By KT Reporter
Institutions tasked with safeguarding public deposits in East African banks are exploring additional measures to protect funds from the risks associated with bank failures. Currently, the region has established Deposit Protection Funds that offer partial coverage in the event a bank collapses or is shut down by the industry regulator.
In Uganda, the Deposit Protection Fund (DPF) provides insurance of up to 10 Million Shillings per account, equivalent to approximately 3,000 US Dollars. For those with larger deposits, the Bank of Uganda handles the excess. While there are concerns that the maximum protected deposits of 10 million are low and should be raised.
DPFs in the East African Community are also faced with more expenses in case of a failure, in handling the resolution or winding up of the bank, in case of a collapse. The DPF Uganda and its regional counterparts now want a legal framework to provide for Resolution Funding for Deposit Insurers, to reduce the risk of using the premiums of DPFs to fund resolutions of the banks.
Julia Clare Olima Oyet, Chief Executive Officer of DPF Uganda, says the core role of DPFs is to pay out money to the affected depositors and therefore, utilising the funds on non-payout activities poses depletion risks. “It is important to note that while we explore various ways of funding non-payout resolutions, the ability of the deposit insurer to execute its core mandate of paying depositors should not be compromised in any way”.
Dr Oyet suggested that the option of creating a separate and distinct resolution fund, which could be managed by the Deposit Insurer, was worth considering. “It is even more important to note that in line with the International Core Principles of Deposit Insurance, using funds meant for payout to resolve banks means that the deposit insurers need to be active players as the most efficient resolution methodology is being discussed,” she said.
She was speaking at a Workshop on Resolution Funding for Deposit Insurers of the East African Community, organised by DPF Uganda in collaboration with the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI). The four-day meeting will, among others, consider possible conditions and limits under which the deposit insurer’s fund may be available for non-payout resolution measures, including strong safeguards for the use of deposit insurance fund resources for resolution.
It also seeks to identify possible resolution tools, powers, framework, and practices for small and medium-sized insured deposit-taking institutions and to determine baseline principles and cost/benefits considerations to help guide the selection of resolution tools. They also aim to consider a design framework to structure the interaction between deposit insurance agencies, the resolution fund, and public backstop arrangements.
It is said that existing resolution toolkits for banks were limited, and that some EAC Partner States are constrained to a few resolution options. It was further observed that resolution planning was relatively underdeveloped across many Partner States, while in some jurisdictions, it was noted that Authorities resorted to public funding too early.
The Monetary Affairs Committee recommended that Partner States should target to establish their National Resolution Funds by December 2026. Alan Lwetabe, the Director of Investments at DPF Uganda, said there was a need to take into consideration the deposit-taking institutions, which are more prone to failure than the bigger systemically important commercial banks.
He wondered where their premiums should be increased in anticipation to the need for resolution processes when such institutions fail. David Rex Bufton, a US-based financial expert, called for complete independence of deposit insurance from the central banks to ensure it is protected from any political interference. He noted that this is because DPFs protect the majority of depositors (80 percent ). After all, they are the ones who have 10 million shillings and less-URN. Give us feedback on this story through our email: kamwokyatimes@gmail.com
