An analysis of the effectiveness of deposit insurance systems in bringing confidence and stability in the financial sector

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AN ANALYSIS OF THE EFFECTIVENESS OF DEPOSIT INSURANCE SYSTEMS IN BRINGING CONFIDENCE AND STABILITY IN FINANCIAL SYSTEMS (THE CASE OF THE DEPOSIT PROTECTION CORPORATION OF ZIMBABWE)

INTRODUCTION
The purpose of this study is to assess the effectiveness of the deposit insurance system in Zimbabwe with regards to bringing confidence and stability in the financial system and to establish its impact on the financial sector as a whole. The writer will begin by giving a background of the deposit insurance system in general, the reasoning behind the whole concept, their objectives and the principles that guide best practice. The writer will also present the research justification, research objectives and the hypothesis. The conceptual framework and literature review will form the basis of the review. The research methodology will then be highlighted. Research findings and analysis will then be discussed and recommendations before the final conclusion is made.

BACKGROUND
Deposit Insurance has become a widely accepted phenomenon the world over. Deposit insurance systems have been set up in Europe and America and Asian countries have followed suit. In Africa the concept is now emerging with more African countries looking to set up deposit insurance schemes. Nigeria, Kenya, Tanzania and Zimbabwe are African examples with functional deposit protection schemes. Deposit insurance systems are designed principally to contribute to the stability of a country’s financial system and to protect small, less financially sophisticated depositors who lack the acumen to appropriately evaluate banking risks against financial loss in case of bank failure. Deposit Insurance systems are guided by several other public policy objectives and are meant to enhance public confidence by providing a framework for the resolution of a failing or failed bank. They are expected to enhance competition in the financial services sector by mitigating some of the competitive barriers in the deposit taking industry and they help in defining the boundaries of the government’s exposure and support with regards to protecting depositors when a bank fails in normal times.

A deposit insurance system should be able to clarify the authority’s obligation to depositors and limit the scope for discretionary decisions that may result in arbitrary actions. Such a system needs to be properly designed, well implemented and understood by the public. The system also needs to be part of a well-designed financial safety net, supported by a strong prudential legal framework that clearly spells out the deposit insurance coverage and limit, type of deposit insured and the rights and responsibilities of the deposit insurer and the insured financial institutions. There should be mandatory membership into the scheme for deposit taking institutions. These institutions should then be properly licensed and supervised by the central bank.

Zimbabwe experienced bank failures since the inception of the multi-currency regime in 2009 and some banks are facing serious viability challenges. As a consequence, the depositors’ confidence in banking institutions has significantly dwindled. It is against this background that the researcher seeks to evaluate the effectiveness of deposit protection scheme in restoring confidence and fostering financial stability in Zimbabwe.

RESEARCH QUESTIONS
1. Since the inception of the deposit insurance system in Zimbabwe, has it effectively brought confidence and stability in the nation’s financial system? 2. What mitigating factors if any could have limited its effectiveness? 3. Is the system having an impact on the financial sector in terms of building depositor confidence? 4. Are depositors aware and appreciative of its role and do they see it as beneficial to them? 5. What is the perspective of bankers regarding the scheme? Do they view is as necessary or punitive? 6. Are any benefits accruing to the banking sector itself? 7. How do other safety...
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