Zim deposit protection laws can’t address evolving risks: Parly

THE existing deposit protection laws in Zimbabwe are insufficient to address the evolving risks and challenges facing the financial sector, a lawmaker said last week, amid fears the gap leaves citizens vulnerable to financial sector instability.

Zimbabwe has witnessed bank failures leaving depositors in a lurch. The banks that closed had the same ailment — insider non-performing loans that is akin to declaration of a dividend 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Portfolio Committee chairperson on Budget, Finance and Investment Promotion chairperson, said the laws were outdated to shield citizens from financial instability, risking the stability of the banking system.

“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 the amendment of 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.

The lawmaker said the amendment of the deposit protection laws in Zimbabwe was not just a matter of regulatory compliance but a critical step towards 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 said it was imperative that legislators take action now to strengthen these laws and ensure the security of the citizens’ hard-earned money.

He said in the event of a bank failure or financial crisis, depositors should have confidence that their money is safe and will be reimbursed up to a certain limit.

“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.

By imposing stricter requirements on banks and other deposit-taking institutions, the country improves risk management practices, increase transparency, and hold institutions accountable for their actions, the lawmaker said.

“This will help prevent reckless behaviour that could jeopardise depositor funds and lead to systemic failures.”

Chiduwa said the strengthening deposit protection laws could promote financial inclusion by encouraging more people, especially those from marginalised communities, to participate in formal banking systems.

Knowing that their deposits are protected up to a certain limit will give individuals confidence in the banking sector and incentivise them to save money rather than keep it outside the formal financial system, he said.

“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 said they have started the journey of amending the DPC Act having noticed glaring inequities in the bank failure resolution framework.

DPC acting chief executive officer Kiitu Zawanda said the amendment will allow a smooth handover and takeover between the reserve bank and DPC, preservation of assets available for distribution and depositor’s compensation claims.

The amendments, among other changes, disallows the conversion of debt to equity as it often leaves the institution unable to fulfil its obligations to creditors and investors.-newsday