NBE awaits gov’t signal on a much anticipated insurance Fund

The National Bank of Ethiopia (NBE) is awaiting the decision of central government to breathe life on the much anticipated Ethiopian Deposit Insurance Fund.

It can be recalled that the Council of Ministers ratified the ‘Establishment and Operation of Ethiopian Deposit Insurance Fund’ regulation which was published in February 2021 in the Negarit Gazette, although it is yet to be established.

The Fund will be a guarantee for depositors at financial institutions, who will be members of the Fund.

According to Solomon Desta, Vice Governor of NBE, central bank has filed its proposal for the government to form the Fund. “As per the regulation, the government is the right entity to give the green light in establishing the fund,” he told Capital. He added that it is difficult to say it will be established in the current fiscal year since it is on the hand of the government, “We are waiting for the decision of the government. It may be that the government is waiting for a suitable time or assessing experienced leaders on the sector.”

“We have developed the timeline that needs the assignment of the board of directors who are the responsible persons to give life to the Fund,” Solomon added. According to the regulation, the board of the Fund shall be composed of seven members; Governor of NBE, Minister of Finance, Vice Governor, Banking Supervision Director and the Microfinance Institutions Supervision Director at NBE who shall be permanent exofficial members of the board. The remaining two members of the Board with knowledge in the area shall be appointed by the government based on recommendations from bankers and microfinance institutions associations. According to the regulation 482/2021 article 4.2, the Fund shall be accountable to the National Bank.

Article 13 stated that a CEO and Deputy CEO of the Fund shall be appointed by the government as recommended by NBE. According to the regulation that was ratified 19 months ago, the Fund will be closely working with the central bank in different forms. For instance article 33, which stated about assistance to the Fund from the National Bank, said that the National Bank may assist the Fund, during its establishment and initial stage of operation, in procuring materials and providing resources needed to run the Fund’s business.

For the formation of the Fund on its preamble of the regulation for the ongoing economic development of Ethiopia it is essential to strengthen the country´s financial system by ensuring its safety, soundness and stability; the protection of depositors contributes to the stability of the financial system; it is essential to introduce deposit insurance fund as an additional element of the country´s financial safety net.

It added that it is necessary to establish and operate a Fund to enable payment to the member financial institution’s depositors with insured deposits in case of the insurance event; and it is vitally important to collaborate with the National Bank, member financial institutions and other stakeholders to mitigate risk and contribute to stability of the financial system that the fund is formed of.

According to the regulation, all member financial institutions have to pay the Fund’s account an initial premium to be determined by the Fund within 30 days as of the Fund becomes operational.

The initial premium contributed by member financial institutions shall be considered as initial capital of the Fund, while the government shall contribute 200 million birr to the initial capital of the Fund. Article 16.5 stated that all member financial institutions that signed membership contract shall pay to the Fund annual premiums of 0.3 percent of their average deposits. Sub article six of the same article added that the Fund may determine by a directive a special initial premium to be paid by a financial institution with poor financial soundness. The Fund shall also be involved in investment activities with the resource it accumulates on the aim to generate income. Article 19.3 stated that investment in government securities issued or securities guaranteed by the government; or any other investment mode will be as approved by the Fund.

According to the regulation article 23.1, the total amount of the insurable deposits of a depositor shall be determined by a financial institution by adding up all the insurable deposits of that depositor maintained in the different accounts, including the accrued interest on those deposits up to the date of the occurrence of the insurance event. Article 23.8 stated that the coverage limit of the Fund shall be set by the board; however, it may not be less than 100,000 birr. Experts said that besides giving a guarantee for depositors and insuring the security of financial firms whether bank or microfinance institutions, it would be an alternative source of finance for the government when it is in need rather than accessing direct advances from NBE.