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THE BENEFITS OF DEPOSIT INSURANCE IN AFRICA - ZIMBABWE EXPERIENCE.
INTRODUCTION
BANK FAILURES IN ZIMBABWE. UNITED MERCHANT BANK
UNIVERSAL MERCHANT BANK
ZIMBABWE BUILING SOCIETY
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INTERNATIONAL MONETARY FUND
ACTUARIES
Public-Policy Objectives
To enhance public confidence and foster systemic stability by providing a framework for the resolution of failed banks, thereby preventing contagion or the risk of rumour-driven bank runs. Deposit protection, therefore, aims at encouraging savings and economic growth;
To protect small, less-financially-sophisticated depositors by providing an orderly means of compensation in the event of a financial institution becoming insolvent;
The scheme enhances competition in the financial sector by mitigating some of the competitive barriers in the deposit taking industry. In line with the above objectives, deposit insurance aims at promoting sound banking practices;
Deposit insurance further helps in defining the boundaries of the Government’s exposure and support in protecting depositors when a bank or group of banks fail in normal times.
Organisational Structure & governance The DPB is a separate legal entity
outside the Reserve Bank of Zimbabwe (RBZ).
Supervisory authority. The DPB Board of Directors
comprises 50% from Government through RBZ and 50% from contributory institutions.
Timing of set-up
Stable economic environment
Prudential supervision strengthened.
Regulatory framework review.
Mandate of the DPB
Phase One Banking Act (Chapter 24:20) and the Banking
(Deposit Protection) Regulations, Statutory Instrument 29 of 2003, provides the DPB with a narrow mandate initially, during which it will be operating as a “paybox” and not as a separate regulator.
Phase Two DPB shall participate in resolving failing or failed
banks. Set conditions and standards for cover. These
functions are necessary for the DPB to Risk minimizer.
Key design features
MEMBERSHIP: Mandatory to avoid adverse selection.
FUNDING: by all contributory institutions, ex ante.
INVESTMENTS OF FUNDS:
High liquidity;
Little or no credit risk;
Independent of insured institutions;
Offer some protection against the impact of inflation; and
Maximum return
SCOPE AND LEVEL OF COVER:
Cover is partial to avoid moral hazard.
PREMIUM ASSESSMENT
An actuarial exercise is undertaken. Flat rate premium system
Troubled Banks - Experience
Century Discount House – Liquidated 2004
Rapid Discount House – Liquidated 2004
Sagit Discount House – Liquidated 2004
Barbican Bank Limited (curatorship 2004)
- Funding sister companies ; no separate boards ; assets sold to ZABG
Trust Bank Corporation Limited
- Poor corporate governance ; rapid expansion ; management restructure ; (too big to fail) ; assets sold to ZABG.
Royal Bank Zimbabwe Limited (curatorship 2004)
- Non performing loans (insider loans) ; assets sold to ZABG (challenged)
Time Bank of Zimbabwe Limited (curatorship 2004)
- Poor corporate governance ; weak risk management systems ; paid its depositors
Troubled Banks – Experience (cont) CFX Bank Limited
- Aggressive acquisition of branches disposed by other banks ; inadequate capitalisation ; scheme of arrangement – debt equity conversion depositors and creditors ; merger with CFX merchant bank
Intermarket Banking Corporation Limited
- Foreign exchange parrallel market ; externalisation of funds ; conversion of debt to equity in holding company ; resume operations January 2006
Intermarket Building Society
- Exposure to Discount House ; set-off intercompany debts ; resume operations August 2005
Troubled Bank Resolution Framework Trouble Bank Resolution Act
– Objectives;
Strengthen banking system
Promote sound banking practices
Restore stability of financial sector
Promote economic development and growth
Preserve indigenisation of the financial sector
Provide permanent solutions for troubled banking institutions.
Zimbabwe Allied Banking Group (ZABG) – Commenced operations 31 January 2005.
Public Awareness
They make better informed financial decisions and reduce the incidences of market volatility
They ensure better financial product pricing hence enhancing market competition
They are less susceptible to unsubstantiated rumours, which, other, may turn quickly into a self validating panic.
They impose additional discipline on the banking system by scrutinising the conduct and practices of banking institutions; and
They push policy makers to implement better consumer protection laws and policies
Inter-relationship among Safety-Net Players Good working relationship Information sharing Memorandum of understanding
(MOU)
CONCLUSION
Financial Stability Prevent bank runs Public confidence