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Deposit insurance not panacea to challenges— BoG

Author: Emmanuel Bruce
Mr Franklyn Belnye — Project Coordinator of the Ghana Deposit Protection Corporation
Mr Franklyn Belnye — Project Coordinator of the Ghana Deposit Protection Corporation

The Bank of Ghana (BOG) has warned that the introduction of the deposit insurance scheme), which seeks to protect small depositors, will not absorb all the risks in the financial services sector.

Although the scheme is expected to support the development of a safe, sound, efficient and stable banking sector, the central bank has cautioned depositors that there are still lots of risks in the financial sector. They should, therefore, be careful about the institutions they keep their deposits with.

The Project Coordinator of the Ghana Deposit Protection Corporation at the BoG, Mr Franklyn Belnye, at the Graphic Business/Stanbic Bank breakfast meeting, said the successful roll-out of the deposit insurance scheme would not be a panacea to all the challenges and risks in the financial services sector because the scheme would only protect deposits to a certain limit.

“There will still be risks and people will still have to monitor the activities of banks and decide the appropriate place to keep their deposits,” he stated.

“A deposit insurance scheme should not be considered as the panacea for all the problems as it is just one of the safety net mechanisms,” he added.

He said every financial system had a safety net, which spelt out the prudential framework for supervising banks to ensure that there was clear entry and exit; and that banks operated within the rules and deposit insurance was just one of them.

Under the deposit protection scheme, in the case of a bank’s collapse, the amount to be paid to depositors shall not exceed GH¢ 6,250 for a bank depositor and GH¢1,250 for a depositor at a specialised deposit-taking institution (SDI).

Confidence in the sector

Mr Belnye, however, pointed out that the introduction of the scheme would increase the confidence in the sector and provide a ready source of funding to address bank distress in order for it not to spread to other institutions.

“If one or two banks go under water and you can resolve that quickly, it doesn’t become an issue in the system which will affect other institutions,” he explained.

­­­Nana Kwaku Dei I (right), acting Managing Director of the Graphic Communications Group Limited, interacting with Mr Seth Terkper (middle), a former Minister of Finance, and Mr Alhassan Andani, the MD of Stanbic Bank at the meeting

In the absence of deposit insurance, he said the challenges of resolving insolvency issues in the sector would be on the central bank and the government.

“But this time round, we are asking the institutions that are involved to contribute part of their resources into a pool of funds so we can use that to address the challenge,” he stated.

Missing link

The Governor of the BoG, Dr Ernest Addisson, who was the guest speaker at the breakfast meeting, pointed out that banks and SDIs assumed and managed risks which made them vulnerable to liquidity, solvency and other risks.

He said those risks sometimes crystallised into failures, leading to loss of customer deposits.

In recognition of that he said the government through the BoG had established financial safety nets, with the aim of minimising insolvency, illiquidity and disruptions in the financial system.

The financial safety nets comprise prudential regulation and supervision, lender of last resort facility and a resolution mechanism.

The governor, however, hinted that there was one missing link, which is a deposit insurance scheme; hence its decision to introduce it to augment the existing safety net by providing explicit protection to depositors.

He said banks and SDI customers were being singled out for such special protection because of the vital role of confidence in the operation of the banking system and the economy.

He noted that an effective deposit protection scheme would reduce the risks of financial crisis by minimising bank runs and preventing the breakdown of payment systems.