DEPOSIT INSURANCE FUND 1. Establishment of the Deposit Insurance Fund The Deposit Insurance Fund was established in Tanzania under Section 23(1) of the Banking and Financial Institutions Act, 1991 and became operational in January 1994. The main objective of the scheme is to protect small depositors from risks of losses of their savings arising from bank failures, thereby maintaining public confidence in the nation s banking and financial system. The scheme does not provide 100% insurance coverage but from the standpoint of priorities, protecting small depositors (i.e. unsophisticated and unprofessional) and maintaining their confidence in the banking system is considered appropriate. In any case, some responsibility should remain with depositors for their choice of institution with which they would wish to place their savings or deposits. Every bank and non-bank financial institution which is licensed to carry on banking business in Tanzania must be a contributor of premium to the Fund. The premiums allow the scheme to build up ample insurance resources over the time to pay claims to depositors of a failed bank or non-bank financial institution. 2. Management of the Fund. In terms of Section 24(1) of the Act, the powers and functions of the Deposit Insurance Fund are under the control and management of the Deposit Insurance Board. The Board consists of the Governor of the Bank of Tanzania who is the Chairman, Permanent Secretary to the Treasury (Mainland) and the Principal Secretary, Ministry of Finance, Zanzibar, and three other members appointed by the Minister for Finance. The Board has legal powers to acquire, own, possess, dispose of property, control and sue and be sued in its own name and perpetual succession. The Board is also responsible for policy formulation and management of the Fund, and is required to keep proper accounts and records and submit a statement of its affairs and annual report to the Minister for Finance within three months after the close of each financial year. The financial year of the Fund is the same as that of the Bank of Tanzania (i.e. July- June).
Under the provisions of Section 24(4) of the Act, the Bank of Tanzania (BOT) is required to provide staff and facilities for proper and efficient exercise of the functions of the Board. That apart, whenever the exigencies of the work of the Board demand, the Fund may utilize staff from the Directorate of Banking Supervision of Bank of Tanzania. However, the day to day management of the Fund is vested with the Director of the Fund who is responsible for the operations and policy implementation as directed by the Board. In terms of Section 23(4) and (5) of the Act, the administrative expenses of the Board, repayments of money borrowed by the Fund and payments for insured deposits are chargeable to the account of the Fund which must be opened at the Bank of Tanzania only. 3. Funding Arrangements Section 23(3) of the Banking and Financial Institutions Act, 1991 provides a number of sources of finance to sustain the activities of the Deposit Insurance Board. The main source of income is annual insurance premium contributions from member institutions, which are calculated by reference to the size of the contributory institution s deposit base. This source is supplemented by income from investment of the Fund s resources, mainly in the Government Treasury Bills. initial contribution towards the capitalization of the Fund of TShs.1,500 million was made by the Government. In addition to the above sources, the Board may be authorized by the Minister for Finance, under Section 23(2) of the Act, to borrow from the Bank of Tanzania or any other person, such amount as it may require for temporary purposes of making up deficiency in the Fund pending collection of premium contributions. 4. Level of Protection Coverage All types of deposits received by a bank in its usual course of business are protected. They include, current account, savings and time deposits, and any other deposits for which a bank is primarily liable. The current maximum deposit insurance coverage is TShs.250,000/= in each insured bank or financial institution in respect of deposit account held in the same right or capacity. The term right and capacity refers to the nature of ownership of deposit, such as individual, joint ownership, business firm or company or trust and is insured up to the maximum of TShs.250,000/= in the aggregate with respect to all deposit accounts held. 2
Thus, a person may hold or have an interest in more than one separately protected account in the same protected bank or financial institution. If each of the co-owners of an account has personally signed a valid account specimen signature card and has a right of withdrawal on the same basis as the other co-owners, the joint account would be considered as being distinct from each of the individually owned accounts which are separately protected. The mandatory protection ceiling of TShs.250,000/= may, however, be amended by the Minister for Finance after consultation with the Deposit Insurance Board and the Bank of Tanzania so as to reflect, inter alia, the nature and structure of deposits in banks and financial institutions as well as adequacy of resources available within the Fund. 5. Contribution and Assessment rate The level of contribution is assessed by an applied uniformity to all banks and financial institutions based on one variable irrespective of risk involved to which a particular institution may be exposed to. However, the assessment rate, in most instances is tied up with the need to hasten accumulation of reserves in line with increase in risk exposure to the Fund. It is also important to take note that the assessment rate depends on loss experience encountered by the Fund i.e. frequency and size of failures and the level of recoveries. According to the Act, contribution to the Fund by every bank or financial institution shall not be less than one percent of the average twelve months total deposit liabilities prior to the date of the Notice served by the Board to call for premium contribution. However, Section 25(4) of the Banking and Financial Institutions Act, empowers the Minister for Finance, after consultation with the Bank of Tanzania, by an order, to amend the minimum and maximum amounts of contributions. Currently, the rate has been set by the Minister for Finance by an Order published in the Government Gazette at one tenth of one percent of the average deposit liabilities for twelve months, and is payable in one lumpsum, within 21 days of notification by the Board. Therefore, the assessment base is the amount of arithmetic average of total deposit liabilities for twelve months period preceding the date of levying the assessment. If for any reason a bank or financial institution fails to pay fully on or before the stipulated date, penalty charge not exceeding one half percent of the unpaid amount for every day outside the Notice period on which the amount remains unpaid is provided for under Section 25(5) of the 3
Act. In addition, under the Act, there is a provision to increase the contribution beyond the maximum set or terminate the protection of the deposits of a bank or financial institution conducting its affairs in a manner detrimental to its own interests or to the interests of the depositors. 6. Functions of the Deposit Insurance Fund and Board The primary functions and options for dealing with problem banks and financial institutions include the following:- a) Administration of Resources Collection of insurance premium from banks and financial institutions and invest the resources. As a matter of policy, all the resources of the Fund are invested in Treasury Bills because these assets are considered to have relatively little risk and are highly liquid. They can be converted into cash quickly without substantial monetary loss to meet the legal obligation of the Board/Fund i.e. payment of insured/protected deposits in the event of bank failure. b) Pay off depositors of a failed bank or financial institution. The deposit pay off arises in the event of liquidation of a failed institution. Once an institution has been declared insolvent by the Bank of Tanzania and subsequently closed, all depositors of the institution are required to claim for their deposits from the Deposit Insurance Board within the prescribed period as announced by the Board through the media, posts etc. submitting documentary proof such as pass book or certificate of deposit to show that they are entitled to payment out of the Fund. The applications will be processed and payments will be made to every depositor, i.e. an amount equal to the amount due to him/her in respect of his/her deposit in the failed institution subject to the statutory coverage of the scheme i.e. TShs.250,000/=. This amount would be the aggregate credit balance of any deposit accounts maintained by a customer less any liability to the failed bank or financial institution. In a deposit pay off, the accrual of interest ceases on all accounts at the time a bank or financial institution is seized by BOT under the provisions of the Banking and Financial Institutions, 1991 and placed under its Statutory Management. There are two types of settlement i.e. transfer of deposits settlement wherein the Deposit Insurance Board assigns a 4
transferee bank which will service payment claims, but up to the insured amount. In the transfer deposit settlement, the claimant has an option to keep his money in a new account in the transferee bank if he so wishes. The depositors with balances in excess of the mandatory ceiling remain entitled to claim balances from the failed institution, as general creditors in the receivership. Such depositors share, prorata, in any proceeds from the liquidation of the failed institution s assets with other general creditors after the Board has been paid first i.e. the Board becomes a subrogee because it subrogates the rights of the depositors. Thus, depositors with funds in excess of the maximum coverage may sustain at least some monetary loss depending on the liquidation value of the assets in the receivership. Furthermore, it also depends on the priority of claims from other creditors of the bank. In a direct claim settlement, the Board determines the insured amount due to each depositor and prepares payment. The direct claim settlement or straight deposit pay off method is generally the most costly method of resolution because the receiver must also bear the cost associated with the paying off all insured depositors. Shareholders of an insolvent bank or financial institution recover their equity investment only after all creditors have received their claim payments. In most cases, shareholders realise little or no recovery because an insolvent bank or financial institution is unlikely to pay all creditors in full. c. Financial assistance to ailing banks and financial institultions. In line with the provisions of Section 28 of the Act, the Deposit Insurance Board can extend financial assistance in the form of short term loans to a bank or financial institution experiencing a temporary liquidity pressure to avoid impending closure, when there are good prospects that the bank or financial institution would get back on its own feet fairly quickly. Such accommodation is granted when it is proved that the financial constraints faced by the bank or financial institution arose entirely from causes attributable to or beyond its control and that in the opinion of the Board the continued operations of the problem bank or financial institution in the country is essential to provide adequate banking services to avoid possible losses to the depositors or to reduce/avert threatened loss to the Fund or to avoid bankrupting some of its customers especially companies or to avoid possible failure of other banks and financial institution that held deposits with the problem bank or financial institution or to avert widespread bank 5
runs in the banking system that could lead to collapse of the payment system. The maximum size of the credit should not exceed its insured deposits. The credit must be well collateralized. Apart from the above, the Board is also empowered to place a deposit with or issue a guarantee to a problem bank or financial institution. d) Purchase of assets of a problem member institution. The Board, acting under Section 28 of the Act may purchase assets (non-performing) of a problem bank or financial institution which is near insolvency with the intention of protecting the interests of all depositors of that bank or financial institution. e) Participating in the liquidation of a failed bank or financial institution. The Banking and Financial Institution Act, 1991 was amended in 1995, in particular Section 27 thereof and now allows the Board to become the liquidator of a failed bank or financial institution, if so appointed by the Bank of Tanzania i.e. The powers of the Bank of Tanzania to appoint the Board as a liquidator of insolvent banks or financial institutions are discretionary and not mandatory. Conclusion The Deposit Insurance Board works very closely with the Bank of Tanzania and in particular, the Directorate of Banks Supervision in order to fulfil its vital role of promoting depositors confidence in a sound, safe and stable banking system. DEPOSIT INSURANCE FUND, NDC Development House, Ohio Street, C/O Bank of Tanzania, P.O. Box 2939, Dar es Salaam, Tanzania. Tel: 255-022-2119339 / 255-022-2114799 Fax: 255-022-2126665 E-Mail: info@hq.bot-tz.org 6