Deposit insurance systems now more critical – Chikura

with a number of international core principles of effective bank deposit insurance systems.
The International Association Deposit Insurers developed a set of 18 core principles in deposit insurance in 2008 based on practical experiences of its members.
But while Zimbabwe has made considerable progress towards setting up an effective deposit protection system the country still falls short on most key principles.
This becomes a worrying factor considering that recent events at Renaissance Merchant Bank proved the country was still in the cusp of possible bank crises, as it emerged last week that at least six banks – out of a total of 26 – are struggling to meet regulatory capital thresholds.
Deposit Protection Board chief executive Mr John Chikura said the global financial crisis showed well functioning deposit insurance systems were now more critical than ever before, considering the potential consequences.
The DPB CEO said this during his presentation on key principles for deposit insurance at the African Chapter of the International Association of Deposit Insurers conference, which ended in Victoria Falls last Saturday.
“Having proper mechanisms in place in a pre-emptive way will provide clarity and certainty should a new episode of financial stress emerge,” he said.
The most critical principle, in the wake of Zimbabwe’s financial crisis of 2003 and the world financial crisis of 2009, is the issue of deposit insurers’ legal powers.
While depositors of failed banks in Zimbabwe were compensated from proceeds of liquidation, the money was insignificant to exhaust most clients’ claims.
The DPB only managed to compensate depositors of three smaller financial institutions due to limited resources as it had just been set up at the time.
Principle four states that “a deposit insurer should have all powers to fulfill its mandate” and “the powers include ability to finance reimbursements, enter contracts and access timely and accurate information”.
Zimbabwe is still working on legislation to clearly define and empower the Deposit Protection Board, whose legal powers to fully discharge its mandate are still limited.
This is further supported by principle 14, which says deposit insurers should have power to seek legal redress against parties at fault in a bank failure.
And the issue of power tallies in with the principle, which requires board members and employees of deposit insurers to be protected against lawsuits for decisions and actions, taken in good faith and normal course of duties.
Speaking at the IADI conference in Victoria Falls, Finance Minister Tendai Biti said deposit insurers deserved enough legal authority to carry out their mandates.
“It is critical that all deposit insurers be given appropriate powers, sufficient legal authority and adequate resources to act and fulfil their mandates,” he said.
Zimbabwe might in the near future have a legally empowered Deposit Protection Corporation, which will have supervision and monitoring powers over banks.
A Deposit Protection Corporation Bill is before Parliament.
IADI’s principle 15 requires deposit insurers to be part of a framework with a financial safety net that provides for early detection, timely intervention and resolution of failed banks and sufficient legal power to act.
But in Zimbabwe only the central bank has sufficient legal power to set up the safety framework, monitor and intervene in bank crises and failed bank resolution while DPB acts as a pay box when a bank collapses.
Zimbabwe is also still struggling to mobilise funding to be able to intervene meaningfully in the event that a big financial institution collapses.
Mr Chikura recently said this has taken long as banks had resisted upward review of their contribution towards the deposit protection fund.
The contribution had been set a very low rate to allow bank to recover.
Principle 11 says: “A deposit insurance system should have all necessary funding available to ensure the prompt reimbursement of depositors’ claims.
“Member banks must pay for deposit insurance since their and their clients directly benefit from having an effective deposit insurance system.”
Countries such as Nigeria, USA, Canada, the United Kingdom have fully functional, legally empowered and well-resourced deposit protection entities.