Existing deposit protection laws in Zimbabwe are deemed inadequate by a lawmaker, who stated last week that they fail to adequately address the evolving risks and challenges confronting the financial sector. This assessment comes amidst concerns that this legislative gap exposes citizens to heightened vulnerability to financial sector instability.
The banks that closed had the same ailment — insider non-performing loans, akin to declaring dividends to shareholders using depositors’ funds, according to the Reserve Bank of Zimbabwe.
Speaking during a Deposit Protection Corporation (DPC) Act amendment breakfast meeting in Harare on Friday, Clemence Chiduwa, Parliamentary Portfolio Committee Chairperson on Budget, Finance, and Investment Promotion, said the laws were outdated in shielding citizens from financial instability, risking the banking system’s stability.
“The coverage limits may be too low to provide adequate protection for all depositors, especially small savers who rely heavily on their bank accounts for financial security,” he said.
“Moreover, the mechanisms for funding deposit insurance schemes may be inadequate, raising concerns about their ability to effectively respond to systemic crises.”
Chiduwa urged fellow legislators to prioritise amending deposit protection laws to safeguard depositors’ funds.
“By enhancing these regulations, we can better protect the savings of our citizens, promote financial inclusion, and strengthen the resilience of our banking sector against future crises,” he said.
He emphasised that amending deposit protection laws in Zimbabwe was not just about regulatory compliance but also a critical step toward ensuring financial stability, protecting depositor funds, enhancing regulatory oversight, and promoting financial inclusion.
“I urge all MPs to prioritise this issue and work together towards enacting necessary reforms that will benefit our economy and society as a whole,” he said.
Chiduwa emphasized the need to act promptly to bolster these laws and guarantee the safety of citizens’ money earned through hard work. He highlighted that in case of a bank collapse or financial emergency, depositors should feel assured that their funds are secure and will be reimbursed up to a specific threshold.
“By enhancing deposit protection laws, we can instil trust in the banking system and encourage more people to save and invest their money, ultimately promoting economic growth and stability,” Chiduwa said.
He noted that in times of economic uncertainty or banking crises, a lack of adequate deposit insurance leads to widespread panic withdrawals, bank runs, and systemic risks.
“By amending the deposit protection laws to ensure comprehensive coverage for depositors, we can mitigate these risks and prevent potential contagion effects that could destabilise the entire financial system,” he said, adding that amending the deposit protection laws would also provide an opportunity to enhance regulatory oversight of financial institutions.
The lawmaker stated that by imposing stricter regulations on banks and other deposit-taking institutions, the country can improve risk management practices, enhance transparency, and hold these institutions accountable for their actions.
“This will help prevent reckless behaviour that could jeopardise depositor funds and lead to systemic failures.”
Chiduwa noted that strengthening deposit protection laws may encourage more people, especially those from marginalized communities, to use formal banking systems. Knowing that their deposits are protected up to a certain limit will instill confidence in individuals and encourage them to save money within the formal financial system.
“By guaranteeing a certain level of protection for deposits, these laws help maintain trust and confidence in the banking system, which is essential for economic stability and growth.”
DPC Chairperson Agmos Moyo stated they have initiated the process of amending the DPC Act due to significant disparities in the framework for addressing bank failures.
DPC Acting CEO Kiitu Zawanda mentioned that the amendment will ensure a smooth transition between the reserve bank and DPC, preserving assets for distribution and compensation claims by depositors.
Among other provisions, the amendments prohibit the conversion of debt to equity, as this often leaves the institution unable to meet its obligations to creditors and investors.
Source NewsDay
