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Foreign currency accounts vulnerable to bank failure

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NEARLY US$2 billion is exposed to potential banking sector risks as the Deposit Protection Corporation (DPC) is yet to extend cover to foreign currency account (FCA) deposits.

ALEX MHANDU

As at 31 December 2020, gross FCA deposits were US$1.6 billion or ZW$130.9 billion at the official interbank rate of ZW$81.79/US$1 and accounted for 55.1% of the combined gross ZW$ and converted FCA deposits of ZW$237.7 billion in the banking sector.

According to the Reserve Bank of Zimbabwe (RBZ), the DPC is still in the process of negotiating with stakeholders for the protection of FCA accounts, a situation that could deter some potential depositors from channelling their foreign currency savings into the formal banking system due to low confidence.

The country’s banking sector has suffered confidence issues with local depositors following a myriad of events, key among them the banking sector crisis of 2004 that saw several local banks placed under curatorship.

Additionally, during the hyperinflationary period of 2008-2009, depositors could not access their funds from banks while savings and pension values were lost as the economy adopted a multi-currency system.

Deposit protection is a scheme established by the government to protect depositors against the loss of their money placed with banks in the event of bank failure.

“The DPC is liaising with stakeholders for protection of FCA deposits which have remained uncovered by the Deposit Protection Scheme (DPS) since January 2019. “Extension of deposit protection to FCA Deposits, which is under consideration is expected to help to boost depositor confidence and promote overall financial stability,” the RBZ in the Financial Stability Report 2020 released last week said.

According to the central bank, effective deposit protection is an important facet of any financial system safety net, promoting public confidence in the sector, as well as stability of the financial systems. As at 31 December 2020, 95.5% of the banking sector’s depositor accounts were fully covered at the level of ZW$10 000 per depositor per bank.

This, the RBZ said, is in line with the public policy objectives of ensuring that at least 90% of the depositors are fully covered.

The adequacy of the DPC Fund however remains of paramount importance in enhancing the corporation’s operational readiness to pay depositors in the event of bank failure. At ZW$134.9 million as of 31 December 2020, the DPC Fund was inadequate to cover an exposure of ZW$166.9 million to the eight contributory institutions, including mostly financial institutions on the watch list.

The DPC gets its funding from quarterly premium levies collected from member institutions and with effect from 1 January 2021, the Corporation reviewed upwards the premium rate from 0.2% to 0.3% per annum, as one of the strategies to close the funding gap.

However, the fund is also exposed to funding and investment risk due to economic volatility. “Premiums collected by the Corporation are mainly invested on the money market in local currency instruments.

Depreciation of the Zimbabwean dollar against the United States Dollar and the high inflation environment have the potential of diminishing the value of the Deposit Protection Fund,” RBZ said.

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