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ADVERTISING SUPPLEMENT TO THE ZIMBABWE INDEPENDENT JANUARY 29 TO FEBRUARY 4, 2016
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Role of Zim’s deposit protection scheme this promise prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences. The knowledge that their savings are protected gives depositors confidence in the banking system as a whole. If one bank has a problem, the deposit insurance scheme will reassure depositors in other banks that there is no need to panic.
SANDERSON ABEL
IN an effort to protect depositors in the banking system in Zimbabwe, the Government set up the Deposit Protection Corporation (formerly the Deposit Protection Board) to provide a depositors insurance scheme in times of bank failure. The Deposit Protection Corporation (DPC) is thus a significant player in the financial sector as it provides a safety net for the savings, banking and payments systems. It is meant to protect depositors against loss of part or all of their deposits in case of a bank failure, by paying out a certain minimum amount to depositors, thereby ensuring depositors remain confident enough to continue keeping their savings within the formal banking and payment systems.
Current deposit protection
At present, all individual depositors in our banking system are insured to a maximum of US$500 per account though the DPC. This means that even if a bank goes out of business, the DPC will pay individual deposit account holders a guaranteed maximum of US$ 500. This may be done all at once or in faces depending on factors determined at the time. Savers are thus guaranteed of US$500 upon the unforeseen collapse of a banking institution, while the remainder would usually be paid out from proceeds realised through the process of liquidation of the bank. This means the depositors will have a lifeline after the collapse of the bank, although this is limited to the cap set by the DPC. The deposit guarantee scheme thus ensures that depositors are reimbursed part or all of their deposits in the event of a bank failure. A deposit protection scheme can also be defined as an institutional arrangement designed to protect banking deposits in the event of a bank failure.
What is deposit insurance?
Deposit Insurance schemes are typically created to prevent contagious bank runs, to provide a formal national mechanism for handling failing banks, and to protect small depositors from losses when banks fail. Because banks are highly leveraged institutions, depositors have a strong incentive to show up at the bank first, to withdraw their funds in case they doubt the financial health of a particular bank. Those at the end of the line may get nothing. In short, deposit protection is designed to prevent depositors from overreacting to bad news about banks. Deposit Insurance as a function, is therefore geared towards reimbursing a limited amount of deposits to depositors whose bank has failed. From the depositors’ point of view, this protects a part of their wealth from bank failures. From a financial stability perspective,
Deposit protection scheme
The Zimbabwean deposit protection scheme is characterised by the following: It is explicitly grounded in law i.e. the DPC is an Institution which was established
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through a legal instrument called the Deposit Protection Corporation Act (Chapter 24:29). It is compulsory for every banking institution in Zimbabwe to be a member of the DPC. The public should note that each and every bank is compelled to be a member of the DPC and to adequately and prominently appoint notices and signs it its banking halls to testify to that fact. Possesses well-crafted procedures for accounting and supervision. There are general guidelines that are publicly available on how the DPC goes about disbursing resources to depositors in case of bank failure The deposit insurance scheme is financed from banking institutions subscriptions. Like any other insurance programme, the banks pay subscriptions to the DPC as agreed in any particular year. Non-discriminatory in that it treats large, small, private and state-owned banks equally. There is no discrimination on the size of the banks, all depositors are treated equally regardless of the bank they bank with. Does not discriminate whether an individual account was a savings or current account. Thus all types of individual accounts are covered. However, corporate accounts are excluded. Prompt reimbursement when a bank fails. Payments are made within reasonably short time period once a bank goes under.
Confidence in the banking sector
It should be understood that banks, at law, have a fiduciary duty. It is the duty of the bank to protect the savings of the citizens and provide reasonable returns in case the savings are placed in appropriate income generating ac-
A safe for deposit protection counts. A fiduciary must avoid “self-dealing” or ‘conflicts of interests’ in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts them. For example, a banker must consider the best investment for the client, and not buy or sell investments on the basis of what brings the highest commission for the banker. Based on the fiduciary role of banks, stakeholders thus place outmost faith in putting their savings in the banks. Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008
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