A legal practitioner, Mr Seth Asante, has called for a deposit insurance scheme that is operationally independent and protected from interference from the central bank.
He said the current structure of the scheme and its governance would result in the yet-to-be-established Ghana Depositors Protection Corporation being perceived as a department of the Bank of Ghana (BoG), and that it lacked an operational independent framework.
Mr Asante, who is the Head of Financial Institutions and Capital Market Practice Group, and Partner, Bentsi-Enchill, Letsa & Ankomah, was speaking at the Graphic Business / Stanbic Bank Breakfast Meeting in Accra on the theme, “Deposit insurance: A catalyst for a stronger banking industry.”
“The structure of the Scheme and its governance is likely to result in the Deposit Protection Corporation perceiving itself as a department of the BoG. The corporation lacks an operational independent framework. Under the Kenya Deposit Insurance Act, 2012, the independence of the DP Corporation is expressly provided for and precludes interference from all external parties,” he said.
He stated that although the scheme would not solve all challenges associated with banking, it was part of the tools needed in the financial system of a developing economy.
“As part of the safety net arrangement, there are certain core principles which should be present in an effective deposit insurance system.
“There is no one size that fits all in a deposit system but we need one that is operationally independent; and this is important because it needs to be protected from external interference. It needs to do its own assessment of premium, its own assessment of what it protects and its own assessment of the examination of banks,” he said.
Mr Asante the governing boards of the schemes should be void of conflicts of interest because there was a real danger where people who had interest in the scheme being in control of the governing bodies, which could lead to significant conflicts of interest and could damage the independence of the scheme.
“Coverage of the scheme should be clearly defined; deposits that are not protected should be clearly specified and easily determined. There can’t be anything worse than an improper communication of what DI achieves. That communication of deposit insurance protection should be very clear,” he mentioned.
Background
The Ghana Deposit Protection Act, Act 931, 2016, forms of part of a pool of financial safety net tools that are being deployed by the government to protect and strengthen the financial sector.
Experts say properly designed deposit insurance schemes remove the incentive of panic runs on banks and lack of confidence that can lead to a systemic contagion. The lack of these schemes, Mr Asante said, could pose a real danger that could lead to moral hazard; in the sense that they increased the risk taken, since many were of he view that they were protected and would not monitor banks in what they did.
“A deposits insurance is not a panacea for financial stability but part of a variable tool box of financial safety net mechanisms that are available to the central bank, such as prudential supervision, increase minimum capital requirement and proper corporate governance,” he said.
Some key elements of the Act include membership: applies to only banks and specialised deposit taking institutions; and objectives: protects small depositors from loss resulting from insured events and support the development of a safe sound, efficient and stable market based financial system in Ghana.
On premium, each member is required to pay an initial premium of 0.1 per cent minimum capital as initial one-time premium. Annual premium is to be determined by the deposit insurance corporation and the level of annual premium may range from 0.3 per cent to 1.5 per cent of average deposits insured by the scheme.
Importance of deposit protection
The Project Coordinator of the Ghana Deposit Protection Corporation, Mr Franklyn Belnye, said the scheme would provide some resources without putting pressure unduly on taxpayers and governing in the central bank, which was common in developed financial system.
He pointed out that since the financial crisis, a lot more countries had moved to deposit insurance because they found it a good anchor to support the dissolution framework.
“It helps to boost public confidence and so there is no issue about bank runs and it helps to reduce the incidence of financial crisis and bank runs,” he stated.
He said that issues that had come up relating to some aspects of the law were being addressed through the amendments that would be put before Parliament in the next few weeks.
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