Minister of Finance should not bring Deposit Insurance Act into operation until appropriate rate of premium has been actuarially determined
Dear Editor, A recent report of the World Bank discloses that the “hinterland areas, where only 9.6 percent of the total population resided, housed 64 percent of the Guyanese population with acute deprivation in health, education and standard of living.” The report also referred to latest poverty estimates which show that poverty in Guyana is deepest in the rural interior regions at 73.5 percent.
Yet, when the Government approaches the World Bank - part of the Washington Consensus associated with the most draconian of conditionalities attaching to the Hoyte/Greenidge Economic Recovery Programme – for funding, it imposes on Guyana not conditionalities but what is refers to as “prior action”. So here we have it, the Granger Administration, in return for a loan of US$35 million acquiesces without any hesitation or question to pass four pieces of legislation, none of which address the problems which the Report helpfully discloses but callously disregards.
The four pieces of legislation presented to the National Assembly are: National Payment Systems Bill 2018 No. 4 of 2018; Financial Institution (Amendment) Bill No. 5 of 2018; Bank of Guyana (Amendment) Bill No. 6 of 2018 and Deposit Insurance Bill 2018 Bill no. 7 of 2018 Status. What is obvious is that none of these legislation were written in Guyana by Guyanese but by the various multilateral financial institutions. Yet, in a classic case of getting one’s priorities wrong, and without any hint of embarrassment, Finance Minister Winston Jordan praised the measures as “part of the ongoing efforts designed to modernise the country’s financial architecture.” For its part, the World Bank through its Senior Country Officer Pierre Nadji praised the speed and timing of the passing of four pieces of enabling commented that the latest legislative acts that were passed were passed at the right time for the US$35 million agreement. Each of the pieces of legislation has serious and adverse implications and warrant analysis by financial commentators and pundits.
One of these – the Deposit Insurance Bill – which was passed and assented to by the President will have serious implications for the financial sector and those who do business with banks and deposit-taking financial institutions. Of course, these businesses will pass on these costs to their customers in what will amount to a tax on savings.
The Act as circulated to subscribers omits several key sections and one has therefore to rely on the Bill for purposes of this discussion. Clause 27 of the Bill sets the target size of the Deposit Fund as 5% of the insured deposits to be reached within ten years and Clause 35 sets out the insured limits at two million dollars. In the absence of information on the composition of deposits held by the financial institutions it is not possible to determine the cost of the scheme and the potential impact on savers.
It does mean however that the effective rate of deposit insurance on small savers will be higher than that for larger deposit balances. By way of example, a $2 million deposit will attract insurance of $100,000, the same as a deposit of $40 million. If the banks were to seek to
recover the full sum from depositors, it means that depositors will receive that much less over a period of ten years.
I was told that the rate was set by these foreign advisers and consultants. Anyone with a passing interest in insurance will know that rates of premiums are set based on scientific, actuarial studies that take account of a range of probabilities, which is this case would be the likelihood of a bank failure. Over the past sixty years, the only financial institution which failed and resulted in a loss of depositors’ money was Globe Trust, a failure due entirely to poor governance and corruption. The other failure was the GNCB but in that case, depositors did not lose a penny.
The chances of a repetition are slim but not impossible. Financial institutions are now strictly regulated, have substantial statutory and excess reserves with the Bank of Guyana and are subject to statutorily established governance rules. Moreover and coincidentally, new accounting rules require loan provisioning to be made prospectively, reducing the possibility even lower. I submit therefore that a five percent fund is unjustified, excessive, ill-conceived, unnecessary, costly and burdensome on to both financial institutions and depositors alike.
And who will administer the Fund? A Deposit Insurance Corporation that will be another vehicle for rewarding the privileged set.
Fortunately, while the Act has already been assented to, it will only come into operation when the Minister of Finance so orders. I am therefore making a public appeal to the Minister not to bring this Act into operation until the appropriate rate of the premium has been actuarially determined.
I also appeal to the Minister, the President and the Government to redirect their attention to the sad state of poverty in large swathes of rural and hinterland areas and to be careful in their dealings with the World Bank, the IMF and that ilk.
Yours faithfully, Christopher Ram