Who will pay to protect depositors?

different economies. The discussion was quite absorbing such that I have to share some of the aspects that we talked about.

By nature, deposit protection boards are typical credit risk mitigation mechanisms which are used as a last line of defence for depositors in times of banking instability.

In other words, they are an insurance against loss of depositors’ funds. With a non-existent derivatives market in Zimbabwe’s banking sector we have had cases of some banking executives that have abused depositors’ funds.

While we have the Depositor’s Protection Corporation its capacity to compensate depositors affected by the shenanigans of these banking executive has been minimal due to its limited capitalisation. Perhaps this is an opportune time to drum up support for its capitalisation so that it executes it role to greater effect, which befits such a vital cog in the interbank market.

It is no secret that it is the local banks which have the mandate to contribute towards the capital requirements of the corporation. I also got the impression that banks are obliged to contribute an average of US$1 million each towards the capitalisation of the corporation which will translate to more than US$20 million, which is slightly lower than quarterly capital thresholds demanded by our central bank to the local financial institutions.

Given that no exciting proposal has been forwarded to deal with the capitalisation of the Reserve Bank of Zimbabwe, this might appear to be a case of putting the cart before the horse or disturbing the apple cart within the market.

I understand that there is a possibility that the appetite to timeously capitalise the central bank to act as a lender of last resort will diminish if the Depositors’ Protection Corporation is adequately capitalised as the latter will have abrogated some of the tenets which define central banking.

In addition, with most banks experiencing depressed profits following the consummation of a moratorium on the reduction of service charges, the need to contribute to the capitalisation of the corporation looks like a luxury.

It will be interesting to observe how a bank, which is failing to attract meaningful deposits would react to being compelled to contribute to risk mitigation through such a mechanism. However, the need to adequately capitalise the Depositors’ Protection Corporation cannot be overemphasised as daily stories indicate a restive banking sector where some banks are losing the plot to circumvent challenges in the economy.

The situation has not been helped by reckless utterances that a bank is collapsing without solid evidence to support this. Such incidents should be nipped in the bud.

The destabilising effect of such is a cancer which can cripple the effort of rebuilding a sector which had already experienced its fair share of challenges.

It is important to learn that sour grapes are not cooled through the media. Fortunately, we are the only nation in the world where a screaming headline announcing the impending collapse of a bank is not followed by a bank run.

I understand there is an argument being thrown around that the Depositors’ Protection Corporation is only able to serve the uninformed and unfortunate members of the society. There is an iota of truth in that assertion. In my opinion the corporation has only been making payments to low-end depositors leaving out the high-end clients.

This by implication will mean if a bank has more corporate blue chip clients, its appetite to believe in the existence of corporation is diminished, with banks which embrace mass banking, their customers might need the mechanism as they might not be savvy enough to read the signals of a bank’s going concern status.

Indeed, in most cases the uninformed are the most vulnerable group who need protection as a strong correlation seems to exist between being uninformed and being impoverished.

It is true that the proportion of non-performing loans is much higher than what meets the eye, the stratospheric loan deposit ratios which characterised the switch to dollarisation have created a credit bubble which might not necessarily burst but its effects will be tangible as business conditions remain negative regardless of an aura of stability which was ushered in by the new currency.

It is the right of the banking public to demand the capitalisation of the board. It can also be a convenient strategy to induce confidence in the banking sector since most depositors are losing interest in banks role due to never ending stories of their abuse of fiducial duties.
Thank you and God bless you.

Christopher Takunda Mugaga is an economist. He is the Head of Research for Econometer Global Capital, a regional finance and economics research firm. He can be contacted on: +263 772 240 353 / +263 776 266 062 or on the following e-mail address: [email protected]