Consumers deposits in commercial banks are safe

In case of a failure in any of the local banking institutions as well as branches of foreign banks operating in Namibia, consumers deposits are safe.

The Namibia Deposit Guarantee Authority (NDGA), which has only been in existence for two, recently released its annual report.

The report demonstrated a 3.8% year-on-year increase in the market value to N$10.3 million for the fiscal year ended 31 December 2021.

The Fund’s value increased primarily due to N$5.1 million in premiums paid by member institutions and a total annual interest income of N$278 496.

All Namibian banking institutions and branches of foreign banks and building societies are required to be members of the Deposit Guarantee Scheme and pay annual premiums to the scheme.

The scheme adopts a guarantee coverage limit of N$25 000, which is currently in effect. At this coverage limit, the scheme covers more than 90% of current depositors.

Speaking at the launch, Ebson Uanguta, chairperson of the NDGA noted that “the establishment of authority remains a significant milestone in our effort to modernise our financial system through the provision of the necessary safety nets.”

Through the establishment of this institution Namibia took a big step in the protection depositors, particularly small depositors and safeguarding financial stability.

“Deposit Insurance Scheme should go hand-in-hand with a strong and effective regulatory framework. The exchange of information between the regulators and the Deposit Insurers is a pre-request for a stable financial system. In that regard, as a regulator of banking institutions, the Bank of Namibia (BoN) will continue implementing its regulatory framework to ensure that banking institutions are well supervised,” Uanguta said.

Small depositors

The failure of any deposit-taking institution can have far-reaching and devastating impact to the depositors, particularly small depositors. Before the introduction of Deposit Insurance Schemes, when a deposit taking institution goes under, it takes its customers’ hard-earned savings with it.

Depositors, particularly small depositors are vulnerable to information asymmetries, unlikely to have knowledge and resources necessary to accurately assess the safety of their funds, he pointed out.

It is for this reason that the primary mandate of the NDGA is to ensure that in an unlikely event of bank failure, small depositors are compensated of their deposits in a timely and transparent manner.

This orderly compensation and crisis management therefore eliminates unnecessary panic and avoid bank runs, Uanguta added.

Stability

The stability of any financial system is crucial for economic growth and development. Through financial intermediation, banking institutions play an important role in mobilizing savings and channelling them into the real economy which can bring about economic benefits such as wealth and employment creation, he said.

If not handled properly, banking institutions’ failures can have negative consequences such as destruction of value, disruption in the provision of services and other spill-overs to the rest of financial system. Despite the different deposit insurance models and designs adopted globally, it is now well understood that Deposit Insurance Schemes provide depositors with clarity, reassurance and confidence and thereby safeguarding financial stability. A speedy and transparent compensation of Depositors, or transfer of the insured deposit book to another bank helps avoid a singular institutional failure culminating into a systemic crisis, Uanguta said.

“It is important that the vital trust in the financial system by depositors is maintained at all times. Studies have shown that consumers are likely to participate in the system where they know that they are protected from abuse and there are effective safety nets in place. This in the end leads to Financial Inclusion,” he concluded.

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