THE closure of several local financial institutions due to a combination of the harsh economic environment, corporate governance failures and mismanagement has left more than 50 000 depositors and creditors in the lurch.
The Deposit Protection Corporation (DPC) has been mandated to reimburse those stranded as a result of bank closures. Business reporter Kudzai Kuwaza (KK) this week caught up with DPC chief executive John Chikura (JC, pictured) to discuss various issues, including progress made in reimbursing creditors and depositors, challenges they face and the current acute cash shortages in the country. Below are excerpts of the interview
KK: Can you give us a summary of your operations as DPC?
JC: Conceptually, a deposit protection system is a deposit guarantee scheme which ensures that depositors are reimbursed part or all their deposits in the event of a bank failure.
In Zimbabwe, the DPC is an independent statutory body established by the government of Zimbabwe on July 1 2003, in terms of Section 66 of the Banking Act (Chapter 24:20) and the Banking (Deposit Protection) Regulations, Statutory Instrument 29 of 2003 as read with Section 4 of the DPC Act (Chapter 24:29).
In terms of the current law, the principal objectives and responsibilities of the DPC include:
contributing towards the stability of the financial system;
promoting sound business practices in contributory institutions;
Enhancing competition between different sectors and institutions in Zimbabwe’s financial system;
protecting the fund against loss;
monitor and assess the risk profile of contributory institutions; and
where necessary, undertake judicial management & liquidations of failed contributory institutions.
Since its inception in 2003, the DPC was appointed liquidator of six failed contributory institutions currently in final liquidation; as well as provisional judicial manager of one failed institution in provisional judicial management.
KK: You are currently holding awareness workshops on the operations of the DPC. What do these workshops entail?
JC: In terms of the law, the DPC has a statutory obligation “to keep the public informed of (i) the corporation’s role in contributing towards the stability of Zimbabwe’s financial system; and (ii) the rights of depositors in the event of a contributory institution becoming insolvent.
Likewise, the law requires every contributory institution to ensure that all its depositors are informed of (a) of the extent to which their deposits are protected and (b) how they may receive compensation in the event of the institution becoming insolvent.
The DPC thus has a comprehensive public awareness program crafted in line with its public policy objectives. The programme employs various initiatives and utilises multiple communication platforms to reach out to the public in both rural and urban areas.
Ongoing media briefings and workshops for staff members of contributory institutions help capacitate these key stakeholders in the dissemination of timely and accurate information on the existence and operations of the Deposit Protection Scheme (DPS) to depositors. The workshops are mainly designed to ensure that participants gain an insight into the operations and key design features of the DPS.
The structure of the presentations includes discussions on; rationale for setting up the DPS; public policy objectives; DPC organizational structure and governance; mandate; key design features; and the benefits and limitations of the DPS.
It is critical that DPC works closely with banks and other safety net participants to ensure that the information provided to depositors is accurate and consistent.
KK: How much have you paid out to depositors of the various failed financial institutions so far?
JC: The DPC was appointed liquidator of six failed contributory institutions currently in final liquidation; as well as provisional judicial manager of one failed institution in provisional judicial management. The eighth failed institution, Capital Bank, is in no man’s land.
DPC payments to depositors take place on two fronts:
i. The Deposit Protection Fund (DPF) up to the prevailing cover level; and
ii. Liquidation dividends on a pro-rata basis depending on debt recoveries and asset realisation.
As at June 30 2017, 11 667 out of 54 909 depositors had been compensated out of the DPF, while in monetary terms about US$3,2 million (50%) had been paid against an exposure of US$6,4 million.
Total recoveries total recoveries in cash and properties for the seven failed CIs were US$34,8 million. About US$7,7 million had been paid out as dividends to creditors of the six failed CIs under liquidation being US$6,52 million to preferred creditors and US$1,52 million to unsecured creditors.
KK: The maximum amount the DPC can give depositors has increased from US$500 to US$1 000. How has this helped you in your operations and is it adequate?
JC: Effectiveness of DPS depends on the coverage level, that is percentage of depositors with deposits equal or below the protection limit. Best practice: 90% of depositors by number. At US$1 000, the DPC currently covers about 93,8% of the depositors.
By insuring at least 90% depositors in full, a DPS reduces financial uncertainty and fosters confidence in the banking system, prevent self-fulfilling panics, or bank runs thereby, reducing the likelihood of contagion and cascading defaults.
DPS helps to minimise losses to small depositors (the majority) who are most affected by bank closures and lack resources and skills to monitor contributory institutions.
KK: What have been the major challenges to your operations so far?
JC: The corporation has encountered a number of challenges in executing its mandate as a deposit insurer or liquidator including:
Challenges pertaining to deposit protection …
Failure to access depositor records before a bank closure — this has militated against attaining a shorter turnaround time.
Poor quality of depositor records at banks such that it takes an inordinate long time to sort depositor data into the required format.
It should be noted that the impediments highlighted above also arise due to the absence of a standard depositor profile format with unique identifiers applicable to deposit insurers. Towards this end, one important reform that is being implemented in several jurisdictions is to develop a single customer view (SCV).
A SCV is defined as a holistic view of all deposit accounts eligible for deposit insurance coverage for a single depositor using unique identifiers.
There are material deficiencies in the current problem bank resolution framework militating against attainment of finality and speedy resolution of failing or failed institutions. There have been undue delays in bringing finality to the liquidation process due to lawsuits by former shareholders, to the detriment of creditors and depositors of closed banks.
Protracted legal processes are also slowing down the pursuit of parties at fault;
Liquidity challenges are negatively impacting on realisation of assets and debt recoveries. The recovery rate on debt collections has been very low due to absence of adequate collateral/security on most facilities granted to insiders. Where collateral is available the realisable value is far below the facility exposure.
Several debtors are under liquidation, judicial management or have abandoned operations and this has also negatively affected the recovery rate from closed banks.
KK: Capital Bank has been closed for more than two years, but is yet to be liquidated which means depositors still cannot get access to their money trapped in the bank. Why is it taking so long?
JC: A June 18 2014 petition by the National Social Security Authority (Nssa) for voluntary liquidation was opposed by the minority shareholders and employees of the bank. The court is yet to set a date for the hearing of the opposed matter.
Currently, the institution is in no man’s land as neither the RBZ nor the DPC is presiding over its affairs. This reinforces the need for a separate resolution regime for banks.
KK: At the various meetings you have had with creditors of failed banks, were given a mandate to audit the banks. Have you made any progress towards that?
JC: Pursuant to the resolutions passed by creditors of the closed banks, the corporation has instituted forensic audits and is now actively pursuing parties at fault with a view to prosecute them in terms of Section 318 and 319 of the Companies Act (Chapter 24:03).
KK: What have you found in the audits that you have carried out?
JC: The audit findings will be disclosed to the public at an appropriate time as the various cases are currently before the courts, while other cases are still under internal consideration.
KK: As a representative for depositors, what are the effects of the current cash shortages on your constituency?
JC: The current cash shortages are a cause for concern to the DPC as this this erodes confidence in the banking sector, thereby militating against DPC’s efforts of contributing to financial system stability.
Take note, however, that deposit protection is automatic once a depositor opens an account with an insured institution (i.e. commercial bank, merchant bank, building society, DTMFIs, or specified entities such as POSB and IDBZ). There are no direct charges to depositors as banks pay the premiums. Depositors do not apply or fill in forms, as deposit protection is automatic once a depositor opens an account with member bank.
We, therefore, encourage depositors to use other alternative modes of payment like mobile money, online banking or plastic money to circumvent the need to queue for cash daily.