THE Deposit Insurance Board (DIB) is a legal entity, operating within the Bank of Tanzania (BoT) since its commencement in 1994.
In this last and third exclusive interview our correspondent who talked recently with the Board's Director, Mr Abraham Rasmini, among other things discusses the paramount significance of the board to financial system stability. Excerpts.
Question: Suppose the Banking and Financial Institution Act, 1991 excluded section 23 (1).In your opinion what do you think would have happened?
Answer: Section 23 (i) covers establishment of Deposit Insurance Fund and Deposit Insurance Board. If this section was excluded in 1991 Banking and Financial Institutions Act, when the Tanzania Banking Sector was reformed there would have been no formal system of protecting depositors.
The Government would have been forced to use tax payer's funds to pay off depositors of failed banks. With a deposit insurance fund, the government is relieved from the burden since contributors of the fund are member banks and financial institutions.
Q: And if the Banking and Financial Institutions Act, 2006, excluded section 37(1), what would have happened?
A: Section 37 (i) cover existence of Deposit Insurance Board. If this section was excluded it means there would be no Deposit Insurance Scheme/System (DIS) in Tanzania implying that there would have been no formal depositors protection system and thus the burden of reimbursement of depositors money in case of bank failure would fall to the government.
Q: DIB recommended to the government to enact a new law to govern deposit insurance system in Tanzania. What has been the government's reaction? Why did you make that recommendation? In simple terms, what is deposit insurance system?
A: The process of seeking government approval of DIB recommendation is still going on. The main reasons for the recommendation are: To make DIB and operationally independent institution. To clearly define the mandate of DIB.
-Deposit Insurance is one of the mechanisms employed by governments to ensure stability of the banking systems and consequently stability of the financial system. It is a complimentary element of an extensive financial safety net that includes Banking Law and Regulations, Lender of Last Resort and Banking Supervision.
-Deposit Insurance Systems are intended to protect depositors against the loss of their insured deposits placed with member institutions in the event a member institution has failed. Deposit insurance ensures that a depositor does not lose all his money in the event of bank failure.
-Deposit Insurance Systems are necessary because financial institutions differ from most industrial and commercial enterprises in that they depend mainly on deposits mobilized from public for their working capital and are highly leveraged.
If a financial institution is unable to meet its obligation to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank as well as other healthy institutions and hence the stability of the financial system would be at risk. Deposit insurance prevents bank runs by providing assurance of deposit repayment to the great majority of depositors.
- Where deposit insurance system exists, depositors are reimbursed their protected deposits when a bank fails and in so doing maintain the confidence of depositors in continuing doing business with banking institutions and promotes the stability of the banking system by assuring savers of the safety of their funds. In many countries the objective has been to protect small savers because most depositors have small deposits amounts and hence cannot cost effectively collect and analyze information on the financial institutions they do business with.
In view of this, governments establish deposit insurance mechanism to provide protection for small depositors and contribute to financial stability. Another motive for protecting small depositors is that the financial intermediary function of banks which is a locomotive force behind an economic expansion is largely supported by small depositors who normally provide less volatile (core) deposits to banks.
Q: Records show the DIB hosted the International Association of Deposit Insurers (IADI), Africa Region Committee Conference and Annual General Meeting. When was that? What benefits did you get from hosting the two events?
A: The conference was held in July 2010. The benefits are:- - Information sharing. - Having current knowledge on DIS matters. Cooperation among safety net players internationally.
Q : A co-operation initiative with Korea Deposit Insurers Corporation was put in place in 2011/2012. In what ways have you benefitted from the initiative?
A : Staff and other stakeholders were exposed to a modern deposit insurance system and the important aspects of Deposit Insurance activities such as payout system, liquidation, Fund Investment, determination of coverage and premium assessment.
- Exposed to Korean Model of Integrated Deposit Insurance System.
- DIB has received a Resident Advisor who is providing technical assistance for 6 months.
Q: The Minister for Finance "determines the maximum amount of protected deposits from time to time by an order published in the Government Gazette. What was the maximum amount of protected deposits as of December 31, 2013 and what was the amount as of December 31, 2012?
A: The current protection is to the extent of TZS 1.5 million per depositors per bank. This ceiling was set in 2010.In 1994 the ceiling was TZS 250,000 and from 2003 - 2010 it was TZS 500,000.
Q: Can some elaboration be given on the following: 12.1 Section 37(5) why are people categorized in 5(b) (c) prohibited from becoming DIB board members? In 5(d) does this refer to a person with shares in a bank licensed by DIB?
A: The intention is to have "fit and proper" persons whose decision cannot be influenced by the politician or the industry. These are persons with shares in a bank licensed by the BOT.
Q: In short, how would you convince a man on the street that it is wise to keep his or her money in the bank?
A: Apart from getting interest income on the deposits, the money is insured up to the maximum coverage limit. If the money is kept home, there will be neither interest income nor deposit insurance.
Q: Section 39 (2) says "a customer of a bank or financial institution many lodge a claim with DIB for payment... " Does this refer to any person with an account in that bank/financial institution?
A: Yes, any person with a bank account may lodge a claim. However, not all deposits are protected. Section 39 (7) provides clarification on excluded deposits.
Q: Same section says claims are welcome under: 39(2)(a) when the bank or financial institution has commenced a voluntary liquidation. What does voluntary liquidation mean? How does it come about?
A: Voluntary liquidation is the mode of winding up of a company voluntarily by shareholders. Shareholders for some reasons may agree to windup the affairs of company. Banks and financial institutions normally operate as limited liability companies.
Q: If the DIB 'earns' what is the logic behind exempting the Board from "payment of any taxes, levies or duties in respect of its profits, transactions and operations"?
A: DIB is a services public institution vested with depositors' protection mandate. It is not a for profit organization. The fund accumulated including the interest earned is intended for paying depositors in case of bank failure it is not for distribution of dividends.
DIB protects depositors of banks. Banks are special companies since;- (i) They hold other people's money (ii)They operate as part of the National Payment System and, They are major source of credits in the economy.
Q: Are subventions from the Bank of Tanzania mandatory?
A: Yes, this is the requirement of the law section 37(11) of Banking and Financial Institutions Act 2006.
Q: Which of the three sources is the Fund's main source of income?
A: Premium contributions from banks.
Q: When the BOT Training Institute organizes seminars and workshops you take advantage to address participants on the Board's roles and activities. What kind of feedback you have had from participants?
A: Participants have commented that Deposit Insurance is a very good system/scheme therefore DIB should make the public aware of the benefits of deposits insurance systems and the role and responsibilities of DIB.