Uganda is planning to raise the official protection cover for cash depositors from Shs3m ($805) to Shs10m ($2,682) in a fundamental move that promises a huge relief to citizens holding fat account balances in times of a bank collapse.
But this could raise contribution costs for financial institutions in an industry haunted by previous bank failures.
Deposit protection cover is the maximum amount of money provided by the government for compensation of depositors who hold cash in closed banks or other “dead” financial institutions.
The current Shs3m ($805) deposit protection ceiling was introduced in the 1990s under the repealed Financial Institutions Statute of 1993.
But significant growth registered in customer numbers, deposits and service providers within the financial sector since 2004 and movements in macroeconomic indicators such as inflation have rendered it obsolete.
The new reform proposal is in the final drafting stage, with officials at the Deposit Protection Fund making final touches on the blueprint before submitting it to the Fund’s board for discussion and approval.
Though previously a department of the Central Bank, the Deposit Protection Fund was recently transformed into a separate institution headed by a chief executive responsible for managing assets meant to be utilised for compensation of depositors belonging to closed banks, credit institutions and micro deposit taking institutions.
As as of June 2018, there were 33 contributing financial institutions enlisted, comprising 24 commercial banks, four credit institutions and five micro deposit-taking institutions.
The expansion of the deposit protection cover will cut losses for some big depositors affected by future bank closures.
Under the existing rules, a depositor with a bank balance of say Shs5m ($1,341) would only get Shs3m ($805) while those holding account balances below Shs3m would be fully compensated.
What the rules provide: Under the existing rules a depositor with a bank balance of say Shs5m ($1,341) would only get Shs3m ($805) while those holding account balances below Shs3m would be fully compensated.
Currently, regulated financial institutions are required to contribute 0.2 per cent of the value of annual deposits to the Deposit Protection Fund; a fee that might be raised to support a higher deposit protection cover.
Under these rules, Bank of Baroda Uganda for example, would remit Shs2.6b ($697,419) to the DPF against total customer deposits valued at Shs1.3 trillion ($348.7m) as at the of December 2018.
Industry players seem unsure of an alternative contribution rate for the deposit protection fund.