SBP launches Deposit Protection Corporation

It will protect depositors, compensate them in case of failure of financial institutions

KARACHI: The State Bank of Pakistan (SBP) has launched much-awaited Deposit Protection Corporation to safeguard banks’ depositors and compensate them if any financial institution fails to meet its obligations to customers in Pakistan.

The need for such an institution had been felt since long as previous laws did not protect depositors of private banks, which had over 80% market share.

The need intensified when KASB Bank’s financial health deteriorated in 2014 and subsequently its depositors faced hardships in withdrawing cash from their accounts, it was learnt. The central bank said in a notification on Thursday, “Consequent upon the promulgation of Deposit Protection Corporation Act 2016, the Deposit Protection Corporation has been established as a subsidiary of the State Bank of Pakistan for protection of small depositors in order to ensure financial stability of the system.”

“The Deposit Protection Corporation shall commence its business with effect from June 1, 2018 (today),” the central bank said. The objective of the corporation is “to compensate the depositors for the loss incurred by them to the extent of protected deposits in the event of failure of a member institution”.

“All banks… unless exempted or excluded by the board [of the Corporation] shall compulsorily be member institutions of the corporation and liable to pay the prescribed premium,” the Act says.

The corporation will guarantee full payment of funds held in depositors’ accounts with a member institution, regardless of the number and size of deposits, up to an amount prescribed by the corporation from time to time, it says.

“The…amount shall be inclusive of any interest accrued or return due…Shariah-compliant mechanism of deposit protection in respect of Islamic banking institutions shall be provided in the prescribed manner, which shall be approved by the SBP’s Shariah Board,” the law says.

The SBP will, by a notification, declare a member institution as a failed institution as a result of its insolvency or any significant judicial or regulatory action that cancels the licence of the member institution or restricts the access to deposits.

The corporation will ensure that payments to most of the protected depositors are made or tendered within seven working days and that all payments are made or tendered within 30 days at the latest, “if there is no dispute as to the entitlement to, or ownership of, the deposit,” it says.

“For foreign currency denominated deposits, the depositor shall be paid the rupee equivalent of the protected amount at the exchange rate declared by the SBP,” it says.

The law says the corporation may collect premium and contribution from member institutions and others; acquire, hold, manage and invest resources of the corporation; receive grants and borrow money; and assess and verify claims of the depositors made against the failed institution.

The authorised share capital of the corporation will be Rs1 billion or such other amount as the SBP may, from time to time, determine and shall be divided into shares of Rs1 million each. The board of the corporation will consist of seven directors, which will include a deputy governor of the SBP as chairman, four directors to be appointed on nomination by the federal government in consultation with the SBP and an official of the Ministry of Finance.

Published in The Express Tribune, June 1^st, 2018.

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