The South African Reserve Bank (Sarb) has established the Corporation for Deposit Insurance (Codi), South Africa’s first deposit insurance scheme to protect bank depositors and boost confidence in the financial sector.
Codi will provide depositors with cover of up to R100 000 of their deposit in a particular bank if that bank fails. Codi’s protection will be automatic – qualifying depositors will not have to apply to be covered.
Codi is a subsidiary of the Sarb, but its affairs are managed by an independent board.
According to the Sarb, cover of R100 000 will be sufficient to provide full protection for more than 90% of the depositors in South Africa.
But Business Day reports that the picture changes dramatically once deposits are looked at in terms of their rand value rather than the number of individual depositors. This is because a small proportion of depositors might hold a high value of deposits in terms of rand value.
The Sarb said that in terms of rand value, only about 23% of total deposits would be insured given the envisaged cover limit of R100 000. However, it said this is in line with international best practice, Business Day reported.
The publication said some doubted the regulators will be able to restrict their deposit insurance cover to a limit of R100 000 if a Systemically Important Financial Institution runs into trouble.
“When you have a bank fail of any reasonable size, it’s difficult for them to basically only bail out the R100 000,” Business Day quoted Rashaad Tayob, a portfolio manager at Foord Asset Management, as saying. “Our big four banks are so systemically important that they will be forced to bail out depositors above R100 000. For systemic entities, you actually just need to make sure that all senior depositors don’t take any losses.”
Although Codi became a legal entity on 24 March, the scheme will only become operational on April 1 next year, once the secondary legislation that provides for the implementation of the scheme’s functions has been enacted. The Sarb expects the legislation to be published this year.
Explicit protection
Currently, if a bank fails, the government may compensate depositors for their losses on a case-by-case basis, and the cost is borne by taxpayers. There is uncertainty about which depositors will be compensated, the amount of protection provided, and from where the funding will come.
The establishment of the deposit insurance scheme makes the protection of depositors’ money explicit, rather than the “implicit” protection on offer, Sarb governor Lesetja Kganyago has said previously.
All registered banks automatically become members of Codi. Currently, there are 17 commercial banks, three mutual banks, five co-operative banks, and 13 local branches of foreign banks. They will pay an annual levy to Codi and monthly premiums to the Deposit Insurance Fund (DIF).
Codi will use the annual levy to cover its operational costs, while the DIF premiums will be used to reimburse covered depositors.
According to Kuben Naidoo, the deputy governor of the Sarb, the premium will work out at about 20 cents per person a year.
How Codi will provide protection
Codi will protect deposits held by natural or non-financial persons. It will protect qualifying banking products where the nominal balance is guaranteed and repayable at par, Hendrik Nel, the chief executive of Codi, said in October last year.
Qualifying accounts held by sole proprietors will be covered separately from an individual’s personal bank account. The coverage limit will be R100 000 if the bank can identify the accounts the individual uses for its sole proprietor business, Nel said.
Qualifying deposits in foreign currencies will also be covered up to R100 000. When a bank fails, foreign currency balances will be converted to rands before a depositor is paid.
Nel said qualifying depositors will not have to lodge a claim to receive their reimbursements. Codi will calculate a depositor’s covered balance based on the records of the failed bank. Depositors will be able to access their funds at a pay-out agent bank.
When a bank fails and is liquidated, Codi will reimburse the qualifying depositors within 20 days from the date of liquidation, he said.
Qualifying depositors cannot buy extra deposit insurance when they have deposit balances of more than R100 000. A depositor can claim balances of more than R100 000 from the estate of a failed bank, which will be handled by the liquidator.
In the case of joint accounts, Nel said the balance will be divided equally among the account holders, unless the account holders asked the bank to record a different sharing ratio.
Codi will protect the depositors’ balance in the joint account by considering other accounts they may have at the same bank when the bank fails.
For example, Zintle and Hangwani have a joint savings account at ABC Bank with a balance of R180 000. They did not ask the bank to record a specific sharing ratio. Hangwani also has a cheque account at ABC Bank with a balance of R20 000.
If ABC Bank fails, Zintle and Hangwani will each be protected for 50% of the balance in the joint savings account (that is, R180 000 divided by 2, or R90 000 each). Hangwani will be protected for another R10 000 for his cheque account balance, providing the maximum protection of R100 000.
Deposits that are not covered
Codi will not cover:
- Deposits by banks;
- Deposits by the non-bank private financial sector, including money market unit trusts, non-money market unit trusts, insurers, retirement funds, fund managers and other private financial corporate sector institutions;
- Deposits by government, including local, provincial and national government, public financial sector entities, the Public Investment Corporation, the Corporation for Public Deposits, and other public non-financial corporations and monetary authorities;
- Bearer instruments;
- Accounts where the capital amount is not guaranteed and not repayable at par;
- Holdings of commodities; and
- Electronic money products.
