…An overview of the Deposit Protection Act
The role of a Central Bank in supervising the operations of all deposit-taking institutions cannot be overstated. As the apex financial institution, it is incumbent on every Central Bank to ensure that all deposit-taking institutions operate within the fine lines of the law to avoid any wanton dissipation of the funds deposited by the citizenry.
In furtherance of this objective, every Central Bank is granted supervisory power over banks and deposit-taking institutions and in some circumstances where it is in the interest of the citizenry, revokes the licences of some of these institutions. Between the years 1994 and 2006, the Nigerian Central Bank revoked the licences of 45 failed banks and appointed the Nigerian Deposit Insurance Company as liquidator for these institutions.
Ghana had its first share of this phenomenon on August 14, 2017 when the Bank of Ghana announced the revocation of the Banking Licence of UT Bank Limited and Capital Bank Limited for a myriad of reasons with the most prominent being issues with liquidity and corporate governance. The Governor of the Bank of Ghana in an address to the Chartered Institute of Bankers in December 2017 stated these reasons and why the Bank of Ghana had to intervene. In the address, he stated, “Let me be upfront and say that though the failure of the two banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices within these institutions”.
This was not to be the last of such acts by the Bank of Ghana. By a notice dated 1st August 2018 the Bank made it known to the public that a new indigenous bank Consolidated Bank Ghana had been granted a universal banking licence to take over the business of The Royal Bank Limited, Beige Bank Limited, Sovereign Bank Limited, Construction Bank and Unibank Ghana Limited. The press release detailed the reasons for the revocation of the licenses of the 5 banks which were very similar to the reasons given for the shutdown of Capital Bank and UT bank the year before.
This cleanup has to date, also seen the revocation of the licences of 347 insolvent microfinance institutions. Following the revocation of the licenses of these banks, the Bank of Ghana came under much scrutiny in the public eye with calls for a review of this action and questioned the Banks of Ghana’s motive for taking such “drastic” measures to kill indigenous banks.
The aftermath of these decisions is still being felt today, the common questions that arose after this centered on what options were available to depositors when their banks had their licences revoked and if there was any state agency responsible for insuring depositor’s funds
This article will look at the various steps taken by the Bank of Ghana after the banking sector clean up to provide insurance for Depositor’s funds. Recourse will be made to the provisions of the Bank of Ghana Act, 2002 Act 612 (hereinafter Act 612); the Companies Act 2019, Act 992(hereinafter Act 992), Banks and Specialised Deposit-Taking Institutions Act,2016 Act 930 (hereinafter Act 930) and The Deposit Protection Act 2016, Act 931 as amended.
The Ghanaian Banking Sector
The Ghanaian banking sector is regulated by the Banks and Specialised Deposit-taking Institutions Act 2016, Act 930. The act grants the Bank of Ghana supervisory and regulatory authority over all deposit-taking institutions. This supervisory control is in line with section 4(1)(d) of Act 612, which states the bank shall perform the following functions … “regulate, supervise and direct the banking and credit system and ensure smooth operation of the financial sector.”
The functions of the Bank of Ghana in this regard are; Promoting the safety and soundness of banks and specialized deposit-taking institutions; considering and proposing reforms of enactments relating to the deposit-taking business; ensuring the soundness and stability of the financial system and the protection of depositors in the country through the regulation and supervision of financial institutions;
In line with the Central Banks’ duty to protect depositors requires that any company issued with a licence to operate as a bank or deposit-taking institution becomes a member of the Ghana Deposit Protection Scheme. A bank or specialised deposit-taking institution that does not comply with the standards for membership of the Scheme required under the Ghana Deposit Protection Act shall undertake a mandatory merger or amalgamation or be closed down by the Bank of Ghana
The Ghana Deposit Protection Act
The Ghana Deposit Scheme is created by the Ghana Deposit Protection Act 2016, Act 931 as amended by Act 968. The Act has as its long title “AN ACT to provide for the establishment of a Deposit Protection Scheme, a Deposit Protection Fund, a Deposit Protection Corporation and for related matters. The Deposit Protection Scheme is managed by the Ghana Deposit Protection Corporation (hereinafter the corporation) created by Section 22 of Act 931.
The corporation was operationalized in 2019. The function of the Corporation includes paying off insured depositors per the act, investing the funds of the scheme in approved investments, set the premiums payable by the Banks and DTI’s. The corporation is funded by contributions from the Government of Ghana and Bank of Ghana; monies approved by Parliament; grants from donors and other sources approved by the Act
The Deposit Protection Scheme (the scheme) was set up to be a paybox to protect depositors from losses caused by an insured event and make payouts to insured depositors. An insured event is defined in the act as either the revocation of the licence of a bank or DTI or the appointment of a receiver or liquidator of a bank or DTI. Membership of the scheme begins with the issuance of a licence to operate as a bank or DTI and ends with the occurrence of an insured event or the acquisition or amalgamation of a Bank.
After the occurrence of an insured event, the affected bank or DTI ceases to be a member of the scheme and shall not hold itself as a member. The Bank or DTI is also under the duty to inform Depositors and the public of this fact and cease receiving deposits from the public. The failure of the Bank or DTI to comply with this duty commits an offence and is liable on conviction to the payment of a fine not exceeding 5000 penalty units.
Members of the scheme are bound to pay premiums for the continued sustenance of the scheme. Members are to pay a one-off initial premium of 0.1percent of the required paid-up capital required to operate a bank or DTI. After the initial premium payment, members are to pay an annual premium payable in quarterly installments to be determined by the corporation. Where a member fails to pay premiums the member is liable to pay an administrative penalty of not more than 5000 penalty units. Where a member delays in making payments the member shall accrue interest on the accrued premium at the 91-day treasury bill rate plus 2percent.
On the occurrence of an insured event, Depositors will be paid from the Protection fund created under the scheme. The protection fund is funded from premiums paid by members of the scheme, returns on the investments made by the scheme using the premiums paid, and claims made by the corporation during the liquidation of a member of the scheme. Though the act was created to insure all deposits, some deposits are excluded from this protection. These include a deposit for which a depositor is not known; a deposit frozen in compliance with a court order; a deposit held by a financial institution, pension fund, insurance company, or central government.
To ensure stricter corporate governance deposits owned by Directors or key management personnel of Banks and DTI’s that are liquidated are exempt from protection under the scheme, this also applies to deposits of audit or accounting firms which are responsible for conducting external audits on Banks or DTI’s that are subsequently liquidated or have their licences revoked. The proviso is that the Director or Auditor must have been in that position for at least 3 years before the liquidation or the revocation of the licence.
When an insured event occurs, the Corporation is to announce publicly through print and audiovisual media channels the modalities by which depositors will make claims and be paid. Claims by affected depositors shall be made personally or by an authorized person in the country.
The Claim by depositors is to be made within 30 days of the announcement by the corporation, a depositor however shall be able to claim payment at any time within 5 years from the occurrence of the insured event. Where an affected depositor fails to make a claim within the stated period the depositor will be deemed to forfeit its claim. Payments for claims by depositors are to be made within 30 days in either a lump-sum payment or in installments. The scheme has a maximum payout of GH¢6,250 for depositors for a bank and GH¢1,250 for a depositor of a DTI.
Evaluation of the scheme
The existence of the scheme is a welcome relief to depositors in the country especially after the revocation of the licenses of some of the banks and the subsequent banking sector clean-up. The Act in its present form is laudable, however, it can be seen from existing Deposit Protection Laws in other jurisdictions that the functions of a deposit protection corporation go beyond insuring deposits and making payments but extend to aiding the central bank in actively preventing the occurrence of an insured event.
Under the Deposit Protection Act of Japan the Deposit Insurance Corporation of Japan (DICJ) in addition to its function of repaying premiums to depositors affected by insured events, the DICJ is given the power to assist struggling financial institutions (Banks and DTI’s) that are merging with financial assistance to aid the merger. The financial assistance may be in the form of donating money; purchasing the assets of the financial institution; acting as a guarantor for the institution. This assistance is to ensure that depositors’ sums with the struggling financial are not lost.
In the same manner, the Jamaican Deposit Insurance system allows the Jamaican Deposit Insurance Corporation to make inquiries and recommendations to the Ministry of Finance concerning a member institution that appears to be in distress, and can arrange for a restructuring of a failed institution in its capacity as receiver/liquidator/Judicial Manager or to appoint a person to act as such.
The Act in its present state is deficient in this regard. This deficiency is however mitigated in some respects. Though the scheme was set up as a paybox, the Corporation is given additional power to inspect the deposit related records of banks and DTI’s. The Corporation has also the power to request that a Bank or DTI submit such data, reports, and information as it may require.
Where a bank or DTI fails to allow the corporation or its officers to inspect such records, or to submit the required information or provide incomplete information the bank or DTI is liable to pay an administrative penalty between 50 and 500 penalty units. The Corporation is also mandated to enter into a formal agreement to share data and information with the Bank of Ghana. This data sharing agreement is to provide the corporation with information on distressed financial institutions and to prepare adequately for the occurrence of an insured event.
Conclusion
The Deposit Protection Act is here to stay with us. It is hoped that with the passage of time and Ghana’s continued membership of the International Association of Deposit Insurers the act may see some amendments which increase the corporation’s participation in the protection of depositors’ funds and not being just a paybox.
