Feature: Deposit protection corporation and its legal and regulatory framework

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

Ghana’s experience(part 9)

The failure of Capital Bank and UT Bank ltd cost the government nearly GH¢ 2.2 billion in August, 2017, while collapse of Royal Bank, Unibank, Sovereign Bank, Premium Bank and Heritage Bank is said to additional GH¢ 7.9 billion, and in May 2019, Bank of Ghana revoked the licenses of 347 micro-finance companies, 39 Micro-Credit firms and subsequently revoked the licenses of 15 Savings and Loan companies and 7 finance houses costing the tax payer for nearly GH¢15.6 billion.

Although, informal new reports suggest that not all depositors have been reimbursed especially customers of the 15 savings and loan companies, some of micro-finance customers as well as the 7 finance houses customers, and these outstanding issues because of the implicit deposit protection.

Without an explicit deposit insurance system/scheme, many developing countries in recent years have extended implicit deposit protection to depositors on a discretionary, ad-hoc basis (Talley & Mas, 1990).

Even though the Ghana Deposit Protection Insurance Act was passed in 2016, but it was not operationalized until Ghana experienced banking crisis in 2017-2018.

The Ghana Deposit Protection Insurance Scheme will protect insured depositors against the consequences associated with the failure of a bank or specialized deposit taking institution, but it is not designed to protect banks from failing.

First, one of the major issues that affect the Ghana Deposit Protection Corporation is the Pay Box mandate that has limited role to collect premiums and pay out depositors on the collapsed of licensed financial institutions.

A “pay box” mandate, where the deposit insurer is only responsible for the collection of premiums and reimbursement of insured deposits

. Ghana Deposit Protection Scheme has no mandate covering comprehensive risk minimisation functions as well as risk assessment/management, and no business for early intervention and resolution powers, and no prudential oversight responsibilities.

The Ghana Deposit Protection Corporation is not part of a framework within the Ghanaian financial system net that could have provided for early detection and timely intervention and resolution of distressed financial institutions.

The design features of a deposit insurance are quite important. Indeed, recent empirical studies show that narrow mandate schemes like the Ghana’s Pay Box increases the likelihood that a country could experience banking crisis.

The Pay box mandate of Ghana’s deposit protection scheme did not provide some sort of assurance about the resolution process of failed banks which had made less important for maintaining stability during future banking crisis.

However, in our country, some key decisive points at the time of reimbursement such as timing of payment, verification of account data, mode of payment (cash, cheque or kind) are not mentioned in the Ghana Deposit Protection Act 2016 Act 931 as amended Amendment Act 2018 Act 968.

Second, another major issue with the Ghana Deposit Protection Scheme was the lack of public awareness of the passage of the Act 2016 Act 931 among stakeholders.

Before the introduction of Ghana Deposit Protection Scheme, the project coordinator and the government did not familiarize with stakeholders with the concept of deposit insurance scheme and how it works, as well as the effectiveness of deposit insurance schemes in promoting financial stability.

During the pre-establishment phase, the project coordinator and the government should have provided information on deposit insurance scheme to stakeholders including small depositors and others to facilitate the establishment of such a scheme and the related legislation.

Policymakers should have considered public consultations with key stakeholders in cities, towns and villages to explain the concept, benefits and limitations of the scheme.

Public feedback could have helped policymakers to tailor the scheme to local conditions especially in towns and villages where some rural and community banks and specialised deposit taking institutions operate.

In addition, it could have enhanced public awareness and improve public consultation process as part of consensus building mechanism as there was little consensus in the pre-establishment period.

For any deposit insurance scheme to be effective it is essential that the public especially the rural folks be informed on an ongoing basis about the laws, the benefits and limitations of the scheme.

Public attitudes and expectation play a particularly important role in reinforcing credibility and the effectiveness of the deposit protection scheme.

If Ghana Deposit Protection Scheme is to operate effectively and efficiently, it must win the confidence of the Ghanaian public.

For what has happened over the past three years in the banking sector, to ensure the success of the Ghana deposit protection insurance scheme as well as to increase the confidence of customers in the banking sector, deposit insurer ought to create awareness about this scheme and convince the public of security of their deposits, may be the Ministry of Information, information vans in the villages, districts, municipals and cities and also means of print and electronic media.

This is because without the public understanding the system, Ghana deposit insurance protection scheme could be effective and general public could not be made aware of the reduced incentive for withdrawing their insured deposit.

However, it seems that neither the project coordinator, nor Ministry of Finance or Bank of Ghana felt it the priority as well as lack any incentive to properly publicise these facts. Thus, most customers are not even aware of this scheme in the banking market even in the urban areas, let alone in the rural areas and villages.

The public seems to be the neglected part of Ghanaian deposit protection insurance scheme and public awareness not the responsibility of project consultant, Ministry of Finance and Bank of Ghana.

Public attitude and expectations play a particularly important role in reinforcing the credibility and the effectiveness of a deposit insurance scheme. For the deposit protection insurer to operate effectively and efficiently, it must win the confidence of the public after three years of banking crisis.

To ensure the success of Ghana deposit protection scheme as well as to increase confidence of customers of the banking sector, deposit insurer ought to create awareness about this scheme and convince the public of security of their deposit, that may require advertisement through print and electronic media.

One benefit of the Ghana Deposit Protection scheme is to increase public confidence by giving them assurance of their deposit. But, all that depends on the level of awareness or knowledge of the depositors about deposit protection scheme.

As it is evident that there is large scale ignorance among uninformed small depositors with regard to the deposit insurance scheme, one may raise the question about the marginal contribution of Deposit Protection Scheme in improving trust of the depositors in the banking industry.

Third, another contentious issue with the Ghana Deposit Protection Corporation is governance structure which is enshrined in Act 2016 Act 931 concerning the appointment of the Governor of Bank of Ghana as a chairman of the Board and the appointment of representative of Ministry of Finance to board.

The Principle 3 of IADI (2014) Core Principles on Governance appeared to be in conflict with Act 2016 Act 931.

The principle 3 states that deposit insurer should be operationally independent, well governed, transparent, accountable and insulated from external interference.

Under external interference there should be no government, Bank of Ghana or industry interference that compromises the operational independence of the scheme.

While it is important to have the Ministry of Finance and possibly also the Bank of Ghana represented as ex-officio on the board of the Ghana Deposit Protection Corporation, the government members should dominate the board by constituting the majority of its members or by holding the position of chairman.

According to IMF working paper (Wp/99/55) and Garcia (1999), the chairman and majority of the board of directors should be worthy, experienced but independent members of the public with no current ties to the banking industry that would present a conflict of interest.

Thus, bankers should not be on the board of the Ghana Deposit Protection Corporation, although their valuable experience and competencies could be utilised through their presence on as consultant.

This assertion would require a legislative amendment to the Ghana Deposit Protection Act 2016 Act 931 (as amended Act 2018 Act 968).

The Ghana Deposit Insurance Protection Scheme should be subjected to sound governance practices, including appropriate accountability, internal controls, transparency and disclosure regime. The Scheme should also have a charter of board, and conflict of interest rules etc.

Fourth, as regards coverage limit (Section 20 (Sub-section5) of Ghana Deposit Protection Act 2016 Act 931 stated that coverage limit of GH¢ 6,250 and GH¢ 1,250 respectively set for banks and specialised deposit taking institutions.

Ghana’s deposit insurance scheme with low levels of coverage would indeed not be effective in preventing bank runs.

Specifying a too low coverage amount tends to be less effective in instilling confidence on the part of (retail) depositors, and it runs the risk of undermining the credibility of the deposit insurance scheme, thus increasing the likelihood of bank runs when problems occur.

Another vital reform that is needed to increase the threshold from its current low base of GH¢ 6,250 and GH¢ 1,250 for banks and specialized deposit taking institutions respectively to reflect inflation and persistent currency depreciation since the passage of Ghana Insurance Protection Act in 2016.

Section 20 (Sub-section 8) states that the Deposit Protection Corporation shall not earlier than 3 years after the commencement of this Act, revise the coverage limits specified under Sub-section (3) to accord with economic conditions prevailing in the country.

In other jurisdictions where persistent inflation, high interest rates and currency depreciation as part of unstable macroeconomic environment, the deposit insurer should be allowed to revise the limits yearly.

Setting the level of insured deposits by giving considerations on prevailing macroeconomic conditions such as inflation, prevailing interest rates and currency depreciation trends, average deposit levels, inclusion of maximum number of accounts of natural persons, country’s GDP, etc would have been reasonable and scientific basis, in this regard.

Author: Dr. Richmond Atuahene, Banking Consultant

Leave a Reply