By Oliver Azi

Prior to the Supreme Court judgment which placed a stop to the plague of cash scarcity in Nigeria; digital banks became a household name. Although starting its history in 2013, with ALAT prided as the first digital banks in Nigeria and gaining popularity during the dark days of the pandemic—COVID 19. Nigerians are yet to trust the integrity of the system, a major reason being that; what if they shutdown with customers funds, seeing that, they have few or no branches at all; what happens to customers money? In view of this, this article will address some concerns and questions regarding digital banks and the banking sector in Nigeria.

THE LEGAL AND REGULATORY FRAMEWORK FOR DIGITAL BANKS IN NIGERIA

There are four laws that majorly regulate banks and banking transactions in Nigeria; the Banks and other Financial Institution Act, 2020; the Central Bank of Nigeria Act 2007; the Companies and Allied Matters Act 2020; the Nigerian Deposit Insurance Corporation Act 2006. However, other statutory laws and acts can be used at any time—it depends largely on the transaction involved.

There are three major agencies that regulate banks in Nigeria and they include the Central Bank of Nigeria; the Nigeria Deposit Insurance Corporation and the Corporate Affairs Commission. However, as earlier noted in the legal framework, other regulatory framework can also interface with banks in Nigeria—depending on the situation.

WHAT HAPPENS TO CUSTOMERS FUNDS IN EVENT OF DIGITAL BANKS SHUTTING DOWN?

The fear has always been; since digital banks have no physical office (except the head office) what happens to customers funds in the event of closure or liquidation. The answer lies in the fact that in 2006, the Nigerian government passed the Nigerian Deposit Insurance Act 2007 which introduced the DIS system. The Deposit Insurance System—DIS—is practically an idea that; banks should pay certain deposits so as to mitigate future risk that might affect the banks and in turn, affect customers.

Deposit Insurance is a system established to protect depositors (customers) against the loss of their insured deposits placed with member institutions (that is the banks) in the event that a member institution is unable to meet its obligations to depositors. It engenders public confidence in, and promotes the stability of, the banking system by assuring savers of the safety of their funds

If a financial institution is unable to meet its obligations to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank as well as other healthy institutions. The government has therefore established a deposit insurance mechanism, under which the NDIC is empowered to provide protection for small depositors and contribute to financial and social order

THE NIGERIA DEPOSIT INSURANCE CORPORATION

To effectively carry out the DIS program, there was the need for the establishment of the NIGERIA DEPOSIT INSURANCE COMMISSION which was to ensure that the banking sector remains secured and safeguarded and to ensure that customer’s funds are duly protected.

Section 2 of the Nigeria Deposit Insurance Corporation Act 2006 stipulates the functions for the Corporation as follows:

Insuring all deposit liabilities of licensed banks and such other financial institutions (hereinafter referred to as “insured institutions”) operating in Nigeria within the meaning of Sections 16 and 20 of this Act so as to engender confidence in the Nigerian banking system;
Giving assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks particularly where suspension of payments is threatened, and avoiding damage to public confidence in the banking system;
Guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum as provided for in section 20 of this Act;
Assisting monetary authorities in the formulation and implementation of policies so as to ensure sound banking practice and fair competition among insured institutions in the country;
Pursuing any other measures necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objects of the Corporation.

ADVICE AND CONCLUSION

In view of this, it is advised that, before opening a bank account, whether digital or traditional, there is need to check if that bank has been registered with the NDIC. The NDIC is the government regulatory body empowered to administer the DIS in Nigeria, thereby protecting depositors of deposit-taking financial institution. Also, listed on the NDIC website are list of banks, microfinance banks et al that has been registered with it.