Source: DPC rolls out awareness campaign – NewsDay Zimbabwe July 13, 2017
AS part of efforts to raise awareness and understanding of operations of the Deposit Protection Scheme (DPS), which is part of the financial safety net, the Deposit Protection Corporation (DPC) is rolling out an awareness campaign to take deposit protection and financial education to the people through a series of workshops and roadshows. I was invited to the Mashonaland region breakfast workshop for banks and the media held on July 5, 2017 at a Harare hotel as part of the countrywide campaign. The workshop included sessions on the overview of the Deposit Protection Scheme by the chief executive officer, John Chikura, and publicity of the Deposit Protection Scheme by the corporation’s public relations manager, Allen Musadziruma. This instalment outlines key highlights of the workshop.
Financial Sector Spotlight: OMEN MUZA
Premiums: Flat or risk rate?
Premiums paid by member institutions can be in the form of a flat rate or a risk-based rate. The flat rate is simple and straight forward but it has its disadvantages. Often cited by big banks is the concern that given their sheer size, they pay more than the smaller banks, something the DPC concedes to be true. Although the risk rate is complicated, it motivates banks that are risky to aspire to become less risky. However, there are also fears that risk-based premiums could precipitate the demise of those institutions which may already be shaky. The Camels rating system (a recognised international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors: Capital adequacy, asset quality, management, earnings quality, liquidity and sensitivity to market risk) or rating agency scores can be used to determine the risk-based premiums.
Institutional and operational independence
In order to effectively carry out its mandate, a deposit insurer must be independent from the central bank. This is in line with the principle of separation of powers or duties, lest the situation arises, whereby, the apex bank licences, supervises, offers deposit insurance and also resolves failed banks. Also, if deposit insurers were part of central banks, there would be no stability in Deposit Insurance Schemes (DIS) because staff would be moved around at short notice to meet the bank’s prevailing human resourcing needs, thereby, militating against continuity. Additionally, when dealing with issues of liquidation and curatorship, independence is of utmost importance. The independence of the DPS is also underlined by Principle Number 3 of the Core Principles for Effective Deposit Insurance Systems, which outlines the essential governance criteria. In countries such as Kenya and Tanzania where the deposit protector is a division of the central bank, stakeholders are currently in the process of pulling them out of the apex bank in order to achieve the required level of independence.
Although most DPS are set up to satisfy public-policy objectives, in some countries, the concept of private deposit insurers has taken root and these are usually driven by an association of bankers. A good example of this set up can be found in Germany.
DPC’s biggest challenge
The gazetting of the DPC Act [Chapter 24: 29] in 2012 transformed the DPC from being a “paybox” to being “a risk minimiser.” On the basis of the efficacy of the Act and its alignment to the Core Principles for Effective Deposit Insurance Systems, the DPC won the 2015 Deposit Insurance Organisation Award for Deposit Insurance System Improvements from the International Association of Deposit Insurers (IADI). However, less than two years later the Act is — according to the DPC — already “being mutilated” and in effect, the country’ deposit insurance scheme has taken one step forward and two backwards. The deposit insurer’s gripe is that changes to the Act have stripped the corporation of some powers that make them effective.
“Can you restrict the insurer from seeing the risk you want them to insure?” Chikura asks rhetorically. He contends that the effect of the amendments to the Act is something like, “You can cover banks, but we don’t want to see your foot in the bank.” In a nutshell, removing some of the DPC powers has rendered the deposit insurer less effective in some respects.
Cover limit
The insurable limit of $1 000 per depositor per bank almost constitutes the average deposit holding in Zimbabwe and covers 93% of depositors by number in full, but the coverage is much lower than in other countries. In the EU, for instance, it is €100 000, and in the USA it is $250 000 while the United Kingdom pays out £75 000. The DPC reckons that the coverage limit can only go up in tandem with the level of economic growth. The DPC also reports that some jurisdictions such as the United Kingdom, Malaysia and South Korea have moved on integrated deposit protection schemes that cover insurance policyholders as well as depositors and investors in bank and non-bank financial institutions such as asset managers and stockbrokers.
DPC wants strong banks
To illustrate the necessity of deposit protection schemes, Chikura used the analogy of resettlement and the emergence of new communities.
“When communities build mortuaries, they don’t wish anybody to die. Similarly, the DPC does not wish any bank to fail. We want strong banks,” he said, noting that mortuaries and hospitals are still built well in advance because somebody will get sick and somebody will die. Chikura also remarked that it is banking institutions themselves that decide that it is time to go six feet under, by the things they do. “If you don’t observe good corporate governance, what do you think will happen?”
Although the DPC has expertise as an undertaker to ensure that when a bank fails, it is given a decent send off, the DPC says it is multi-skilled and can also effectively carry out the role of specialist doctor in the intensive care unit (ICU). On being asked if the DPC plays a part in the opening of new banking institutions or only shows up when they are failing or have failed, Chikura said that the law provides for the Reserve Bank of Zimbabwe to consult the DPC during the licensing process but the apex bank sometimes does not do that, hence, the tendency to characterise the deposit insurer chiefly as an undertaker.
Other interesting tit bits from the workshop are that, worldwide, the emphasis on protecting only small depositors is dissipating and the focus is now on protecting all types of depositors in line with financial inclusion goals. I also learnt that from a banking perspective, deposit insurance is a capital development cost. It was also interesting to find out that China, Saudi Arabia and South Africa do not have deposit insurance systems, but are all in the process of setting up this necessary financial infrastructure on the back of pressure brought to bear on them by G20.
The DPC also revealed that in an effort to spread its reach, it would be opening a regional office in Bulawayo by the end of July, which will make it much easier for them to service depositors in the southern region of the country.
Omen N. Muza is the founder and editor of the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact on omen.muza@gmail.com.
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