Depositors’ protection scheme in the offing

Malawi Government has plans to protect “small and unsophisticated depositors” through the establishment of a deposit insurance scheme (DIS) to cushion depositors in case of a bank failure.

This is one of government’s moves to strengthen the stability of the financial system while expanding the financial safety net.

Already, the national task force headed by the Ministry of Finance comprising Reserve Bank of Malawi (RBM) and Bankers Association of Malawi (BAM), was set to develop a comprehensive business plan after which government and RBM will provide seed capital to enable the scheme to roll out.

A bill on the same was being drafted before being circulated and discussed among all the key players before being presented to Parliament.

In the 2013/14 budget, government said it had provided money for the capitalisation of the scheme and that within the year, they were to ask Parliament to consider and approve the legal and regulatory framework for the scheme.

Treasury spokesperson Nations Msowoya in an interview this week doubted if much has been done thus far, but assured to provide details on the progress of the scheme.

The dissolved the Parliament did not enact the legal framework to enable the operationalisation of the scheme.

But earlier, Msowoya said government through the Ministry of Finance will provide 40 percent of the seed capital while the RBM will make available the remainder [60 percent].

“A tentative provision—based on expected costs—has been made under Vote 20 of the 2013/14 budget being contribution by government and the Reserve Bank of Malawi board will also meet to consider and approve their contribution once the business plan is finalised and approved by authorities,” he said.

According to budget document five (Output based), Vote 20 is compensation and refunds and has been allocated K13.9 billion.

RBM spokesperson Mbane Ngwira had not yet responded to a questionnaire to indicate whether the central bank has provided their balance of seed capital to the scheme.

BAM confirmed that the DIS is “a project that the central bank has been talking to the bankers association”.

In terms of operation, according to officials, the DIS will be a stand-alone entity, separate from the RBM, with its own board.

The design of the scheme will be in such a way that the premiums that banks will pay to insure their deposits will not be passed on to depositors and will basically be negligible, to make banks fully responsible for the cost of failure.

The beauty of the scheme is that it will guarantee reimbursement of customers’ deposits up to the insured limit.

According Treasury officials, deposit insurance is a complementary financial safety net initiative in addition to the others such as supervision and lender-of-last-resort provided by RBM.

The major public policy objectives of DIS are to protect small depositors and enhance financial stability since there is no clear, legal obligation on government or the RBM to bail out the depositors.

The responsibility then rests with the government to protect depositors’ money and the DIS provides just that.