The Budget, Finance and Investment Promotion Portfolio Committee of Parliament is currently seized with the Deposit Protection Corporation Bill, which was gazetted on October 22 2010.
The Bill, awaiting second reading in the House of Assembly, seeks to establish a new statutory independent body that will replace the existing Deposit Protection Board, a subsidiary of the Reserve Bank.
Although the Deposit Protection Corporation will retain most of the powers, responsibilities and functions of the Deposit Protection Board, its sphere of operation and influence has been expanded to include monitoring the affairs of financial institutions as well as being involved in the administration of failed or failing financial institutions.
The Bill is extremely important in that when a bank collapses, such as the widespread closure of banks in 2003, the effects will be felt widely by ordinary members of the public who would have deposited their money with the failed institutions.
The Deposit Protection Fund provides the necessary insurance cover.
My heart bleeds if I think of the huge deposits that ordinary members of the public lost when there was a sudden abolishment of the Zimbabwe dollar and introduction of the multi-currency system.
It is very sad that pensioners were the hardest hit and that there has been no compensation at all.
The Budget Committee has been scrutinising the Bill and recently met with the Minister of Finance to express its concerns about some aspects of the proposed amendments.
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The committee also met with the Bankers Association of Zimbabwe and the current Deposit Protection Board management.
It is advisable that the committee also invite submissions from the Reserve Bank of Zimbabwe as one of the key stakeholders in this matter.
Of major concern to the committee and stakeholders in the banking sector is that the Bill does not provide for a minimum capital for the Deposit Protection Corporation, just like the current Board which is critically under-funded.
This reduces confidence, not only in the institution, but the banking sector as a whole. There is concern as to how an institution with no capital can be an effective insurance scheme for deposits which have a potential to reach many billions of dollars.
In a press statement last month, Finance minister Tendai Biti announced that total deposits in the financial sector continued to grow recording $2,36 billion in February 2011.
This rise in deposits requires that a sound insurance mechanism is in place to protect depositors.
Biti also noted that the banking sector remained vulnerable, raising possibilities of bank failures and depositors failing to salvage anything out of their deposits.
Stakeholders in the banking sector therefore feel strongly that the corporation should have a minimum capital of $12,5 million, which is equivalent to that for commercial banks.
This will ensure premiums received from banking institutions to fund the Deposit Protection Fund are not used to fund the day-to-day operations of the corporation and prejudice depositors in the event of a bank failure.
The other concern is that the expanded powers and responsibilities of the Deposit Protection Corporation will interfere with the powers and responsibilities of the Reserve Bank of Zimbabwe as the regulatory and supervisory authority of the banking sector.
For example, currently in terms of section 53 of the Banking Act (Chapter 24:20), it is the responsibility of the Reserve Bank to place a distressed bank under curatorship and appoint a curator.
However, in Clause 5 of the Bill, the corporation is expected to manage the affairs of financial institutions that are placed under curatorship in terms of the Banking Act.
The undertaking of bank examinations by the corporation will increase regulatory risk and burden on the banking institutions, given that this function is already the responsibility of the Reserve Bank.
The recommendation is that the Deposit Protection Corporation liaises with the Reserve Bank to get whatever information they may want on any banking institutions instead of subjecting it to another on-site examination.
Better still, joint on-site examinations need to be arranged for efficiency and effectiveness.
The Bill is silent on the percentage of deposits that depositors are guaranteed from the corporation in the event that the bank collapses.
Currently, the Deposit Protection Board has capacity to pay 70% of depositors at a rate of $150 per depositor. This is grossly inadequate.
Given the Finance minister’s fears of a banking crisis, there is concern whether the Deposit Protection Corporation will rise to the occasion given its lack of capitalisation, or it will be another National Social Security Authority which is there to accumulate huge financial resources while paying out negligible pensions.
In addition, it has been noted that the current Deposit Protection Board is spending over 60% of premium income on employment costs.
This has resulted in calls for the Bill to set a maximum benchmark of 30% of income to be spent on employment costs with the rest going to provide insurance cover for deposits.
While it is acceptable for banking institutions to have a majority representative on the Board of Directors of the Deposit Protection Corporation and that the institutions submit their recommendations for the nominees, the Bill does not give the banking institutions the power to recall their representatives where they deem them inefficient.
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