KAMPALA – The Governor Bank of Uganda, Mr Emmanuel Tumusiime-Mutebile, has explained that failure by commercial banks to respect deposit insurance has been costly to the government during the closure of several commercial banks in the past 10 years.
Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due.
Speaking at a conference organized by the International Association of Deposit Insurers – Africa Regional Committee Lake Victoria Serena Hotel in Kigo on Monday, Mr Mutebile said deposit insurance exists to protect the banking system against the risk of bank “runs”, that is, unrestrained demand for cash by savers.
“In Uganda, the need for effective deposit insurance was exposed during the resolution of several local banks that failed during the late 1990s and early 2000s. Indeed, the Bank of Uganda (BoU) has recently been the subject of a Parliamentary probe seeking final closure of the numerous issues and contested claims that arose out of the associated receivership and liquidation processes,” he said.
“Notably, the depositors of those failed banks were fully compensated, for the most part, using taxpayers’ funds as the Government sought to preserve public confidence in the banking system,” the Governor added.
He said as result, BoU established a deposit protection fund under the Financial Institutions Act 2004 as amended.
“Therefore, in 2016 the Financial Institutions Act 2004 was amended to provide for the establishment of an autonomous Deposit Protection Fund of Uganda, among other reforms. Another vital reform, worth highlighting here, is the recent increase of the deposit insurance threshold to USh10 million from only USh3 million previously,” he added.
The Governor explained that the higher threshold is likely to enhance public confidence and encourage greater customer deposits, thereby expanding the funds available for financial intermediation by the banking sector.
“Larger pools of deposits would reduce the cost of loanable funds for banks, spur credit expansion, and ultimately support faster economic growth,” he said.
Mr Mutebile urged government to allow the Deposit Protection Fund to function independently.
“I must stress the need for the nascent Deposit Protection Fund (DPF) of Uganda as an autonomous institution to prove its credibility and fitness for purpose before it gets tested in a period of difficulty. The DPF must be well funded, capably staffed, and should maintain the support of the central bank as well as that of the Government as partners in ensuring the stability of the financial system.”