Maravi

(HERALD) Bill to protect bank deposits

Bill to protect bank deposits
Monday, 27 June 2011 01:00
By Golden Sibanda recently in Victoria Falls

GOVERNMENT is working on legislation to restructure the Deposit Protection Board by establishing a new entity with powers to deal with failed banks.

Addressing the African chapter of the International Association of Deposit Insurers' Conference in Victoria Falls last week, DPB acting manager (risk analysis) Mr Wisdom Mandizvidza said the Bill had been tabled before Parliament.

"The Deposit Protection Corporation Bill seeks to provide the DPB with bank resolution powers and effectively complement the supervisory efforts of the central bank," he said.

The IADI conference ran under the theme "Financial Stability in Africa: Role of Deposit Insurance and Financial Inclusion".

Mr Mandizvidza said the Deposit Protection Corporation Act would help overcome some of the problems arising from the 2003-2006 financial crisis which claimed 14 banking institutions.

He said the challenges had presented a strong case for a review of bank supervisory powers and bank resolution regime and were now well placed to deal with similar problems.

The banking sector had been largely stable since independence. But in 1995 it had started to exhibit signs of distress. It was not a big surprise when United Merchant Bank was liquidated in 1998.

In the same year, two more banks - Universal Merchant Bank and First National Building Society - were placed under curatorship, setting the stage for what turned out to be a widespread crisis in the sector.

After realising that depositors of the liquidated banks did not receive compensation, the Government decided to establish the deposit protection scheme. This eventually gave birth to the DPB in 2003.

The role of the DPB was confined to compensating depositors for the insured amount in the event of a bank failure.

The DPB has handled payouts for two liquidated discount and finance houses. It is now set for transformation of its mandate and responsibilities as the Deposit Protection Corporation.

Under this arrangement it would assume the supervisory function to prevent bank failures.

In the 2003-2004 financial crisis the DPB was only involved in reimbursing depositors of failed banks, as it had just been formed.

It had no financial capacity, while the central bank played a prominent role. But it has emerged that other nations, such as Nigeria and Malaysia, Canada and the US, now have fully-fledged deposit protection institutions with legislative powers for bank supervision and monitoring.

According to Mr Vijay Despande from the Federal Deposit Insurance of Canada, there will always be bank failures of some kind, no matter how strong regulatory, supervisory and monitoring systems may be.

This makes the case for well-established deposit protection schemes more critical, he said.

Developments at Renaissance also showed that bank failures could still occur in Zimbabwe.

The DPB said the 2003-2004 financial crisis had provided lessons on the need for strong preventive and bank resolution structures to be able to deal with similar bank failures in the future.

This is particularly important, considering the failed bank resolution challenges of the 2003-2004 era.

Three banks amalgamated into the Zimbabwe Allied Banking Group - Barbican, Royal Bank and Trust Bank - challenged the legality of their amalgamation into ZABG. This led to a protracted battle with the central bank. While curatorship was meant to preserve depositors' funds, some banks stayed under curatorship for more than a year and depositors' funds locked in the closed banks lost value due to hyperinflation.

Depositors also lost confidence in banks, which has called for a more efficient and effective bank resolution framework. But apart from empowering the DPB to have resolution powers over troubled or failed banks, Government will need to ensure the institution has financial resources to be able to intervene in case of a bank failure.

The bank sector crisis of 2003-2004 was attributed to unstable economic conditions, diversion from core business, inadequate risk analysis systems, poor corporate governance structures, high levels of non-performing loans, overstatement of capital and chronic liquidity challenges, among other factors.

Labels: BANKING, INSURANCE

posted by MrK @ 3:45 PM