Ghana’s implementation of explicit deposit insurance scheme in the banking and financial system is long overdue

According to the Bank of Ghana and Finance Ministry available data, In the quest for seeking sanity in the banking sector during the 2017 banking crisis cost the state at least GHS25 billion and 420 banking and non-banking, and financial and non-financial got their class 1 license revoked. Having explicit deposit insurance in place could have saved depositors' funds and employment.

Out of curiosity, I assessed and examined the Deposit insurance database developed by ( Asli Demirgüç-Kunt, Luc Laeven,& Edward Kane, 2014 ) to analyze how many African countries have in place deposit insurance schemes to safeguard it banking and financial systems. The database is the compilation of deposit insurance releases around the world dated 2003,2010 and 2013. Explicit deposit insurance schemes typically insure deposits up to a statutory coverage limit.

I discovered that Ghana as a beacon of African democracy does not have in place explicit deposit Insurance. The data shows that, only four African countries (Nigeria, Kenya, Uganda & Tanzania) has explicit deposit insurance with coverage limit/GDP per capita (%) as of 2013.

Coverage limit including government guarantee and with the current exchange rate equivalent are, Nigeria NGN500,000 (US$1,086), Kenya KES100,000 (US$748.33), Uganda UGX3,000,000 (US$797.37) and Tanzania TZS1,500,000(US$641.42) and this is not enough for protection against both domestic and external crisis.

Highlighting on few empirical evidences on the relevance of explicit deposit insurance, bank stability and corporate governance. Abdallah and Ismail (2017) find a positive relationship between corporate governance and firm Performance. Weak corporate governance is one of the problems that facilitated the crisis and there’s a need to tighten regulation on ownership structure by BoG. Laeven and Levine (2009:273) show that bank risk does not rise in response to deposit insurance when the bank is widely held. Gropp and Vesala (2004) show that the adoption of deposit insurance is associated with lower bank risk in the European Union. Chernykh and Cole (2011) also document that the adoption of deposit insurance in Russia is associated with better financial intermediation. Karels and McClatchey (1999) find stabilization effects from the adoption of deposit insurance for US credit unions. The benefits of the adoption and implementation of Explicit Deposit Insurance would outweigh the cost in the crisis period.

Of course there are critics of deposit insurance, some argue that the government may lack the resources, information or incentives to correctly assess bank risk and charge deposit insurance premium accordingly. Lack of resources for effective operations of the GHANA DEPOSIT PROTECTION ACT, 2016 (ACT 931) as amended (AMENDMENT) ACT, 2018 (ACT 968)1, might be the case Ghana finds herself. However, we should capitalized more on the general benefits of the financial safety net ( Explicit Deposit Insurance) from the perspective of cost and benefit analysis in both scenario (stable and unstable) in domestic and global financial systems.

The negative impact of the banking crisis, Data from iwatch Africa states over 6, 000 direct jobs were lost accompanying a loss of over GHS20billion taxpayer monies against BoG claims that 70% of jobs of the affected banks were saved. The banking clean-up had affected a lot of households' ability to feed, provision of shelter for families, rent etc, and it is very important we put in place measures such as explicit deposit insurance with good statutory limit, coverage including government guarantee, coverage limit/ GDP per capita, effective functioning of the schemes, and BoG ensuring effective monitoring and supervisory of banks within the remit of modern scientific and empirical-based models especially risk-taking levels and risk management.

In a nutshell, we have come to a point in life, where a country and African continent must accept the fact humanity dwells on science, learning from the best practices and systems is key, and this has been the approach of the Western world which ought to be emulated. Therefore, it is prudent we tailored investment on scientific research on reoccurring social problems that affects the daily bread of the ordinary Ghanaian and Africans in general and in specific areas in the event of a bank/firm failure.

It is very disturbing Ghana has not yet embraced explicit deposit insurance schemes in the banking sector. Although, there is formal assented legislation in 2016 on Deposit Protection Act and amended in 2018 but its effective implementation is lacking. The question is, if explicit deposit insurance is not good measure, would the USA and EU be reviewing their schemes during crisis, in the 2008 global financial crisis the US FDIC upward adjusted the deposit insurance statutory limit from US$100,000 to US$250,000 , currently, the US Treasury and Congress is considering lifting the FDIC cap from 250,0000 amidst the failure Silicon Valley Bank and Signature Bank. The few African countries (Nigeria, Kenya, Uganda, Tanzania ) that have explicit insurance also do not have enough coverage to protect depositors and investors when banks fail. How are we protecting our banking and financial systems?

Key: Bank of Ghana(BoG), European Union ( EU), Gross Domestic Product (GDP), Federal Deposit Insurance Corporation(FDIC).

Produced by: Mr. Evans DARKO, Doctoral Researcher, CREM LAB, France.