Sunday, September 24, 2023
BusinessBillion br deposit insurance scheme afoot, banks to face 5bl br

Billion br deposit insurance scheme afoot, banks to face 5bl br

The new government-run deposit insurance scheme for Ethiopian savers, the Ethiopian Deposit Insurance Fund, is launching with an initial one billion birr capital.

It took over two years to operationalize the Fund after a governing regulation was approved by the Council of Ministers in 2021.

With a mandatory initial 0.04 percent premium contribution on deposits financial institutions reported until the third quarter of the just-ended fiscal year, the Fund aims to rake in 800 million birr in premiums from banks and microfinance institutions in the next two years.

The government will then contribute an additional 200 million birr for the Fund’s billion birr launch pad, according to the Fund’s new CEO Merga Wakweya.

The Fund’s directive that took effect July 4, 2023, also compels commercial banks and MFIs to contribute an annual premium of 0.3 percent of deposits as yearly contributions. Banks will need to pay around five billion birr in annual premium contributions to the Fund based on current deposit trends.

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As of the second quarter end of the last fiscal year, total deposits at commercial banks reached two trillion birr while the 43 microfinance institutions (MFIs) recorded 23.6 billion birr in savings deposits, according to the National Bank of Ethiopia’s quarterly report.

The financial institutions are required to pay half the 800 million birr the Fund is eying – 400 million birr – by this month’s end. The remaining half will be paid over the next two years in 200 million birr installments, Merga explained.

The Fund collects institutions’ annual contributions based on the average deposits mobilized during the previous year, computed using the four quarterly deposit balances. At the end of each quarter beginning this fiscal year, the Fund will collect premium contributions on last year’s mobilized deposits.

“Beginning in September through June, we expect to collect over five billion birr in annual contributions for this year,” Merga said.

A mandatory three-page membership contract was sent to financial institutions along with the directive. However, institution heads did not openly welcome the development.

An official at a private bank who requested anonymity said it’s illogical for banks to contribute to deposit insurance.

“Deposit insurance is for depositors logically, not banks. So fees should logically be collected from insured depositors. Or the government itself should do it if it feels depositors should be protected,” the official said.

The bank executive argues that if the government implemented the scheme because institutions use deposits for loans, it should have devised a different mechanism.

The government may have established the fund to use it as a financial instrument to fill budget gaps, according to another executive The Reporter spoke to.

“Depositors are already guaranteed when they use our services. There is no way we would mishandle our clients’ deposits and we pay them promptly with minimum interests,” he said. “Deposit insurance isn’t a risk now.”

While agreeing that deposit insurance is not currently a risk, Merga forecasts future risks as the threat exists with the entry of foreign banks.

“Competition is already high and will increase in the future. The more competition, the higher the risk of banks defaulting. It has happened in other countries,” Merga argues.

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