From Basel to Bujumbura: Why Deposit Insurance Matters

Broad access to safe and affordable small savings accounts promotes financial inclusion and helps households prepare for unexpected expenses and plan for a more secure financial future.

Deposit insurance, which insures the safety of depositors’ savings in the event of bank failure, can play a key role in protecting savers, particularly those who save in small amounts, have little experience with formal financial institutions, and live in emerging economies with less developed banking systems.

Through public awareness initiatives, deposit insurance systems can play a meaningful role to ensure that poor and low-income depositors are informed about safe methods of storing their money and can help build trust in formal financial institutions. By promoting confidence in formal financial institutions and the banking system, deposit insurance has the potential to play an instrumental role in promoting financial inclusion and broadening access to the mainstream financial sector.

An explicit deposit insurance system is a key component of the financial safety net in many countries, which also includes prudential supervision and a lender of last resort, such as a ministry of finance or central bank. In addition to playing a key role in promoting financial stability as a component of the financial safety net, deposit insurance ensures the safety of depositors’ savings in the event of the failure of a deposit-taker or bank.

The International Association of Deposit Insurers (IADI) is an international standard setting body founded in 2002 with over 70 members and associates representing more than 65 jurisdictions. A non-profit organization based at the Bank for International Settlements (BIS) in Basel, Switzerland, IADI provides a forum for international cooperation among deposit insurers, central banks, and international organizations on issues related to financial stability, deposit insurance, and bank resolution activities.

One of IADI’s current priorities is to respond to the recent Group of 20 “call on relevant international standard setting bodies to consider how they can further contribute to encouraging financial inclusion, consistent with their respective mandates.” In response to this call to action, IADI formed a Financial Inclusion and Innovation Subcommittee (FIIS) to focus on issues related to financial inclusion and deposit insurance and to better enable it to formally engage with other entities on this topic.

IADI is currently focused on the implications for deposit insurers of recent developments such as branchless banking, e-money, and mobile payments, to expand financial access among the poor. These developments—all very exciting from a financial inclusion perspective–also raise a number of interesting questions and challenges for deposit insurers.

First, with respect to financial stability, an important consideration for deposit insurers (as well as other regulatory authorities) is the need to strike the right balance between controlling risks and encouraging innovation in the promotion of financial inclusion.

Regulators and deposit insurers need to ensure that the institutional framework and regulatory oversight supporting the expansion of financial inclusion promotes and does not undermine financial stability. A deposit insurance system is most effective if a number of external elements or preconditions are in place, including a sound banking system with strong prudential regulation and supervision and a supportive legal framework.

Second, a number of important issues and questions are beginning to arise with the introduction and growth of new products and channels of service delivery that lie outside the scope of the traditional deposit insurance system, including:

• Whether membership in the deposit insurance system is compulsory or voluntary and available to specialized microfinance providers as well as mainstream banks and under what terms and conditions;
• The level and scope of coverage provided by the deposit insurance system, and whether very small deposits in the form of e-money and/or depositors with the smallest deposit denominations have adequate protections and under what conditions;
• The deposit insurance funding systems employed, whether they extend to specialized microfinance institutions, and whether funding differs between specialized providers compared to mainstream banks;
• The need for adequate consumer protections and public awareness of the benefits of deposit insurance, particularly among lower-income households that are the target of financial inclusion initiatives;
• Emerging issues such as e-money and pooled trust accounts that support payment transfer services and the need for and applicability of deposit insurance protections; and
• The potential impact of financial inclusion initiatives on the risk exposure faced by deposit insurance systems.

IADI is researching how deposit insurance can help promote savings and financial inclusion. We plan to conduct a survey of deposit insurers to assess the range of practices related to financial inclusion.

Based on the outcome of the survey effort, IADI will consider developing additional guidance for deposit insurance systems to address these emerging issues. The ultimate objective of these efforts is to provide guidance to IADI’s members about the contribution of deposit insurance in promoting financial inclusion.