THE Deposit Insurance Board (DIB) is a legal entity currently operating within the Bank of Tanzania (BoT) in accordance with the law.
Since its commencement in 1994, DIB has remained largely unknown to the public.
Our Special Correspondent recently had an exclusive interview with the DIB Director, Mr Abraham Rasmini who discussed widely about DIB, in this first of three interviews. Excerpts.
QUESTION: We are made to understand that Deposit Insurance Board (DIB) started its operations in 1994. In simple terms, what is deposit insurance system all about?
ANSWER: Deposit Insurance is one of the mechanisms employed by governments to ensure stability of the banking systems and consequently stability of the financial system.
It is a complimentary element of an extensive financial safety net that includes Banking Law and Regulations, Lender of Last Resort and Banking Supervision.
Deposit Insurance Systems are intended to protect depositors against the loss of their insured deposits placed with member institutions in the event a member institution has failed.
Deposit insurance ensures that a depositor does not lose all his money in the event of bank failure.
Deposit Insurance Systems are necessary because banks and financial institutions differ from most industrial and commercial enterprises in that they depend mainly on deposits mobilized from public for their working capital and are highly leveraged.
If a bank or financial institution is unable to meet its obligation to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank as well as other healthy institutions and hence the stability of the financial system would be at risk.
Deposit insurance prevents bank runs by providing assurance of deposit repayment to the great majority of depositors.
Where deposit insurance system exists, depositors are reimbursed their protected deposits when a bank fails and in so doing maintain the confidence of depositors in continuing doing business with banking institutions and promotes the stability of the banking system by assuring savers of the safety of their funds.
In many countries the objective has been to protect small savers because because they cannot cost effectively collect and analyze information on the financial institutions they do business with.
In view of this, governments establish deposit insurance mechanism to provide protection for small depositors and contribute to financial stability.
Another motive for protecting small depositors is that the financial intermediary function of banks which is a locomotive force behind an economic expansion is largely supported by small depositors who normally provide less volatile (core) deposits to banks.
Q: How does insured deposit differ from 'uninsured deposit'?
A: Insured deposits are those deposits within the insurance coverage limit of DIB. Currently, the limit is TZS1.5 million. Uninsured deposits are those above insurance coverage limited.
Q: What are the risks taken by Tanzanians for having uninsured deposits?
A: The risk taken is potential loss of uninsured amount in the event of bank failure. It is therefore recommended that depositors should keep their money in separate banks if are above maximum coverage limit.
Q: What is the main objective of DIB?
A: Like other deposit insurance systems in the world, the main objective of DIB is to provide protection to small depositors or small savers against risks of losing their savings arising from bank failures and thereby maintaining public confidence in the banking and financial system.
Q: How do you summarize the DIB roles and activities that contribute to enhancement of public confidence in the banking system?
A: The DIB role is to protect depositors against the loss of insured deposits placed with member institutions in the event a member institution has failed.. .
DIB activities are under the stewardship of the Board of Directors, The Board is responsible for policy formulation and management and control of the Deposit Insurance Fund.
According to the provisions of the law, DIB Board is comprised of the following members; Governor of the Bank of Tanzania (BOT) - Chairman, Permanent Secretary to the Treasury (United Republic of Tanzania) Principal Secretary to the Ministry responsible for finance of the Revolutionary Government of Zanzibar, and three other members appointed by the Minister for Finance United Republic of Tanzania.
Day to day activities of the DIB are under the control of the Director of Deposit Insurance Board who is assisted by two line managers namely; Manager Operations and Manager Finance and Administration.
The BOT is required under the Bank and Financial Institutions Act, 2006 to provide facilities and officers that are necessary for the proper and efficient exercise of the functions of DIB.
Q: The assertion is that the DIB has contributed to the promotion of financial stability in co-operation with other safety net players. What is meant by safety net players here? Who are other safety net players?
A: In the context of financial sector, Safety net players are authorities within the financial sector that work together for the purposes of attaining financial stability. The Safety net players constitutes all institutions that play role in ensuring that country's financial system is stable, safe and sound.
In Tanzania the institutions are BOT which is a lender of last resort, supervisor and regulator of banks and financial institutions; DIB for protection of depositors funds and the Ministry of Finance (MOF).
The components of the financial safety net are: Supervisory and regulatory framework For a country's financial system to remain stable, safe and sound there must be an effective regulation and supervision of all key financial institutions.
This will ensure entrance of viable members into the system and make close follow up on the member's performance. Lender of last resort function of the central bank Liquidity in banking institution is comparable to oxygen in normal life.
Due to the nature of banking business an institution may face temporary liquidity problem. While illiquidity in a banking institution may not automatically lead into insolvency it remains true that a prolonged illiquidity condition may lead into insolvency and ultimately collapse of a bank or financial institution.
In view of this central banks provide a temporary liquidity support (facilities) to banks and financial institutions and thus bail them out of temporary liquidity problems.
Deposit Insurance System While effective regulation and supervision and lender of last resort is of paramount for the survival of a banking institution it however happens that due to other unavoidable circumstance an institution may fail.
Under such circumstances and in understanding of the fact that a banking institution working capital is derived from public deposits, an orderly exit of a failed banking institution is important for the stability of the financial system.
A Deposit Insurance System is therefore designed to ensure an orderly exit of a banking institution. Government (Ministry of Finance) - the Fiscal aspect A Deposit Insurance System is designed to manage medium sized banking institution failures.
In case of failure of a large banking institution with systemic impact in the economy or in case of failure of several banks (crisis), the funds collected by a DIS may not suffice the financial requirement of such failures.
Under these circumstances, the government through the ministry of finance may intervene by providing financial support that will help to resolve the bank failure in a manner that will have less negative impact on country's economy.
Source allAfrica
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