Dr Richmond Atuahene’s thoughts … Deposit protection corporation and its legal and regulatory framework: Ghana’s experience (1)

Banks see deposits fluctuate over slow private sector recovery
Dr. Richmond Atuahene is a banking consultant

Banks are in the business of assuming and managing risks and by virtue of this they are vulnerable to liquidity and solvency challenges. Since, banks rely on customers’ deposits that can be withdrawn on little or no notice, banks are prone bank-runs, where depositors seek to withdraw funds quickly ahead of possible bank insolvency. Policy makers around the world thus try to establish and maintain deposit insurance scheme to protect depositors and to give them comfort that their funds are not at risk. Some developing countries from Africa have established deposit insurance schemes to prevent contagious bank runs, to provide a formal national mechanism for handling failing banks and other financial institutions and to protect small depositors from losses when banks or other financial institutions fail.

Without an explicit deposit institution scheme, many developing nations in recent times have extended implicit deposit protection to depositors on a discretionary, ad-hoc basis. Deposit protection scheme as known in Ghana, has been recently introduced by the government of Ghana. While introducing the scheme in 2019, a thorough and comprehensive studies do not seem to have been conducted in the towns, villages and the rural settings by the government, project coordinators and Bank of Ghana before the operationalization of the Ghana Deposit Protection Scheme in November,2019.

There are a lot of contentious issues that both legislature and executives seemed not have dealt with. The Deposit Protection Act 2016 Act 931 (as amended Amendment Act 2018 Act 968) should be legislative amendments to address issues such as governance structure, cross border issues, and contingency planning and crisis management to meet the best international practices and based on basic principles of deposit insurance. As per the Core principles for effective deposit insurance scheme, policy makers should prepare a way out for the Ghana deposit protection scheme.

This research, thus, seeks to find out the basic principles of effective deposit insurance system, practices and trend in the four different African countries and compare it with the Ghanaian context. The research also explores and highlights the major contentious issues in the Ghanaian case.

The primary data of this research is drawn from existing literature on deposit insurance as well as websites of central banks and government of different countries in the Sub-Saharan Africa. Thus, it is a review research. It was found that there are several contentious issues in the Ghanaian deposit protection scheme that need to be addressed based on the basic principles of deposit insurance system. Some of the contentious issues include Core Principle 3 and 5.

Governance appeared problematic. As per the essential criteria, the deposit insurer should be operationally independent, well governed, transparent, accountable and insulated from external influences. Under external interference there should be no government, central bank or industry interference that compromises the operational independence. Principle 5 on cross-border issues, there is material presence of foreign banks operating in Ghana but nothing was enshrined in the Act 2016 Act 931.

On the proper and fitness test there is a questionable character on the board that must be addressed properly to enhance the credibility of the Ghana Deposit Protection Corporation. As per the Core principles for effective deposit insurance system, policy makers should prepare a way out for the Ghana deposit protection scheme. Based on the findings of this research, it is recommended that at least following improvements need to be done; broader mandate such as Pay Box Plus; governance, cross border issues; contingency planning and crisis management and public awareness. One of the major issues of controversy seems to be the one- off premium paid by the participating banks as equity contribution as well as the premium rate, which is very high compared to the four African countries used in this study, it needs to be revisited.

Banks that accept deposits from the public are important in the economy because of their involvement in the payment system, their role as intermediaries between depositors and borrowers and their function as agents for transmission of monetary policy. The importance of banks to the economy, the potential for depositors to suffer losses when a bank fails and the need to mitigate contagion risks, lead several countries globally to establish financial safety nets.

Theoretically, financial safety nets usually include strong prudential regulation and supervision, lender of last resort and deposit insurance scheme. Public policy makers thus maintain deposit insurance scheme to protect depositors and to give them comfort that their funds are not at risk. While these measures did not address the root causes of the lack of confidence, they were nevertheless helpful in avoiding a further accelerated loss of confidence, thus buying valuable time (Schich, 2008). Smooth functioning of the financial system rests upon a number of mechanisms such as a set of prudential norms supported by the appropriate legal framework, lender of last resort facility and deposit insurance system.

Various Governments and central banks globally attempt to stem contagion through financial safety net mechanisms. The first line of defence is a lender of last resort- a bank which has the ability to create new bank reserves and to lend them to commercial or universal banks. This is one of the most important functions of a central bank, like Bank of Ghana, Central Bank of Nigeria, Bank of England or US Federal Reserve Banks. The second line of defence is a deposit insurance schemes that guarantees depositors that their funds will be repaid in the event of bank or special taking institution failure. The final line of defence is a government bailout.

A second component of the financial safety net is a deposit insurance scheme, whereas the first financial safety net is lender of last resort which designed to provide liquidity to illiquid but still solvent banks. Deposit insurance is defined as a system that is established to protect depositors against the loss of their insured deposits in the event that a bank or financial institution is unable to meet its obligations to such depositors, according to the International Association of Deposit Insurers (IADI,2014). Explicit deposit insurance is a measure implemented in many countries such USA, Nigeria and Kenya to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its obligations when due. In an implicit deposit protection scheme, losses arising from the insolvency of banks and specialized deposit taking institutions are borne by the general public or taxpayers, regardless income, size of individual deposit, or size of the financial institution. Such implicit deposit protection scheme cannot be seen as fair to general public (Choi,1999).  Deposit insurance scheme has different objective of ensuring that in the event of a bank failure, depositors are guaranteed to receive back at least the minimum insured amount of their deposits. Thus, payments under a deposit insurance scheme are made to depositors when a specified trigger event- such as a bank being put insolvency. In this situation, depositors do not have to wait for the winding up of the bank to be completed before being repaid and do not face the uncertainty of receiving back only a fraction of the amount they had deposited.

The writer is a Banking Consultant.

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