Aftermath of DKM, UT Bank & Capital Bank quagmire: Time to intensify Deposit Insurance (DI) Scheme

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A bank is a financial institution which is fundamentally involved in accepting deposits from its customers, borrowing funds and lending money. Banks take customer deposits in return for paying customers an annual interest payment and for onward lending. The banking space has evolved over the years with lots of new trends of serving the customer satisfactorily and advanced in e-intelligence. Primarily, banks operate with an overwhelming aim of accepting and safekeeping of deposits from the general public and granting credits as well. Deposit is thus the life line of general banking. It’s the traditional source of funding for them (banks).

A rise in deposits enable banks to effectively perform their central role of financial intermediation and also to create cash flows. As essential as deposits are to banks, it’s worth nothing that deposits are hard-earned savings of the customer. Any attempt not to protect such hard-earnings will be to an injurious detriment to both the bank and customer. Whiles corporate financial institutions can fail in liquidity lines etc, a severe effect of these failures can have ripple effects of domestic and external economics. Some of these includes, unproductive cash flows, collapse of SMEs, breakdown of government financial controls and financial systems.

Deposit Insurance (DI) Scheme:
In a deliberate attempt to avert the aforementioned failures, banks or financial service providers must fully embrace the Deposit Insurance (DI) Scheme concept. The aim is to strengthen the financial regulatory space and boost depository assurances. Deposit Insurance scheme dates back to the 1930s of the Great Depression where more than 9,000 banks became prey to substantial erosion in depository flows. The aftermath of the Great Depression led to the establishment of the Federal Deposit Insurance Corporation (FDIC) in the United States of America. The objective was to protect depository lodgments should a bank fail to foster congenial financial delivery and promote confidence within the financial sector.
In recent times, having a Deposit Insurance Scheme is seen as a strong immunity against the unexpected.

Deposit Insurance (D) Scheme regime in Africa:
The concept of the DI policy is gradually having its roots firmly rooted within the financial landscape of the African continent. Some countries have the DI explicitly whiles some have their implicitly stated. For instance, Kenya, Tanzania,Nigeria, Uganda and some other African countries have established explicitly this policy (DI). The terms of the Policy are legitimised and enforceable on financial service providers. Other countries such as, Cameroon, Ivory Coast, Benin,Burkina Faso,the Chad have their DI implicitly stated – those with no stated rules but the depositor is assured anyway of government protection.

The DI regime in Ghana:
It’s heartwarming to note that, Ghana has an explicit DI regime. It has an Act backing it’s DI (very explicit). The Ghana Deposit Protection Act,2016,Act 931 came into being as a result. The legal connotation of this Act is to assure and protect depositors from suffering undue losses in case of any liquidity crisis faced by a financial service provider. Although the Act still a work-in-progress (yet to be implemented), its consequent implementation will bring some sudden trust and hope to the depositor and the bank as a whole.

Note worth taking:
Issues concerning insurance-induced risk taking by banks is a dere concern to DI Scheme. Immunizing banks from the gross consequences of their negligence and ill-actions will raise their risk. The higher the risk ,the lower the return-rule will work. A major threat to the scheme is the temptation for Fund managers to deliberately indulge in dubious practices in the name of this Act will be suicidal since there will be checks and balances and internal control systems to be evaluated.
Deliberate attempt to land a bank into insolvency resolution and subsequently leading to dissolution is a major pitfall. Since, this will only make the Scheme susceptible to bail-out entity rather than strengthening financial stability and robustness. Prudential regulations and monitoring by the Bank of Ghana should be intensified to eliminate trim down unnecessary insolvency and moral deficiencies of insured banks.

The coverage of the DI is a grey area to consider. The Act clearly states that a bank or a specialized deposit-taking institution licensed by the Bank of Ghana shall be a member of the Scheme. This purports a mandatory and extensive coverage of the scheme. The extensiveness of the scheme provides a large pool of revenue for the fund. Equally, the extensiveness presents higher risk alerts for all categories of bank’s risk to be pooled. The provisions of the Act provide for a differential premium based on risk assessment of individual banks will pay additional premium. In the unlikely event that a differential premium is charged on a bank,that bank will be perceived by the larger public as “danger zone (highly risky). This would negatively impact their operations particularly revenue mobilization and make them vulnerable to market shocks, gearing crisis etc. cognizant of this, authorities would pursue cautious policies in imposing a differential premium. Yet risky banks would remain in the pool and would consequently undermine the Scheme’s financial soundness.

Definitely, Management of the Scheme would be driven towards its success. The efficiency of government-run entities has always been questionable in this Country. In the wake of this, possibility of the Scheme been managed by the Central government is high. To make the Policy function in all these uncertainties, private insurance practitioners must be engaged to shred some expert knowledge and to be considered to handle the technicalities within the scheme. Government must hence partner the National Insurance Commission and the Ghana Re-insurance Company and other International insurance entities in an attempt to close any loophole.

But is there an Excess Regulation?:
There have been sincere concerns expressed by some experts that claiming deposit Insurance is an excess regulation on financial service providers. But, could they be speaking from larger minds of the public? Between 2016 and 2017, data from the Bank of Ghana shows that total deposits of commercial banks in Ghana saw a 10.6% annual growth. This is a sharp reduction from the 27.6% annual growth record between 2015 and 2016. The fall in depositories shows that investors are putting their funds elsewhere. This unfortunate revelation purports lack of customer confidence in financial institutions. As a result leading to depletion in profitability of commercial and universal banks. With the coming into operation of the Deposit Insurance (DI) which will require banks to pay premiums (between 0.3-1.5% of deposits), there will be a less for banks to carry out their supreme functions.

The DI and the New BoG’s minimum Capital requirement:
Currently, some financial institutions are struggling to meet the new Bank of Ghana’s minimum Capital requirement (GHC400 million). This challenge re-echoes the fact that banks/ financial institutions are not raking adequate deposits. It can be argued that, if banks are to perform effectively, they will need to hold-on to any available deposits for their operations. The likely effect of the Deposit Insurance Scheme will be in placing relevant and reasonable control measures on banks in mobilizing deposits.
But, should we sacrifice the ends for the means? Absolutely no! Banks are not “Father Christmas” (they are in for profits) and will take risk that is very reasonable that will expand their net profit. Evidence gathered from post-financial crisis shows how banks desire for profits have led to depositor’s losing their savings. The DKM scandal, insolvency of UT bank and Capital bank tells us that depositors are not safe reckoning the fact that liquidity crisis ought to be given adequate attention. In fact, no amount of regulation can make banks vault a safe haven for depositor’s savings; hence the more regulations the better for a resounding and trustworthy financial system.

Stakeholder support for the DI:
The MD of Stanbic Bank Ghana Mr. Alhanssan Andani who also doubled as the President of the Ghana Bankers Association has stated that Deposit Insurance in Ghana was long overdue. He emphasised the need to insure depositor’s fund just as banks insure their assets. Again, the Head of Exclusive Banking at Access bank Ghana, Mrs. Matilda Asante-Asiedu has encouraged the Bank of Ghana to expedite the implementation and establishment of the Deposit Insurance in Ghana. The implied preparedness of banks should be cautious in their operations as the insurance will only put them in a secured position or reimburse depositors to a stipulated indemnity.

Deposit Insurance Scheme is the new window to migrate depositors from depository insecurity onto an a path of assurance of safety of deposits. Given the advancement in financial engineering and banking sector’s desire for profits, depositors fund are at risk than before. And so the time for Deposit Insurance is much welcome. It therefore impose a duty on government to strategically design and implement the scheme for a meticulous financial regime and to secure and protect bank-depositor business transactions.

By: Eli K. Avickson

MOBILE:+(233)54 2484057M


NB: The issue(s) or propositions raised in this publication are solely the views or thoughts of the writer hence does not reflect those of his employer(s) or any other party thereof.

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