Malawi has taken significant steps towards bolstering financial stability with the roll out of the Deposit Insurance Corporation (DIC) to safeguard savings by reimbursing insured deposits in the event of a licensed bank failure.
The DIC, established under an Act passed by Parliament on March 18 2022, prioritises protection of smaller depositors, offering insurance coverage of up to K1 million (about $560).
This safety net is expected to incentivise savings and contribute to a more robust financial sector in Malawi, according to DIC director general Chitani Chigumula.
He said: “The DIC employs a multifaceted approach.
in case of bank failure
“We can provide financial assistance to struggling banks to prevent collapse, facilitating acquisitions by healthy institutions or directly reimbursing insured deposits as outlined in the DIC Act, ensuring timely payouts.”
Chigumula said DIC is using its coverage limit of K1 million and covers less than 10 percent of the value of savings to safeguard against moral hazard, particularly for larger financial institutions.
Moral hazard arises when parties have incentives to accept more risk because the costs are borne, in whole or in part, by others, according to the International Association of Deposit Insurers(IADI) Core Principles for Effective Deposit Insurance Systems Handbook.
Experts anticipate the DIC will foster financial inclusion by boosting depositor confidence and increased savings activity to contribute to a more vibrant financial system, potentially leading to greater access to credit for businesses and individuals.
Malawi Stock Exchange (MSE) chief operations officer Kelline Kondowe, in an interview on Friday, welcomed the establishment of DIC.
She said: “The Deposit Insurance Corporation’s establishment demonstrates a strong commitment to financial sector stability.
“This will enhance trust and credibility within the system, fostering an environment conducive to growth. Increased confidence from both domestic and foreign investors could unlock new financial resources for Malawi’s development.”
In a separate interview, Catholic University of Malawi economics lecturer Greenson Nyirenda said DIC’s role i will ensue spreading of the risk of bank failure.
He said: “The Deposit Insurace Corporation pools premiums which redistribute the cost of failure, which can make depositors feel more comfortable regardless of which financial institutions they are dealing with.”
Economic statistician Alick Nyasulu in an interview said the establishment of the firm will bring confidence that their deposits are safe, particularly for small banks that do not trade on the MSE.
He, however, pointed out that local commercial banks are already well-regulated.
Said Nyasulu: “Most of them hold assets that can be easily liquidated and regulatory authorities often ensure there is a right balance to mitigate the risk of bad debts and other liabilities.”
On the threat of moral hazard, he allayed concerns that savers would become complacent, but stressed that banks might become reckless in lending since some deposits are secured.
The protection offered by the Deposit Insurance Corporation mitigates risk for depositors regardless of their chosen financial institution, potentially encouraging them to explore a wider range of banking options beyond traditional players.
In April 2022, the Reserve Bank of Malawi applied for the winding up of Alliance Capital Limited on the grounds that the company is insolvent with its net capital excessively below the minimum regulatory capital requirement of K50 million.
The firm owed various businesses, individuals and State enterprises in excess of K24.7 billion out of which K11 billion is owed to State agencies.
