System launched to protect deposits of accountholders

SBP sets protected amount at Rs250,000 per depositor per bank

KARACHI: Deposit Protection Corporation, a wholly owned subsidiary of the State Bank of Pakistan (SBP), launched on Friday a mechanism to protect deposits of bank accountholders.

As envisaged in the Deposit Protection Corporation Act 2016, the protected amount has been set at Rs250,000 per depositor per bank. "All commercial banks are members of this scheme and will be paying required premium," the SBP said in a statement.

The establishment of Deposit Protection Corporation is one of the most important objectives in the SBP's strategic plan 2016-20. It is part of the strategic goal of strengthening the financial system stability regime.



The corporation is a subsidiary and entirely owned by the SBP under the Deposit Protection Corporation Act. Its "objective is to compensate small and financially unsophisticated depositors to the extent of protected deposits in the unlikely event of a bank failure," the SBP said.

It pointed out that stability of financial systems was of paramount concern for policymakers around the world and the State Bank had also a comprehensive framework to ensure safety and soundness of the banking system of Pakistan.

"While key pillars of this framework namely strong banking laws and regulations and effective supervision have been in place for a long time, the introduction of deposit protection is a recent addition, which will reinforce the bank regulation regime of the SBP," it said.

The international standard followed for designing a robust deposit protection scheme is laid out in the "Core Principles for Effective Deposit Insurance Systems" issued by the International Association of Deposit Insurers (IADI). Features of the deposit protection mechanism in Pakistan are mostly in line with these principles.



The SBP emphasised that the launch of a formal deposit protection scheme would be beneficial for Pakistan as it would provide sizable funds through premium payments from banks that could be used to provide immediate liquidity to small depositors in case of a bank failure.

"Such a scheme will not only reduce burden on the exchequer, but will also improve financial stability in the system," it said.

Calling financial stability one of its top priorities, the SBP emphasised that its effective supervisory regime ensured that depositors did not lose their money and that public confidence in the system remained strong.

It voiced hope that implementation of the deposit protection mechanism would further strengthen the overall regulatory architecture and safety of deposits.

Published in The Express Tribune, June 23^rd, 2018.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.