Africa Rising is the new buzzword in the global business arena. Nevertheless, even with such a promising future, we are told that 75 per cent of sub-Saharan African adults do not have a bank account.
Financial inclusion in Africa remains a hard nut to crack although mobile banking seems to have picked up at an unprecedented rate.
Many factors are to blame for the slow spread of banks in Africa. One of the issues is deposit insurance. Are African banks investing enough in deposit insurance?
The banking business is about people and relationships. Indeed, a bank’s major stock-in-trade remains the customers’ trust in the brand.
Banking involves mobilising customers’ deposits and doing business with these funds. In this business, the customer is the king. For an individual to toil and then entrust their savings to you, you must demonstrate impeccable reliability over time.
If customers suspect that their bank’s going-concern status is at risk, they vote with their feet! This may culminate in a run on the bank. This is so serious that at times it leads to the collapse of an entire banking system.
Central banks are usually careful to avoid such failure. The protection of customers is critical. Do you know if your deposits or savings in a commercial bank are fully or partly insured? This is referred to as the depositors’ insurance.
Globally, nations have established deposit insurance to ensure financial stability. Deposit insurance is simply protection provided by a government agency to depositors of a bank or deposit-taking institution. It assures the depositors of compensation in case a bank collapses.
Deposit insurance started in the US after the Great Depression, the longest lasting economic downturn in the US. The on-switch went on after the infamous stockmarket crash of October 1929.
By 1930, the first wave of banking crises hit the economy. Large groups of depositors panicked and lost confidence in their banks. The result: Mass withdrawals. As expected, banks ran amok liquidating loans to complement the dwindling cash reserves.
By 1933, the Great Depression was at its worst. An estimated 15 million Americans became jobless and nearly half of the country’s banks went under.
President Franklin Roosevelt came to the aid of the banks.
Initially, he announced a four-day bank holiday for the government to push through legislation in Congress to resuscitate the economy. One piece of legislation involved creation of the Federal Deposit Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and Exchange Commission (SEC) to regulate the stockmarket. The FDIC pioneered the concept of deposit insurance globally.
According to the Association of International Deposit Insurers (AIDI), an organisation of 71 insurance organisations based in Basel, Switzerland, in 2014, there were 113 countries with deposit insurance, up from 12 in 1974.
But 41 countries are preparing to adopt the system. In the US, the FDIC insurance limit is now permanent at $250,000 per depositor. That is a huge limit and few depositors will have such account balances at a given point in time.
China, in November 2014, proposed that every depositor be insured to the tune of 500,000 yuan ($81,300). The majority of Chinese depositors hold far less and the central bank estimated that 99 per cent of depositors were within the cover.
In 1994, the European parliament passed a law requiring all member states to have a deposit insurance for at least 90 per cent of the deposited amount with a minimum cap of least 20,000 euros ($212,434) per depositor.
But, like in the US, the 2008 global financial crisis saw the figure readjusted to at least 50,000 euros ($53,108) per depositor. But Ireland tipped the balance in September 2008, when it increased its deposit insurance to an unlimited amount.
Most of the other EU countries increased their limits too. Germany, France, Finland and Belgium have pushed their insurance limits to 100,000 euros ($106,217).
In Africa, deposit insurance schemes are gaining currency. Recently, the International Monetary Fund advised South Africa to consider introducing deposit insurance after the country’s largest unsecured lender‚ African Bank‚ collapsed last year.
In Kenya, for some time, a customer was sure of a payment of not less than Ksh100,000 ($1,086) in case of failure of a member institution of the Kenya Deposit Insurance Corporation. According to the Central Bank of Kenya, this limit covers over 90 per cent of the total number of depositor’s accounts in Kenya.
But other data from the CBK indicates that these protected funds in absolute figures only cover 10 per cent of industry’s total deposits. That means in case a bank collapses, many deposits will be lost.
As an improvement to the existing position, the CBK has said that banks will be contributing to the insurance fund based on a flat rate. They will also contribute a percentage of their total deposit liabilities based on a risk-adjusted contribution methodology stipulated by the Kenya Deposit Insurance Corporation. The flat rate is equal to 0.15 per cent of deposits held by a member institution with a minimum of Ksh300,000 ($3,258).
Such deposit insurance is already in place in Kenya, Uganda and Tanzania.
Rwanda is also considering introducing deposit insurance and arrangements are said to be at an advanced stage.
In Tanzania, depositors in failed banks or financial institutions are assured of a coverage limit of Tsh1,500,000 ($516) per depositor.
In Uganda, the Deposit Insurance Scheme became operational in 1997. The depositors are sure of at least Ush5 million ($2,000) in case of a bank’s failure.
But there is school of thought that believes that deposit insurance encourages laxity, makes depositors less careful, and likely to invest in obviously risky institutions.
Second, in some instances and jurisdictions, the procedures of compensation can take such a long time that depositors suffer in the process.
Nevertheless, all said and done, for financial systems to be sound and to encourage depositors to develop trust in our banking institutions, governments must seek to cultivate confidence. And deposit insurance is a key component of secure financial systems.