Picture: 123RF/TASHA TUVANGO
Picture: 123RF/TASHA TUVANGO

The cabinet has approved the creation of a comprehensive deposit insurance scheme to ensure that banking clients are paid their funds when a bank fails.

Once established it will be the first such scheme in the country, though many countries have such schemes to maintain the stability of their financial systems. SA is the only G20 country, and one of the few developing countries, without such a scheme.

Provision for the scheme is included in the Financial Sector Laws Amendment Bill that the cabinet approved on Wednesday for submission to parliament.

The creation of a deposit insurance scheme has been on the Treasury’s agenda for several decades.

Treasury chief director of financial markets and stability Roy Havemann said the deposit insurance fund will be under the management of the Reserve Bank and that banks will be required to pay 21c for every R100 clients deposit into their bank accounts. It is likely, however, that banks will pass this cost on to their clients.

Should a bank fail, the depositor would be refunded up to R100,000 of their total deposits out of the fund.

Havemann said that another provision in the bill is that depositors will rank ahead of other creditors in the event of a bank failure, which is not the case now. This brings SA in line with the practice of other countries.

It is understood that the scheme will be phased in over time by the Reserve Bank.

The cabinet statement released on Thursday said the deposit insurance scheme “will protect the vulnerable depositors and ensure minimal disruptions to the financial system and broader economy when such institutions enter into financial distress”.

The bill proposes a new framework to sort out financial institutions, primarily banks, when they enter a period of financial distress.

Havemann said the bill also proposes designating the Reserve Bank as the authority in charge of the curatorship of a bank. While this has been the practice, the law on the matter has been unclear.

The cabinet statement said the bill enhances the regulatory tools of the Bank for discharging its statutory mandate of ensuring stability of the financial system.

Update: June 11 2020 
This article has been updated with new information throughout.

ensorl@businesslive.co.za