED RESEARCH
DEPOSITORS’ PROTECTIONSCHEME: ASSESSING THE EFFECTIVESS OF ISLAMIC DEPOSIT INSURANCE SYSTEM IN
NIGERIA
I declare that the copyright holders of this thesis are jointly owned by the student and IIUM.
Copyright © 2018 Salisu Hamisu and International Islamic University Malaysia. All rights reserved.
No part of this unpublished research may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the copyright holder except as provided below
1. Any material contained in or derived from this unpublished research may be used by others in their writing with due acknowledgement.
2. IIUM or its library will have the right to make and transmit copies (print or electronic) for institutional and academic purposes.
3. The IIUM library will have the right to make, store in a retrieved system and supply copies of this unpublished research if requested by other universities and research libraries.
By signing this form, I acknowledged that I have read and understand the IIUM Intellectual Property Right and Commercialization policy.
Affirmed by Salisu Hamisu
……..……….. ………..
Signature Date
vii
DEDI
CATION
This work is dedicated to my humble self for taking the bull by the horn to pursue the PhD journey even against all the obvious odds.
viii
ACKNOWLEDGEMENTS
All praises be to Allah, the Lord of the universe, and peace and salutations be upon our beloved prophet Muhammad (S.A.W). First and foremost I thank Allah, for answering all my prayers and making all the blessings in my life possible.
I am very grateful to all those who have positively contributed towards the completion of this work. I am particularly indebted to a wonderful person, Professor (Dr.) Rusni Hassan, amiable lecturer and my supervisor who has always supported me in terms of guidance and inspirations, expert’s as well as professional advice. I would also like to thank my co-supervisor Associate Prof. (Dr.) Abideen Adewale for his immense contribution and support. Also, my special appreciation goes to all staff of the Institute of Islamic Banking and Finance for their contributions towards better and ethical finance. I thank the NDIC management for allowing me to proceed on leave without pay to pursue this dream, and my colleagues for their prayers and best wishes.
My heartfelt appreciation goes to all my family members especially my Mother, my wife and my daughters for their sacrifice, support and daily prayers to Allah for me. I would also like to express my gratefulness to my esteemed friends who stood by me and my family extending their moral and financial support at all times. Most importantly special thanks to those special ones who believed in me more than I do believe in myself.
ix
TABLE OF CONTENTS
Abstract ... ... ii
Abstract in Arabic ... ... iii
Approval Page ... ... iv
Declaration ... ... v
Copyright ... ... vi
Dedication ... ... vii
Acknowledgements ... ... vii
List of Tables ... ... xiii
List of Figures ... ... xv
List of Abbreviations ... ... xvi
CHAPTER ONE:INTRODUCTION ... ... 1
1.1 Background of the Study ... 1
1.1.1 The Context: Deposit Insurance and Need for Deposit Protection Scheme ... ...1
1.2 Statement of the Problem... 7
1.3 Summary of Gaps in the Previous Study on Deposit Insurance ... 11
1.4 Research Questions ... 16
1.5 Research Objectives... 16
1.6 Significance of the Study ... 17
1.7 Scope and Limitations of the Research ... 18
1.8 Organization of the Study ... 19
CHAPTER TWO:LITERATURE REVIEW ... ... 21
2.1 Introduction... 21
2.2 Banking Crises and the Theories of Liability Insurance ... 22
2.2.1 Banking Crises and Failures: The Need for Financial System Protection ... ... 22
2.2.2 Liability Insurance Theories ... ... 29
2.3 The Concept of Deposit Insurance Scheme (DIS) ... 34
2.3.1 Conventional Insurance versus Deposit Insurance Scheme ... ... 37
2.3.2 Functions of Deposit Insurance and Its Design Features ... ... 41
2.3.3 Deposit Insurance as a Consumer Protection Scheme ... ... 49
2.3.4 Deposit Insurance Scheme for Banking System Stability ... ... 59
2.4 Deposit Insurance in Islam ... 63
2.4.1 The Concept of Maslahah and Maqasid al Shariah ... ... 63
2.4.2 Conditions of Maslahah ... ... 66
2.4.3 The Principle of al-Qawaid al-Fiqhiyyah (Legal Maxim) and Maslahah ... ... 67
2.4.4 The Needs for Depositors Protection Arrangements in Islamic Financial Industry ... ... 69
2.4.5 The Concept Protection of Wealth (Hifz-al-Maal) as Maslahah in the Financial Safety-net Arrangement ... ... 70
2.4.6 Prohibitions in Deposit Insurance Scheme ... ... 72
x
2.4.7 Shariah Issues In Respect Of Islamic Deposit Insurance
Scheme Arrangement ... ... 74
2.5 Practice of Islamic Deposit Insurance in Some Jurisdictions ... 83
2.5.1 The Malaysian Model ... ... 83
2.5.2 Sudan Model ... ... 87
2.6 Conclusion ... 89
CHAPTER THREE:DEPOSIT INSURANCE IN NIGERIA ... ... 92
3.1 Introduction... 92
3.2 Consumer Protection and Deposit Insurance in Nigeria... 92
3.3 The Deposit Insurance Scheme (DIS) ... 94
3.3.1 Establishment of Nigeria Deposit Insurance Corporation (NDIC) ... 95
3.3.2 Rationale for the Establishment of NDIC ... ... 97
3.3.3 Design Features of the Scheme ... ... 97
3.3.4 Depositors Protection Strategies of the NDIC ... ... 100
3.4 Non-Interest (Islamic) Deposit Insurance Scheme in Nigeria ... 101
3.4.1 Efforts of Establishing Islamic Deposit Insurance in Nigeria ... ... 102
3.4.2 Structure of Islamic Deposit Insurance in Nigeria ... ... 105
3.4.3 Issues and Challenges of Islamic Deposit Insurance in Nigeria ... ... 106
3.5 Public Awareness and the Role of Islamic Deposit Insurance in Promoting Financial Participation in Nigeria ... 111
3.5.1 Deposit Insurance Awareness and Financial Inclusion ... ... 111
3.5.2 Role of Islamic Deposit Insurance in Promoting Financial Participation Nigeria ... ... 112
3.5.3 Challenges of Achieving Financial Inclusion through Islamic Deposit Insurance ... ... 116
3.6 Conclusion ... 119
CHAPTER FOUR:RESEARCH METHODOLOGY ... ... 121
4.1 Introduction... 121
4.2 Research Purpose ... 121
4.3 Research Design ... 122
4.4 Research Approach ... 125
4.5 Data Collection Procedure ... 130
4.5.1 Population ... ... 130
4.5.2 Sampling for Qualitative Data ... ... 131
4.5.3 Sampling for Quantitative Data ... ... 131
4.5.4 Data Collection Techniques ... ... 133
4.5 5 Qualitative Data Collection Technique ... ... 135
4.5.6 Quantitative Data Collection Technique ... ... 138
4.5.7 Theoretical/Conceptual Framework of Assessing the Effectiveness of Depositors Protection Scheme in Nigeria ... ... 140
4.6 Data Analysis ... 144
4.6.1 Qualitative Data Analysis ... ... 144
4.6.2 Quantitative Data Analysis ... ... 145
4.7 Conclusion ... 148
xi
CHAPTER FIVE:FINDINGS ON EFFECTIVENESS OF THE
DEPOSITORS PROTECTION SCHEME IN NIGERIA ... ... 150
5.1 Introduction... 150
5.2 Findings on NDIC’s Achievements of its Core Mandates ... 150
5.2.1 Achievements in respect of Mandate of Deposit Guarantee (success indicator 1.1.1) ... ... 151
5.2.2 NDIC Conducts Banks Supervision effectively every year (success indicator 1.1.2) ... ... 153
5.2.3 Nigerian Banks are being assisted regularly through Failure Resolution Options (success indicator 1.1.3) ... ... 159
5.2.4 NDIC’s Timely Compensation to Banks Depositors (success indicator 1.1.4) ... ... 162
5.2.5 Other NDIC Activities which facilitate Stake Holders Awareness and Collaboration (Success indicators 1.1.5) ... ... 179
5.3 Findings from expert interviews on Non-Interest (Islamic) Deposit Insurance Scheme ... 181
5.3.1 Mandatory Participation in Deposit Insurance Scheme (success indicator 2.1.1) ... ... 182
5.3.2 Use of Kafalah bil Ujur as Underlying Shariah Compliant Structure (success indicator 2.1.2) ... ... 187
5.3.3 Insurability of Islamic Banking Deposit Products (success indicator 2.1.3) ... ... 190
5.3.4 Perpetuity of Premium Payments (success indicator 2.1.4) ... ... 195
5.3.5 Instituting a Separate body for Standard Setting and a Separate Global Standard for IDI (success indicator 2.1.5) ... ... 198
5.4 Findings on depositors Awareness and Perception on DIS ... 200
5.4.1 Demographic characteristics ... ... 201
5.4.2 Respondents Level of Awareness ... ... 204
5.4.3 Level of Confidence as a result of DIS ... ... 210
5.4.4 Increased Participation in Financial System as Result of IDI ... ... 213
5.4.5 Increased Savings ... ... 215
5.4.6 Comparative Analysis across Different Respondents’ Demographic Profile on the Level of Awareness of the Deposit Insurance scheme ... ... 217
5.4.7 Impact of Awareness on Confidence, increased participation and increased Savings ... ... 221
5.5 Summary of Findings ... 226
CHAPTER SIX:DISCUSSION ... ... 230
6.1 Introduction... 230
6.2 Discussion on Documents, Interview and Survey Findings ... 230
6.3 Focus Group Discussion ... 232
6.3.1 Integrating Hibah Model in a Dual Window Deposit Insurance Scheme... ... 233
6.3.2 Re-rebranding the Nigeria Deposit Insurance Corporations ... ... 239
CHAPTER SEVEN:CONCLUSION ... ... 242
7.1 Introduction... 242
7.2 Research Objectives Revisited ... 243
xii
7.2.1 Research Objectives One ... ... 243
7.2.2 Research Objectives Two ... ... 244
7.2.3 Research Objectives Three ... ... 245
7.3 Implications and Contributions of the Research ... 247
7.4 Recommendations... 249
7.4.1 Policy Recommendations ... ... 249
7.4.2 Future Research... ... 250
REFERENCES ... ... 252
APPENDIX A: SURVEY QUESTIONNAIRE ... ... 264
APPENDIX B: EXPERT INTERVIEW QUESTIONS & TRANSCRIPS ... ... 267
APPENDIX C: NDIC ACT 2006 ... ... 314
APPENDIX D: NDIC STRATEGIC PLAN 2016-2020 ... ... 344
APPENDIX E: FRAME WORK FOR THE OPERATION OF NON- INTEREST DEPOSIT INSURANCE SCHEME ... ... 360
APPENDIX F: CLOSED BANKS IN NIGERIA AS AT DECEMBER 2015 .. ...369
xiii
LIST OF TABLES
Table No. Page No.
2.1 Inter-temporal Major Banking crises Across Regions of the world 24 2.2 Survey of factors causing banking crises in 29 selected countries 25
4.1 Design Criteria of Assessing DIS 128
4.2 Break-down of Research Samples 133
4.3 Reliability statistics 140
4.4 Theoretical framework of assessing depositor’s protection scheme in
Nigeria 141
5.2 On-site Supervision carried out for Deposit Money banks from
2011-2015 156
5.3 MFBs and PMBs On-site Examination by NDIC 158
5.4 Deposit pay out for closed banks as at 31st December, 2015 165 5.5 Payments of insured deposits of the closed MFBs As at 31st December,
2015 169
5.6 Payments of insured deposits of the closed PMBs As at 31st December,
2015 175
5.7 Liquidation dividends paid to creditors as at 31st December 2015 178 5.8 Liquidation dividends paid to Shareholders as at December 2015 179
5.9 Demographic profile of the Respondents 203
5.10 Awareness and knowledge of DIS in Nigeria 205
5.11 DIS is different from normal Insurance 206
5.12 Depositors’ knowledge about NDIC limit of coverage 207 5.13 Respondents knowledge of other roles performed by NDIS 208
5.14 Banks informs Depositors about NDIC 209
5.15 People confidence on the safety of their funds as a result of DIS 211 5.16 People appreciate government effort as a result of DIS 213
xiv
5.17 Increased banking participation 214
5.18 Depositors encourages family and friends to open account
because of IDI 215
5.19 Knowledge about DIS influences depositors saving behaviour 216 5.20 Shariah compliant DIS assist banks to attract customers 217 5.21 One-way ANOVA for the difference in awareness among different level
of Education 218
5.22 Mean awareness level among group education level 219 5.23 One-way ANOVA for the difference in awareness among type of bank
used by depositors 220
5.24 One-way ANOVA for the difference between classes of banks operated by
depositors 221
5.25 Summary of Regression Analysis Results on Confidence in financial
system as a result of DIS 223
5.26 Summary of Regression Analysis Results on increased participation as a result of
DIS 224
5.27 Summary of Regression Analysis Results on increased household
savings as a result of DIS 225
5.28 Summary of the findings 227
xv
LIST OF FIGURES
Figure No. Page No.
2.1 Malaysian Structure of Administering Deposit insurance Scheme 84 2.2 Sudan Model of Administering Deposit insurance Scheme 87 4.1 Selected Mixed Method Strategy to be used for the study (Convergent Parallel
Design) 124
4.2 Data Collection Technique 135
6.1 The Proposed Integrated Hibah Model 235
xvi
LIST OF ABBREVIATIONS
BDSF Bank Deposit Security Fund BNM Bank Negara Malaysia
BOFIA Banks and Other Financial Institutions Act CBN Central Bank of Nigeria
CGAP Consultative Group to Assist the Poor CPC Consumer Promotion Council
DIS Deposit Insurance Scheme DMBs Deposit Money Banks
DPAS Differential Premium Assessment System FDIC Federal Deposit Insurance Corporation
FRACE Financial Regulation Advisory Council of Experts FSA Financial Services Authority
IADI International Association of Deposit Insurers
IAHs Investment Account Holders
IBIs Islamic Banking Institutions IDI Islamic Deposit Insurance IDIFs Islamic Deposit Insurance Funds IFIs Islamic Financial Institutions
IFSB International Financial Services Board IIUM International Islamic University Malaysia IMF International Monetary Fund
IRTI Islamic Research and Training Institute
ISRA International Shari'ah Research Academy for Islamic Finance MDIC Malaysian Deposit Insurance Corporation
MFBs Micro Finance Banks
NICOM Nigeria Insurance Commission
NDIC Nigeria Deposit Insurance Corporation NIBs Non Interest Banks
NIDIS Non Interest Deposit Insurance Scheme NIFIs Non Interest Financial Institutions
PENCOM Pension Commission
PLS Profit & Loss Sharing account PMBs Primary Mortgage Banks
PSIA Profit Sharing Investment Accounts RSA Regulatory & Supervisory Authority
SCDIS Shariah Compliant Deposit Insurance Scheme UNDP United Nation Development Programme
1
CHAPTER ONE INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Deposit protection scheme has assumed a significant aspect of the financial safety-net arrangements, established by different governments worldwide, to reduce the incidence of financial system instability or minimize its effects whenever it occurs.
Although various other options exist to all nations in their desire to protect the interests of the banks depositors in their domains, deposit insurance is prominently the ideal choice. It is defined as a “financial guarantee to protect depositors in the event of bank failure and also offers a measure of safety for the banking system” (Gillian Garcia, 1996). This chapter gives a brief summary of the research focusing on the background of the study, a statement of the problem, objectives of the study, scope of the study and organization of the study.
1.1.1 The Context: Deposit Insurance and Need for Deposit Protection Scheme
Banks keep only the required reserves and lend out or invest the rest of the deposits made by the depositors. In a fractional reserve banking system, the loan of one bank becomes the deposit of another bank. This will allow the second bank to lend out all the deposits less the required reserves. In this way, the total money created is the reverse of the reserve ratio. If the reserve requirement is for instance 10%, then the total money created will be 10 times the deposit (Syed Othman Alhabshi, 2011).
When the number of non performing loans in a bank is very high, the bank will run a risk of having insufficient funds to pay the depositors and the depositors will risk losing their deposits. When a bank becomes illiquid or is unable to meet its
2
contractual agreement with the depositors as a result of business and/or operational failure, a ‘bank run’1 may be triggered by apprehensive depositors, that can trigger not only lack of confidence among the depositors, which will in turn cause more banks to face similar problem, but it can also cause an economic recession, as has happened many times in the past.
Deposit insurance is a means of protecting bank depositors, in full or in part, from the likely losses due to a bank's inability to pay its debts when due. Chaibou Issoufou, (2008) opined that Deposit Insurance Scheme (DIS) is established to provide some form of assurance to depositors that are at risk of losing their hard earned money in the event of bank failures. It has been established mostly by governments, which make it compulsory for banks to join as members and pay the required premium. It is therefore a component of the financial system to create the safety net2 that promotes financial system stability.
The evolution of the elaborate DIS can be traced to the United States Congress, which created the Federal Deposit Insurance Corporation (FDIC) in 1933 following the Great Depression that was experienced worldwide between 1929 and 1933. Prior to that, however, it is on record that some form of deposit insurance system had been introduced in Czechoslovakia in 1924 (Ogunleye, 2010) which was applied to revive the Nation’s financial system after the First World War devastation. DIS is therefore adopted in the aftermath of a banking crisis or when industry conditions are deteriorating and unstable (De Giuli, Maggi, & Paris, 2009). Depositors protection is often described as the most basic reason for banking regulation (Kleftouri, 2014). To
1 A bank run is a situation that occurs when a large number of bank or other financial institution's customers withdraw their deposits simultaneously due to concerns about the bank's solvency
2 A safety net is a welfare arrangement by governments to protects citizens especially low income from hardship and poverty
3
this end, therefore, deposit insurance system has become an essential component of prudential bank regulation.
Conceptually there are essentially two types of DIS; implicit deposit protection and explicit protection.
(i) Under the implicit DIS no formal structures are evident, and the means of funding, and the system in place are also not clearly defined along with the coverage limit. All decisions taken under this scheme are also flexible and uncertain.
(ii) The explicit DIS is established by legislation or private contract, which clearly spells out the scope of its mandate; powers and governance structure. The rules and regulations guiding participating institutions are clearly defined along with the coverage limit etc.
In 2013 there were 189 countries of the world administering the deposit insurance scheme either in the form of implicit or explicit protection system (Asli, Kane, & Laeven, 2014). More countries have continued to introduce explicit deposit insurance schemes in their jurisdiction. Out of the 189, 112 countries (or 59 percent) had explicit deposit insurance as at 2013, having increased from 84 countries (or 44 percent) in 2003 (Asli et al., 2014).
An explicit deposit protection can either be ‘Pay box’ or ‘Risk Minimiser’. The pay box function provides payout to depositors in the event of bank failure. It can also be a pay box plus or pay box with extended mandate, in which countries may combine the DIS function with either or both, the resolution functions and banking supervision.
The risk-minimiser explicit deposit protection however, was designed with powers to guarantee deposits of all licensed financial institutions that offer deposit products to
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their customers, monitor their health status through effective supervision, partake in failure resolution processes and liquidate failed insured institutions (Ogunleye, 2010).
In Nigeria an explicit Deposit Insurance System (DIS) was introduced through the establishment of the Nigeria Deposit Insurance Corporation (NDIC) under the Nigeria Deposit Insurance Corporation decree No. 22 of 1998; now repealed and replaced with NDIC Act 16, 2006, with the primary objective of providing protection for small depositors, maintaining confidence and ensuring stability in the financial sector by guaranteeing to pay to the bank depositors in the event of failure of insured institutions as well as promoting safe and sound banking practices through an effective supervision. The whole essence of DIS is to protect especially small savers, in guaranteeing payment to depositors when a bank threatens or actually refuses to pay. Thus, confidence and trust is engendered in banking and the vast populace is encouraged to save.
With the establishment of non-interest (Islamic)3 banking/non-interest windows in Nigeria and the rapid growth of the Islamic financial Sector across the globe in general, there is an obvious need for an Islamic version of the deposit insurance to cover the Islamic bank as well. This is indeed necessary to create a level playing field for both conventional and Islamic banks (The Star, 2009). “Islamic deposit insurance (IDI) is an arrangement to protect insured depositors against the loss of their insured Islamic deposits placed with Islamic banking institutions (IBIs) in the event of an IBI’s failure” (Md Khairuddin Hj Arshad, 2011, p.1). Islamic deposit insurance is put into practice by countries where Islamic deposits are offered to the depositors by the deposit taking financial institutions. The conventional and Islamic
3 In Nigeria Islamic Banks and Islamic windows are generally referred to as Non-Interest Banks/Non- Interest window
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deposit insurance have similar features, but with IDI operating under Shariah compliant principles.
However, despite the development and the emergence of many countries offering Islamic financial services, not many countries introduced the concept of Islamic deposit insurance, even though, Bahrain and Sudan had implemented Ex post4 in 1993 and Ex ante5 in 1996 respectively. A few other countries have also implemented IDI and these include Turkey in 2001 (operating under conventional DI), Malaysia in 2005 (operating together with conventional but parallel operation) and Nigeria in 2012 (same dual system like Malaysia). Furthermore, other jurisdictions that provide protection for Islamic deposits include Bosnia and Herzegovina, Jordan, Kuwait, Singapore and the United Kingdom. These countries with the exception of Jordan6 employ structures that protect Islamic deposits under their conventional deposit insurance system. In summary, from the structure of these countries’ systems, generally according to IFSB 2015, three kinds of Islamic deposit insurance models practiced became evident. They are
1. Protection under a conventional deposit insurance system;
2. An IDIS separately from a conventional system; and 3. Fully fledged IDIS.
The general desire of deposit insurance whether it is Islamic or conventional, is to protect the interests of bank depositors, promote their confidence, enhance financial and economic participation, encourage saving, promote inclusive growth and the
4 “Ex post deposit insurance system” is a system in which a levy is imposed after the failure of an insured bank to provide funds to cover deposit insurance claims
5 ” Ex ante deposit insurance system” refers to a system in which a fund is accumulated to cover deposit insurance claims in anticipation of the failure of an insured bank. Most countries with deposit insurance systems use an ex ante system
6 In Jordan, the deposit insurance membership is voluntary for Islamic banks operating in the Kingdom, but none of them has joined the system yet.
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overall financial system stability. This therefore suggest that a link exists between the concept of deposit insurance and Maqasid al-Shari’ah, or the objectives of Shari’ah, that are designed or aimed to promote benefits and repel harms (Al-Mubarak &
Osmani, 2010), and by aligning the whole concept of Islamic banking and finance with the Maqasid al-Shariah or the objectives of Shariah, it is argued that Islamic Finance can be the solution to the policy makers in countries that are serious about enhancing access to finance (Mohieldin, Iqbal, Rostom, & Fu, 2012).
In view of this, one may suppose that there is a point of convergence between deposit insurance and the core principle of Islam which lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have not’s (Mohieldin et al., 2012).
However, globally there are over 2.5 billion people who are excluded or underserved by financial system (Mercy Corps, 2014). These are often poor or underserved populations with multifaceted financial lives, relying typically on a mix of informal and formal financial services, and neither fully meeting their diverse financial needs. The Global Findex7 report indicated gaps in financial inclusion across demographics, with women, the poor, youth and rural residents at greatest disadvantage, and unfortunately a great part of the financially excluded come from countries with a predominantly Muslim population, even though, the core principle of Islam stress as prominent importance on social justice, mutual help, inclusion, and sharing of resources between the have and have not’s.
In Nigeria (CGAP, 2008) reported in (UNDP, 2012) that more than 72 per cent of Muslims have been found to have excluded themselves from non Shariah-
7 The global findex a database that provides in-depth data on how individuals save, borrow, make payments, and manage risks. It is the world's most comprehensive database on financial inclusion that consistently measures people's use of financial services across countries and over time.
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compliant financial systems. Imperatively the Nigeria Deposit Insurance Corporation in conjunction with the Central Bank of Nigeria, in their effort of promoting financial inclusion strategy, which is aimed at better financial services, employment and socio economic development, had established various guidelines and framework for the coverage of specialised institutions8 aimed at enhancing confidence and encouraging financial inclusion to those who have been excluded. An effective implementation of Islamic deposit insurance scheme can therefore be considered as a dynamic tool towards achieving Maqasid al Shariah, enhancing financial participation and promoting inclusive growth.
The purpose of this study is to provide some basic understanding on the need, issues and challenges regarding Islamic Deposit Insurance in an existing conventional system such as the one recently established in Nigeria known as the Non Interest Deposit Insurance, highlighting its implication or permissibility under Shariah. To ascertain people’s perception and awareness of the scheme, and that, if public confidence which the system aimed to provide can actually translate into financial system participation, and to generally determine how far these objectives of protecting bank depositors by scheme were achieved.
1.2 STATEMENT OF THE PROBLEM
The concept of Islamic deposit insurance as a form of depositor protection scheme under the deposit insurance system is relatively new in the Islamic financial industry, Malaysia was the first country to institutionalise IDI, and it established the scheme in September 2005, to provide equivalent protection for insurable Islamic deposits. A
8 Specialised institutions include Islamic banks/Non-Interest Banks, Microfinance banks and Primary Mortgage Banks
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few countries have implemented deposit insurance (Md Khairuddin Hj Arshad, 2011), and there are only a few write-ups about its development and implementation, unlike in the case of the conventional deposit insurance scheme. Out of the 189 countries practising deposit insurance system, only 10 (ten) have implemented an Islamic deposit insurance scheme, and among these 10, only Malaysia and Nigeria are operating a fully institutionalised dual window deposit insurance, with other countries such as Sudan practising a fully Islamic deposit protection scheme, operating under conventional deposit insurance in turkey, Singapore and United Kingdom, or operating voluntary Islamic deposit insurance e.g. Jordan.
However there were several controversies (Mohammed Khnifer, 2010) over its permissibility, for instance, in the areas of insurability of some deposits, especially in the issue of guaranteeing Mudarabah (the profit sharing contract) deposits. There were also divergent views on the underlying contract to be applied for the operation of the scheme. While, the GCC adopted the Tabarru (donation) structure and permitted the arrangement of an in-house deposit insurance by the depository institutions, the Malaysian deposit insurance corporation adopted the Kafalah bil ujur9 as the most viable structure (Mohammed Khnifer, 2010), which was also implemented in Nigeria.
However, there were two divergent views regarding adopting Kafalah bil ujur. While Bank Negara Malaysia (BNM) considered it permissible, other fatwa issuing bodies like AAOFI, Majamaa and others in the GCC allowed it only with varying conditions (Laldin, Khir, & Parid, 2012).
Most of the basis of reference considered in justifying the permissibility of IDI has at all times been based on public interest (Maslahah). However, in most countries
9Kafalah bil ujur is a contract under Islamic law meaning guarantee with fee.
