THE BENEFITS OF DEPOSIT INSURANCE IN AFRICA - ZIMBABWE EXPERIENCE.

1. THE BENEFITS OF DEPOSIT INSURANCE IN AFRICA - ZIMBABWE EXPERIENCE. INTRODUCTION BANK FAILURES IN ZIMBABWE. • UNITED MERCHANT BANK • UNIVERSAL MERCHANT BANK • ZIMBABWE BUILING SOCIETY -------------------------------------------------------------------------------------- • INTERNATIONAL MONETARY FUND • ACTUARIES

2. Public-Policy Objectives • To enhance public confidence and foster systemic stability by providing a framework for the resolution of failed banks, thereby preventing contagion or the risk of rumour-driven bank runs. Deposit protection, therefore, aims at encouraging savings and economic growth; • To protect small, less-financially-sophisticated depositors by providing an orderly means of compensation in the event of a financial institution becoming insolvent; • The scheme enhances competition in the financial sector by mitigating some of the competitive barriers in the deposit taking industry. In line with the above objectives, deposit insurance aims at promoting sound banking practices; • Deposit insurance further helps in defining the boundaries of the Government’s exposure and support in protecting depositors when a bank or group of banks fail in normal times.

3. Organisational Structure & governance • The DPB is a separate legal entity outside the Reserve Bank of Zimbabwe (RBZ). • Supervisory authority. • The DPB Board of Directors comprises 50% from Government through RBZ and 50% from contributory institutions.

4. Timing of set-up • Stable economic environment • Prudential supervision strengthened. • Regulatory framework review.

5. Mandate of the DPB • Phase One • Banking Act (Chapter 24:20) and the Banking (Deposit Protection) Regulations, Statutory Instrument 29 of 2003, provides the DPB with a narrow mandate initially, during which it will be operating as a “paybox” and not as a separate regulator. • Phase Two • DPB shall participate in resolving failing or failed banks. • Set conditions and standards for cover. These functions are necessary for the DPB to Risk minimizer.

6. Key design features • MEMBERSHIP: Mandatory to avoid adverse selection. • FUNDING: by all contributory institutions, ex ante. • INVESTMENTS OF FUNDS: • High liquidity; • Little or no credit risk; • Independent of insured institutions; • Offer some protection against the impact of inflation; and • Maximum return • SCOPE AND LEVEL OF COVER: • Cover is partial to avoid moral hazard. • PREMIUM ASSESSMENT • An actuarial exercise is undertaken. Flat rate premium system

7. Troubled Banks - Experience • Century Discount House – Liquidated 2004 • Rapid Discount House – Liquidated 2004 • Sagit Discount House – Liquidated 2004 • Barbican Bank Limited (curatorship 2004) • Funding sister companies ; no separate boards ; assets sold to ZABG • Trust Bank Corporation Limited • Poor corporate governance ; rapid expansion ; management restructure ; (too big to fail) ; assets sold to ZABG. • Royal Bank Zimbabwe Limited (curatorship 2004) • Non performing loans (insider loans) ; assets sold to ZABG (challenged) • Time Bank of Zimbabwe Limited (curatorship 2004) • Poor corporate governance ; weak risk management systems ; paid its depositors

8. Troubled Banks – Experience (cont) • CFX Bank Limited - Aggressive acquisition of branches disposed by other banks ; inadequate capitalisation ; scheme of arrangement – debt equity conversion depositors and creditors ; merger with CFX merchant bank • Intermarket Banking Corporation Limited • Foreign exchange parrallel market ; externalisation of funds ; conversion of debt to equity in holding company ; resume operations January 2006 • Intermarket Building Society - Exposure to Discount House ; set-off intercompany debts ; resume operations August 2005

9. Troubled Bank Resolution Framework • Trouble Bank Resolution Act – Objectives; Strengthen banking system Promote sound banking practices Restore stability of financial sector Promote economic development and growth Preserve indigenisation of the financial sector Provide permanent solutions for troubled banking institutions. • Zimbabwe Allied Banking Group (ZABG) – Commenced operations 31 January 2005.

10. Public Awareness • They make better informed financial decisions and reduce the incidences of market volatility • They ensure better financial product pricing hence enhancing market competition • They are less susceptible to unsubstantiated rumours, which, other, may turn quickly into a self validating panic. • They impose additional discipline on the banking system by scrutinising the conduct and practices of banking institutions; and • They push policy makers to implement better consumer protection laws and policies

11. Inter-relationship among Safety-Net Players • Good working relationship • Information sharing • Memorandum of understanding (MOU)

12. CONCLUSION • Financial Stability • Prevent bank runs • Public confidence