The Era of Deposit Insurance: Enhancing Financial Security for Depositors in Malawi

The world of business is met with unforeseen challenges that arise at any time, in any place, and in any manner. This holds across all industries, including financial services. Banks, which are traditionally viewed as symbols of stability, are not excluded from the predicament. The liquidation of Finance Bank of Malawi Limited and the sale of Malawi Savings Bank Limited serve as sobering reminders of this reality.

The coming in of Deposit Insurance Corporation Act No. 10 of 2022 (“the Act” or “the DICA”) has provided a safety net for banks and deposit taking Microfinance Institutions in Malawi from unpredictable failures of the financial system. The Act governs all matters related to deposit insurance in the country. ?

The broad scope of this definition benefits a wide range of service providers and clients, supporting investments of all sizes, from small to large. The deposit insurance scheme in Malawi protects depositors, and investors from catastrophes and risks that befall failing financial institutions. In addition to empowering clients with confidence in the financial system, the safety emanating from this regime fosters a culture of saving and? investing.

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Under the DICA, the Deposit Insurance Corporation (“the DIC”) is established in section 3. The functions of the DIC are outlined in section 10 of the DICA. The most notable function is that the DIC is responsible for providing insurance cover for funds of insured institutions (banks or any other institution of the deposit insurance scheme) in Malawi. In addition, the DIC provides financial assistance to insured institutions particularly when faced with the threat of suspended payments. Together with other mentioned functions, the DIC′s role is crucial in eliminating damage within the financial system.

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The Act proceeds to provide for exemptions of deposits it will not insure. This includes insider deposits, inter-bank deposits, Government deposits, deposits which serve as collateral for a loan over which the insured institution holds a lien or such other deposits that the DIC is at liberty to decide.

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Apart from the above-stated benefits, the DIC supervises struggling insured institutions; and manages and applies deposit insurance funds in accordance with this Act. If an insured institution is beyond recovery, the DIC recommends to the Registrar of Financial Institutions that the failing insured institution should be closed. This rule seeks to protect the interests of clients against the continued operations of a failing insured institution.

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Despite the positive aspects of this development, it is not without its challenges. The most notable challenge stems from section 59 of the Act, which encompasses the transition of financial institutions to the deposit insurance scheme. While the provision appears to establish a compulsory system, this only applies to “banks”. The section states that “all licenced banks shall, within sixty days after commencement of this Act, insure their deposits and pay premium to the Corporation on a pro-rata basis.”

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Given the broad definition of “financial institutions”, this provision allows for suggestion that Malawi has a hybrid system comprising both compulsory and voluntary deposit insurance systems, as it does not require other financial institutions besides banks to compulsorily insure their deposits. This provision is problematic, as it undermines the very safety net the DICA aims to provide for depositors. Such a gap leaves room for other financial institutions to be reluctant to insure deposits. Nonetheless, the benefit of doubt must be given to DIC to address this gap through its powers under the Act.

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The DICA legal framework has made Malawi′s financial institutions a safe haven for clients′funds. In the event of a failing insured institution, the DIC is empowered to assist clients, ensuring they are protected from financial losses. Thanks to the DIC, the financial system in Malawi is now a reliable refuge for clients.

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