The recent failures of VBS Mutual Bank and African Bank had wide-ranging implications for consumers, including financial losses, limited fund access, disrupted banking services, and diminished trust in the banking industry. The failures of these banks exposed a vulnerability within the South African banking sector, highlighting the necessity for substantial regulations to safeguard depositors. Thus, as part of their mandate to ensure financial stability, the South African Reserve Bank (SARB) has taken a significant step in strengthening the country’s financial sector by establishing the Corporation for Deposit Insurance (CODI, henceforth), South Africa’s first deposit insurance scheme.
According to the central bank and the finance ministry, this move aims to protect bank depositors and instil confidence in the banking system. For instance, in the event of a bank failure, South African depositors will automatically receive coverage of up to R100 000 through Codi. This article will explore the intricacies of Codi, including its functionalities, coverage, and the broader implications it has for depositors and the financial sector at large.
What is CODI and How Does it Work?
The Corporation for Deposit Insurance, a subsidiary of the South African Reserve Bank, is an independent body responsible for managing the affairs of the deposit insurance scheme. The institution aims to provide explicit protection to bank depositors, replacing the current case-by-case compensation approach that burdens taxpayers. As part of its functions, Codi will automatically cover qualifying depositors up to R100 000 without the need for them to apply for coverage. However, the scheme is set to become operational on April 2024, pending the enactment of secondary legislation.
Scope and Limitations of Coverage
While the R100 000 coverage limit is expected to protect over 90% of depositors in South Africa, it is important to consider the implications when looking at deposits in terms of their Rand value. Business Day reports that only about 23% of total deposits would be insured based on the envisaged cover limit. However, this aligns with international best practices, according to the South African Reserve Bank. Furthermore, some experts express concerns that the R100 000 limit may prove insufficient in the case of a failure of a Systemically Important Financial Institution (SIFI). For instance, they argue that the bailout of depositors above this limit may be necessary to maintain stability in the financial system.
Membership and Funding
In terms of the Financial Sector Regulation Act, all registered banks automatically become members of Codi, including commercial banks, mutual banks, cooperative banks, and local branches of foreign banks. These member banks, for instance, will pay an annual levy to Codi and monthly premiums to the Deposit Insurance Fund (DIF). The annual levy covers Codi’s operational costs, while the DIF premiums will be used to reimburse covered depositors. The premium is expected to amount to approximately 20 cents per person per year.
Protection for Different Types of Depositors
Codi aims to protect deposits held by both natural persons and non-financial persons. Qualifying banking products with guaranteed and repayable balances at par will be covered. However, sole proprietors will have separate coverage for qualifying accounts related to their business. Furthermore, foreign currency deposits will also be covered up to the R100 000 limit, with conversion to Rands upon a bank’s failure.
Reimbursement Process and Timelines
One of the key benefits of Codi is its streamlined reimbursement process. Qualifying depositors will not need to lodge a claim to receive their reimbursements. Codi will calculate the covered balance based on the records of the failed bank. Deposit funds can be accessed through a pay-out agent bank within 20 days from the date of liquidation. It is worth noting that depositors with balances exceeding R100 000 can still claim the excess from the estate of the failed bank, handled by the liquidator.
Joint Accounts and Other Considerations
In the case of joint accounts, the balance will be divided equally among account holders unless a different sharing ratio is recorded with the bank. Codi ensures that depositors’ balances in joint accounts are protected by considering their other accounts at the same bank. It is important to note that not all types of deposits are covered by Codi. This includes deposits by banks, non-bank private financial sector institutions, government entities, bearer instruments, non-guaranteed accounts, commodity holdings, and electronic money products.
Benefits and Challenges of Deposit Insurance
The establishment of Codi brings several benefits to depositors and the financial sector as a whole. It provides explicit protection for depositors’ money, instils confidence in the banking system, and ensures a more systematic and efficient reimbursement process. According to the SARB, one of the significant benefits of an explicit deposit guarantee scheme is that it provides certainty to depositors, not only about the amount of compensation that they will receive in the event of bank failure but also about the process and timing of compensation. However, challenges remain, particularly in cases involving SIFIs and the potential need for additional support beyond the R100 000 limit. Therefore, striking the right balance between protecting depositors and maintaining financial stability will be crucial for the success of Codi.
In conclusion, the establishment of the Corporation for Deposit Insurance (Codi) marks a significant milestone in South Africa’s financial sector. As the country’s first deposit insurance scheme, Codi aims to protect bank depositors and boost confidence in the banking system. With automatic coverage of up to R100 000 for qualifying depositors, Codi provides explicit protection and streamlines the reimbursement process. While challenges exist, particularly in cases involving SIFIs, Codi sets the stage for a more secure and resilient banking industry in South Africa.
