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A stable financial system as a capacity to efficiently allocate resources, manage risks and support the realization of sustainable economic development of a country. The well-functioning and adequate implementation of financial safety nets is very important to ensure financial system stability. Financial safety nets include the functions of prudential regulation and supervision, resolution, lender of last resort and deposit insurance.

Deposit insurance is clearly the most recognized component of the financial safety net and undoubtedly helps to sustain the general public’s confidence in the financial system. However, deposit insurance has benefits and limitations.

Benefit

  • Financial system stability: deposit insurance eliminates the incentive for bank-run by giving depositors confidence that their deposits are insured and can be reimbursed in case of failure of a deposit taking financial institution;
  • Consumer protection: consumer protection is one of the principal reasons for establishing deposit insurance to reduce the risk that small and unsophisticated depositors would suffer losses in the event of the liquidation of a deposit taking financial institution;
  • Protecting tax payers money: the adoption of deposit insurance ensures the transfer of the burden or cost of depositors’ protection to deposit taking financial institutions (commercial banks and microfinance institutions) that pay premiums to be used for depositors reimbursement instead of using tax payers’ money to reimburse depositors of a failed commercial bank or microfinance institution;
  • Fair competition: the deposit insurance promotes fair competition amongst all commercial banks and microfinance institutions, irrespective of their size. In absence of deposit insurance, depositors would prefer to place their funds with government owned banks which are assumed to have an implicit government guarantee in case of their failure; and
  • Promote financial inclusion.

FUNCTIONS OF EDIF

  1. Determine initial and annual premium to be contributed by member financial institutions (commercial banks and microfinance institutions);
  2. Collect premiums from member financial institutions, and deposit in the account of the Fund;
  3. Invest and manage resources of the Fund;
  4. Assess compensation claim and make payment to eligible depositors to the extent of insured deposit;
  5. Recover deposits paid-out from liquidation proceeds of the failed member financial institution;
  6. Issue directives necessary for the operation of the Fund;
  7. Raise public awareness about the Deposit Insurance Fund;
  8. Collect information from member financial institutions and prepare periodic reports;
  9. Collaborate with concerned local and international stakeholders;
  10. Borrow money from Government and other sources if there is shortage of funds; and
  11. Take legal action on parties at fault in a member financial institution’s failure.