House passes Bill to protect depositors
Parliament on Friday passed a Bill on Deposit Insurance which seeks to protect clients from losing their deposits with banks and any other financial institution in an event of financial institution failure.
Presenting the Bill in the House, Legal Affairs Committee chairperson Peter Dimba stressed that ensuring stability of the financial system and protecting depositors’ funds is the government’s important responsibility as stipulated under Section 10 of the Financial Services Act (FSA).
Said Dimba: “Failure of a financial institution can disrupt the discharge of the responsibilities outlined in Section 10 of the FSA and would further be catastrophic to depositors, policyholders and investors who do not have resilience mechanisms.”
The chairperson added that in the absence of explicit guarantee either by the Reserve Bank of Malawi (RBM) or government regarding deposit protection, government becomes the guarantor and carries an implicit contingent fiscal liability in line with stress levels in the financial system.
Dimba informed the House that the committee together with the Budget Committee held consultative meetings with the Ministry of Finance, Ministry of Justice, RBM and Business Association of Malawi (BAM) to appreciate the perspective of business community on the Bill.
According to Dimba, the stakeholders agreed to establish the Deposit Insurance Corporation (DIC) which will guarantee that all or part of clients’ deposits should paid following a financial institution’s failure.
Said Dimba: “The proposed corporation shall be responsible for setting up and administering of a Deposit Insurance scheme among deposit taking financial institutions such as banks, microfinance institutions and Saccos in Malawi. In addition, investors and policyholders in the capital market and insurance sectors, respectively, will be covered under the Scheme.
“Deposit Insurance provides a guarantee that all or part of the deposits or invested funds or insurance premiums shall be paid following failure by an insured financial institution. This entails that instead of the cost of failure of a financial institution to be borne by one institution, by pooling premiums, the Deposit Insurance Corporation will redistribute the cost of failure that is payment to depositors, among financial institutions.”
According to him, some of observation by BAM during the consultative meetings included that government should avoid making the institution a statutory corporation because of the many failures arising from such setups, that government contribution should be less than 20 percent and that minister of Finance should not appoint board members.
BAM also proposed that instead of government and RBM owning 60/40 of the shares, respectively, the shareholding should be widened to allow financial institutions and individuals to have stakes in the corporation.
In his contribution, Dowa West member of Parliament Abel Kayembe welcomed the Bill, saying government will now have an option on where to borrow money from with less interest charges.
