Amaka Obiefuna

Considering the fundamental role of deposit insurance in maintaining financial stability, the Nigerian Deposit Insurance Corporation (NDIC) in a recent workshop for financial journalists x-rayed the emergence of cutting-edge technologies as tools in shaping the future of deposit insurance schemes.

Imade Uhunmwagho presenting a paper at the workshop held in Owerri in Imo State, stated that Deposit Insurance is currently positioned at a crucial crossroad, undergoing significant transformation under the impactful force of technology.

“At the heart of this evolution lies the fundamental role of deposit insurance as a linchpin in maintaining financial stability.

“The financial sector is undergoing a profound paradigm shift, with technological trends shaping the future of deposit insurance schemes. Our journey     begins by acknowledging the existing landscape of deposit insurance systems and the pressing need for innovation in response to the challenges posed by traditional methods,” he said.

He highlighted the emergence of cutting-edge technologies such as blockchain, artificial intelligence, and enhanced cybersecurity measures, showcasing their potential to redefine the landscape of depositor protection.

According to him, the current landscape of deposit insurance systems reflects a traditional framework and these systems are grappling with the complexities of an evolving financial environment.

Uhunmwagho noted that traditional methods, while robust in their time, are now confronted with issues of scalability, efficiency, and adaptability in the face of rapid technological advancements.

Legacy systems, he said, are often plagued by prolonged claim processing times, bureaucratic inefficiencies, and an inability to adapt to the nuanced risks of the modern financial world.

But the current landscape of DIS involves the following processes to ensure financial stability; “Resolution of failed Banks: When a bank fails, the DIS scheme steps in to pay out insured deposits to depositors. The DIS may also take other steps, such as arranging for the sale of the bank’s assets or providing financial assistance to a struggling bank.

“Supervision of Banks:  DIS schemes monitor banks on an ongoing basis to identify and address potential problems. This involves regular on-site inspections and reviews of banks’ financial data.

“Risk Assessment: DIS schemes assess the risk of bank failures by analysing banks’ financial statements, creditworthiness, and risk management practices.

“Premium Setting: DIS schemes set premiums based on the assessed risk of each bank. Banks with higher risk profiles pay higher premiums,” he educated.

However, he revealed that the current landscape is fraught with challenges yearning for innovation to effectively integrate technological advancements.

The challenges include that of scalability, adaptability to modern risks and enhancing customer experience.

 Scalability Challenges: The current landscape of deposit insurance systems often grapples with scalability issues, especially in the face of growing customer bases and increasing transaction volumes.

Adaptability to Modern Risks: The financial landscape has evolved with the emergence of complex financial instruments, rapid technological advancements, and interconnected global markets. Traditional deposit insurance models may not effectively address modern risks such as cyber threats, systemic vulnerabilities, or the complexities of international financial transactions.

Enhancing Customer Experience: Depositors increasingly expect a seamless and user-friendly experience in their interactions with financial services. Traditional methods often involve lengthy paperwork, cumbersome verification processes, and delayed claim settlements.

Uhunmwagho contrasted this with the potential for innovation, where digital identity verification, mobile applications, and streamlined processes can offer depositors a more efficient and transparent experience.

He presented additional challenges to include bank runs due to social media vast misinformation, verification of depositors to pay insured amount and emerging challenges with Fintech

He defined deposit insurance as a financial safety net designed to protect depositors by providing coverage for their deposits in the event of a bank failure, ensuring the stability of the financial system.

Noting that the NDIC is the Nigerian regulatory body responsible for safeguarding the depositors’ funds, promoting financial stability, and contributing to the effective functioning of the country’s banking sector through; deposit insurance, banking supervision, failure resolution, and bank liquidation

Though depositors confidence has been elevated since it commenced operations in 1989, the insurance expert noted that the landscape is evolving with recent technological advancements, like Financial Technologies, Cryptocurrency, Artificial intelligence amongst others, posing challenges to traditional methods of deposit classification, bank’s business model and coverage.

In this regard, he said NDIC continuously deploys cutting-edge technology solutions and also collaborates with relevant stakeholders in ensuring depositor protection and contributing to financial system stability.

On the future outlook of technology as a driver for the future of DIS, he further explained that technology can facilitate the implementation of risk-based pricing models, tailoring insurance premiums to the specific risk profile of each member financial institution.

“This approach promotes fairness and encourages sound risk management practices among banks,” he said, adding that automating this process on the cloud ensures information is always accessible, while the use of blockchain technology also ensures the information is transparent to all relevant stakeholders.

Continuing, he said DIS can leverage technology to strengthen supervision and regulatory oversight. “Automated data collection, analysis, and reporting can streamline compliance monitoring, identify potential breaches, and ensure timely corrective actions.

“Application Programming Interface (API) can be developed to interact with financial institutes applications for live feed of data and fast collection of data and supervision.

Also embracing technology in deposit insurance, he said, enables expedited claim processing through automation and digitalisation. “Swift settlements enhance depositor trust, reduce financial stress during crises, and contribute to overall system efficiency.

“Leveraging Blockchain technology for depositor records will enhance payout process, minimise errors and expedite deposit payout to within 24 hours,” he explained.

On another advantage of technology in DIS, Uhunmwagho said DIS can leverage technology to enhance collaboration and information sharing among regulatory authorities, financial institutions, and other stakeholders.

“Secure communication platforms, data sharing agreements, and standardised data formats can facilitate coordinated responses to emerging risks and promote financial stability,” he explained.

“The journey into the future of deposit insurance schemes is inseparable from the transformative influence of technology.

“It is evident that the integration of cutting-edge technologies such as blockchain, artificial intelligence, and advanced cybersecurity measures is not just a possibility but a necessity for the resilience and relevance of deposit insurance in the 21st century,” he concluded.