Deposit insurance is a financial safeguard that protects depositors by guaranteeing the safety of their deposits in banks and other financial institutions, up to a certain limit, in the event of a bank failure. This system is designed to maintain public confidence in the banking system, ensuring that even if a bank becomes insolvent, depositors will not lose their money within the insured limits. The Deposit Insurance Corporation (DIC) is the institution responsible for administering this scheme, collecting premiums from member institutions, and managing the deposit insurance fund.

The DIC was established in response to the need to enhance financial safety nets within the country’s banking sector. As economies evolve and financial systems become more complex, the stability and trust of depositors in the financial system are paramount. Recognizing this, the government and the Reserve Bank of Malawi initiated the creation of the DIC as a specialized institution dedicated to protecting depositors and enhancing the resilience of the financial sector. The DIC was officially established by an Act of Parliament, and assented into law on 20 May 2022; providing it with a clear mandate and the authority to operate as the nation’s deposit insurer. The legal framework defines the scope of the DIC’s responsibilities, including the collection of premiums from member institutions, the management of the deposit insurance fund, and the administration of claims in the event of a bank failure.

The objectives of the DIC are:

• Financial stability: To strengthen the financial system by providing a safety net for depositors, particularly in times of bank failures.
• Public confidence: To enhance public confidence in the banking system by ensuring that depositors’ funds are protected.
• Alignment with global standards: To align the country’s financial regulatory framework with international best practices, as recommended by the International Association of Deposit Insurers (IADI).

The main functions of the DIC are to protect depositors and promote financial stability by providing a reliable deposit insurance system. This mission is anchored on the following core functions:

• Protecting depositors: The DIC is committed to safeguarding the interests of depositors, particularly small and vulnerable depositors, by ensuring that their funds are protected in the event of a bank failure. The DIC provides coverage up to K3,000,000.00, giving depositors peace of mind and confidence in the safety of their deposits.
• Enhancing financial stability: By providing a safety net for depositors, the DIC plays a crucial role in maintaining public confidence in the banking system, which is essential for overall financial stability. The existence of a deposit insurance scheme helps prevent bank runs and contributes to a more stable and resilient financial environment.
• Facilitating orderly resolution of bank failures: In the event of a bank failure, the DIC is responsible for managing the resolution process in an orderly manner. This includes ensuring that insured depositors are compensated promptly and efficiently, minimizing disruption to the financial system.
• Promoting public awareness: The DIC is dedicated to educating the public about the deposit insurance system, its benefits, and its limitations. By promoting awareness, the DIC helps ensure that depositors understand how their funds are protected and what actions they need to take in the event of a bank failure.
• Collaborating with safety net players: The DIC works closely with the Reserve Bank of Malawi (RBM) and Ministry of Finance, to ensure a coordinated approach to financial stability and crisis management. This collaboration is essential for the effective functioning of the financial safety net.

Deposit insurance offers several key benefits that are crucial to both individual depositors and the broader financial system:

• Protection for depositors: The primary benefit of deposit insurance is the protection it offers to depositors. It ensures that their savings are safe, even if the financial institution they bank with fails. This is especially important for small depositors who may lack the resources or expertise to assess the financial health of their banks.
• Prevention of bank runs: In the absence of deposit insurance, rumours or news of a bank’s potential failure can trigger a rush of withdrawals, leading to a bank run. Deposit insurance mitigates this risk by reassuring depositors that their funds are protected, reducing the likelihood of panic-driven withdrawals.
• Enhanced public confidence: A well-functioning deposit insurance system enhances public confidence in the banking system. When depositors trust that their money is safe, they are more likely to keep their funds in banks, which supports the stability and liquidity of the financial system.
• Support for financial stability: By preventing bank runs and maintaining depositor confidence, deposit insurance plays a critical role in promoting overall financial stability. A stable financial system is essential for economic growth, as it ensures the smooth functioning of credit markets and the efficient allocation of resources.
• Orderly resolution of bank failures: Deposit insurance facilitates the orderly resolution of bank failures. When a bank fails, the deposit insurance system steps in to compensate insured depositors quickly, minimizing disruption to the financial system and the economy. This orderly process helps prevent the negative spillover effects that can arise from bank failures.
• Contribution to financial inclusion: Deposit insurance can also promote financial inclusion by encouraging people to use formal banking services. When individuals know that their deposits are insured, they are more likely to trust and engage with the banking sector, increasing access to financial services for a broader segment of the population.

Deposit insurance is a cornerstone of financial stability, contributing in the following ways:

• Mitigating systemic risk: Deposit insurance helps mitigate systemic risk by preventing the collapse of confidence that can spread from one financial institution to others. When depositors are assured that their funds are safe, they are less likely to withdraw their deposits en-masse, which helps contain the spread of financial distress.
• Reducing Government intervention costs: In the absence of deposit insurance, governments may be compelled to use taxpayer money to bail out failing banks to protect depositors and maintain stability. A well-designed deposit insurance system reduces the need for such costly interventions, as it provides a pre-funded mechanism to deal with bank failures.
• Promoting sound banking practices: Deposit insurance systems often work in tandem with regulatory and supervisory frameworks to promote sound banking practices. By requiring banks to adhere to certain standards and pay premiums based on their risk profile, deposit insurance incentivizes prudent management and reduces the likelihood of bank failures.
• Encouraging market discipline: While deposit insurance protects depositors, it also encourages market discipline among banks. Knowing that they must contribute to the insurance fund and that their premiums may increase based on their risk levels, banks are motivated to adopt sound risk management practices to avoid costly failures.
• Building resilience in the financial system: By providing a safety net, deposit insurance enhances the resilience of the financial system. It ensures that the impact of bank failures is contained and managed in a way that prevents broader economic disruption, thereby contributing to the overall stability and health of the financial sector.

The DIC provides a crucial safety net for depositors by insuring deposits held at member financial institutions. The scope of coverage offered by the DIC includes the following key elements:

• Insured institutions: currently the DIC insures deposits held at all banks that are members of the deposit insurance scheme. Membership is mandatory for all licensed banks, ensuring broad coverage across the financial sector.
• Insured deposits: The types of deposits covered by the DIC include savings accounts, current accounts and fixed deposits.
• Coverage limit: Currently, the DIC provides coverage up to K3,000,000.00 per depositor, per bank.
• Exclusions: Certain types of deposits and financial products are excluded from DIC coverage. These include government deposits; interbank deposits; deposits which serve as collateral for a loan; deposit for which a depositor has not been identified; deposit that belongs to a shareholder, director or senior management official of the bank; or a deposit held in a foreign branch or subsidiary of a bank.

In the event of a bank failure, the DIC plays a critical role in ensuring that depositors receive timely compensation for their insured deposits. The claims process is structured to be efficient and straightforward:

• Initiation of claims: When a member institution fails, the DIC is promptly notified by the Registrar of Financial Institutions. The DIC then initiates the claims process, starting with the identification and verification of insured depositors and their eligible deposits.
• Notification to depositors: The DIC communicates with affected depositors through various channels, including direct mail, email, and public announcements. Depositors are informed about the bank failure, the insured deposit amount, and the claims process.
• Filing a claim: Depositors are required to file a claim with the DIC to receive compensation. The DIC provides clear instructions on how to submit claims, including the required documentation and deadlines.
• Verification and pay-out: Upon receiving a claim, the DIC verifies the depositor’s identity and the insured deposit amount. Once verification is complete, the DIC disburses the insured amount to the depositor through a designated payout method, such as a cheque, electronic transfer, mobile money transfer, or payment through an agent bank.
• Timeframe: The DIC aims to process and settle claims as quickly as possible, typically within 45 days from the date of bank closure. This prompt payout helps minimize disruption to depositors and ensures they can access their funds without undue delay.