It is commonplace to hear of depositors losing their savings held with some financial institutions when they collapse. Those who could not bear the painful loss died and left emotional scars on their families’ memories. To control the risks associated with such events, it is just proper to adopt mechanisms that reassure customers of protection regarding their savings with licenced deposit-taking institutions, while educating them to stay away from any fly-by-night institution in the country.
In this regard, the Deposit Protection Act, 2016 (Act 931) as amended, was enacted to establish a Scheme to compensate small depositors. These small depositors are entitled to compensation when the central bank revokes a bank’s licence, or the licence of a Specialised Deposit-taking Institution (SDI) in which they have deposits and then appoints to it a receiver. So, to operationise the Act, the government of Ghana in June 2018, entered into a concessional loan agreement with the government of the Republic of Germany for €13million to establish the Scheme.
The purpose of the credit facility, with a repayment period of 30 years and other terms, was highlighted in the appendix (10 B: List of all Loans Signed in 2018) of the Budget Statement and Economic Policy for 2019. The Budget Statement reinforces “to ensure that depositors’ funds remain protected and to insulate the budget from costs associated with banking sector disruption, the Ghana Deposit Protection Scheme will become fully operational in 2019”.
Indeed, we are barely in the first quarter(Q1) of 2019; and while waiting for the eventual take-off of the Scheme, there are pertinent issues to consider in our public discourse for general understanding. It is therefore apt to ask: Who does the Act recognise as a small depositor? Which deposits are not covered under the Scheme? Are your deposits excluded from insurance protection and denied compensation in the event of liquidation because a shareholder of the bank/SDI is your family member? Above all, how is the initial premium determined?
In the first place, Act (931) recognises a small depositor as “a person who has a level of account determined by the Board [of the Deposit Protection Corporation] to be a small account”. Even though the Board has an administrative power to determine what in its wisdom constitutes a ‘small depositor’ and by extension a ‘small account’, the exclusion list of persons not covered by the Scheme clearly defines the parameters to identify the small depositor/account.
As simplified therein, insurable deposits exclude the following category of deposits/ accounts:
- Deposits/accounts of unidentified persons
- Frozen Accounts
- Deposits of Key management persons/director(s) working with the bank/SDI for at least 3 years preceding the revocation
- Deposits of Pension funds, other financial institutions, central government/administrative bodies, insurance companies, collective investment undertaking held in the bank/SDI
- Deposits held in a foreign branch of bank/SDI registered in Ghana
- Deposits held in a subsidiary of the foreign bank/SDI operating in a foreign country
- Deposits of external auditors with at least a 3-year relationship with the bank/SDI prior to liquidation/appointment of a receiver.
Thus, the exclusion list shows that the Scheme does not provide blanket protection for all depositors. Revealing as the exclusion list is, it also shows that a ‘small depositor’ is not necessarily determined by this depositor’s relative quantum of deposits held in the bank/SDI. Hence, any liability-free deposit held in a bank/SDI and not on the exclusion list is insurable and entitled to compensation within the coverage limits when a bank/SDI collapses. Nonetheless, the current coverage limit under the deposit protection is GH¢6,250 for bank depositors and GH¢1,250 in respect of depositors with the SDIs. Oooops! Disheartening coverage limit? Section 20(3).
There are twenty-three (23) universal banks currently in Ghana and operating under the new minimum paid-up capital of GH¢400million. Based on this, it is easy to determine how much initial premium each of them is required to pay to the Corporation when it begins to receive same. Section 14(1) of Act (931) makes it clear that “a member of the scheme shall pay to the Corporation an initial one-off premium of zero-point-one percent (0.1%) of the required minimum paid-up capital, as provided in relevant laws on banks and SDIs”. As a result, each of the (23) banks will pay GH¢400,000 as their initial premium, adding up to GH¢9.2million.
However, to arrive at the total banking industry’s initial premium payable to the Corporation is dependent upon ascertaining the number of all the Specialised Deposit-taking Institutions (SDIs) currently in good standing with the central bank, and their respective minimum paid-up capitals. Since the decision to resolve insolvent SDIs is imminent, and the number to be affected and the tiers in which they are is not public, it is just prudent not to factor them into the computations – at least for now.
What is more, it is expected that the banks/SDIs will start paying their initial premium to the Corporation by September 2019 when the LI (Legislative Instrument) to the Act is in place (if it is not yet formulated) and the annual mandatory renewals thereafter.
As an assurance to small depositors that their savings are covered in the event of liquidation, deposit protection helps to instil confidence in the banking system. But it brings about the burden of recurrent cost implications on the banks/SDIs and depositors alike. The net effect is that the expenses will be passed on to the same depositors or customers by way of high tariffs/charges, leading to non-performing loans, and therefore expose the moral hazards associated with bad decisions which cause bank failures. Kaput! God Bless!
This script was written by a Chartered Banker with a flair for feature writing. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside. Email: Kwaku.Anumu@gmail.com