Benefits of deposit protection to the financial sector

APromote fi nancial stability DEPOSIT Protection Scheme ( DPS) offers assurance to depositors that in the event of a contributory institution being unable to pay depositors, they will be partially or totally reimbursed their deposits.

Thus, by insuring the deposits, a DPS helps to build confidence in the banking system, prevent self- fulfilling panics or bank runs thereby reducing the likelihood of contagion and cascading defaults. A DPS reduces financial uncertainty thereby promoting financial intermediation and enhancing economic and financial stability.

Competition A DPS levels the playing field in the banking sector. Larger banks, due to their size, track record and brand visibility have an edge over smaller banks in attracting deposits at lower interest rates. A DPS makes depositors of smaller banks feel safe and protected hence neutralising the advantages. Complementary financial safety nets and regulatory discipline Establishment of deposit protection agencies with wide mandates such as risk minimisation or loss minimisation complements the supervisory and regulatory framework.

Financial inclusion Establishment of a deposit protection scheme catering for both individual and well to do corporate clients, as opposed to a scheme for small depositors alone, also reduces incidences of deliberate financial exclusion.

Liquidity Some deposit insurers have mandates and resources that enable them to inject capital in distressed banks to avert bank failures.

Reminder: Compensation to depositors of the following closed banks is in progress: AfrAsia Bank, Allied Bank, Interfin Bank, Genesis Investment Bank, Royal Bank and Trust Bank. If you have not received any reimbursement to date, kindly contact us today.