Ghana Deposit Protection Corporation: Key operational challenges and emerging policy issues

By Richmond Akwasi ATUAHENE (Dr)

In most countries including Ghana, banks are the most important financial institutions for intermediating between savers and borrowers, assessing risks, executing monetary policy and providing payment services.

At the same, the configuration of their portfolios makes them especially vulnerable to illiquidity and insolvency. In particular, by law, bank deposits have to be repaid at par; in addition, they are highly leveraged and often maintain liquid assets to meet withdrawals at only normal times.

Moreover, there is concern that the demise of bank, if handled poorly could spill over to other banks in the banking system thus creates negative externalities causing a more general problems for the system.

For these reasons, many governments in the world including that of Ghana have provided safety nets for banks that generally included deposit insurance protection schemes, and lender of last resort facilities, in addition to a system of bank regulation and supervision (IMF, Working paper, WP/99/54/1999).

Bank failures have undermined depositor confidence and hindered the provision of services that are essential to the functioning of the economy. In order to minimize such impact, the failure management framework should enable insured depositors to be protected, value to be preserved and an abrupt withdrawal of services to be avoided. These considerations apply to a greater or lesser extent in any bank failure.

Effective bank insolvency procedures that address these issues may require additional sources of funding. A regime that confers more options and greater flexibility to undertake a variety of transactions may be better suited to manage the insolvency of banks that are important to local or regional economies, but not necessarily systemic, than a regime based on a more limited set of liquidation powers.

Such options include protection of deposits and continuity of other banking services through transfers. However, the available assets and loss-absorbing capacity within banks that are insolvent or close to insolvency are unlikely to be sufficient to fully support such transactions.

That is particularly the case where the majority of liabilities are deposits, which have only limited loss-absorbing capacity. Orderly management of bank failure is therefore likely to require some external funds. The main public policy objectives of a deposit insurer are to reimburse depositors after bank failure and to contribute to the stability of a financial system.

To achieve these objectives and to build public confidence in a deposit insurance system, deposit insurers must have operational readiness to be able to act quickly after a bank failure. Deposit insurance is a widely used and integral part of the financial safety net provided by states across the globe.

Sound funding arrangements are essential aspects of such readiness, as they ensure prompt reimbursement of insured depositors and sufficient funds for the deposit insurer to unwind the institution. Depositor confidence depends, in part, on knowing that adequate funds for deposit insurance would always be available to ensure the prompt reimbursement of their claims.

It is therefore considered a best practice to build credible ex-ante funding mechanisms which have the financial capacity to ensure that these obligations are met.

 The Ghana’s financial crisis of 2017-2019 served as an impetus in strengthening the role of the deposit insurance system and increasing the public confidence in the financial system by raising insurance coverage of deposits and shortening the period for commencement of payouts.

However, despite significant progress in the development of the deposit insurance a stable banking system is important to an economy and various initiatives have been implemented over time to foster financial system stability. One of such initiatives was the establishment of a Deposit Insurance System (DIS), to curtail economic disruptions that typically follow bank failures.

The history of Ghana shows that low economic growth tended to be followed by financial sector clean up between 2017-and 2019 estimated to have cost GHC25 billion or 7.1% of the GDP.

  Deposit protection Insurance is a system established to protect depositors against the loss of their insured deposits in the event that a bank is unable to meet its obligations to the depositors. It provides a financial guarantee which ensures that depositors do not lose all their funds in the event of a bank failure Ghana before 2019 had an implicit DIS has no formal system in place.

There was neither a formal means of funding nor government commitments to compensate depositors when failure occurs. It also does not have any administrative structure to support its implementation system, Ghana deposit insurer around still face various challenges including macro-economic instabilities of high inflation, persistent depreciation of local currency against major trading currencies and as well as high fiscal deficits.

The Banking sector has been relied upon by many household, small savers and industrialists to provide their financial assistance at one time or the other. While it is expected that they do this very well, banks have fallen short-off expectations in this respect due to fraud, mismanagement, inexperience and the initial absence of regulatory laws and authorities.

People lost their trust and confidence in the banking system, which the government couldn’t afford. The government desirous to instill confidence on the banking system by the public in the establishment of Ghana Deposit Protection Corporation (GDPC) in 2019.

Literature review

A vast empirical literature established that deposit insurance brings economic benefits by ensuring depositor confidence and preventing bank runs. At the same time, deposit insurance also comes with the unintended consequence of encouraging banks to take on excessive risk.

This standard moral hazard problem arises because deposit insurance distorts incentives for bank managers, shareholders, and depositors. Bank managers and shareholders are incentivized to take on higher risk, as they privately capture the upside returns but do not internalize downside losses, which are socialized through the deposit insurance fund. By limiting downside risk, deposit insurance naturally incentivizes greater risk-taking.

Depositors also have less of an incentive to be careful in the initial selection of their bank and monitoring its financial condition, as they are protected against losses when there is a bank failure.

The role of the banking sector, the financial safety net, and other financial institutions that accept deposits from the public are important in the economy because of their involvement in the payments system, their role as intermediaries between depositors and borrowers, and their function as agents for the transmission of monetary policy. By their nature, banks are vulnerable to liquidity and solvency problems, among other things, because they transform short-term liquid deposits into longer-term, less-liquid loans and investments.

They also lend to a wide variety of borrowers whose risk characteristics are not always readily apparent. The importance of banks in the economy, the potential for depositors to suffer losses when banks fail, and the need to mitigate contagion risks, lead countries to establish financial safety nets. Financial safety net is usually made up of three components: prudential regulation & supervision, a lender of last resort and deposit protection scheme.

The distribution of powers and responsibilities between the financial safety-net participants is a matter of public-policy choice and individual country circumstances. For example, some countries incorporate all financial safety-net functions within the central bank, while others assign responsibility for certain functions to separate entities.

A deposit insurance system is preferable to implicit protection if it clarifies the authorities’ obligations to depositors and limits the scope for discretionary decisions that may result in arbitrary actions. To be credible, however, and to avoid distortions that may result in moral hazard, such a system needs to be properly designed, well implemented and understood by the public.

A deposit insurance system needs to be part of a well-designed financial safety net, supported by strong prudential regulation and supervision, effective laws that are enforced, and sound accounting and disclosure regimes.

A large variety of conditions and factors that can have a bearing on the design of the DIS system need to be assessed. These include: the state of the economy, current monetary and fiscal policies, the state and structure of the banking system, public attitudes and expectations, the strength of prudential regulation and supervision, the legal framework, and the soundness of accounting and disclosure regimes

2.i.  Concept of Deposit Insurance

Based on its role and focus in the financial system, a deposit insurance scheme has been defined as a financial guarantee to protect depositors in the event of a bank failure and also to offer a measure of safety for the banking system (Ebhodaghe 1997).

In most economies where the scheme exists, it serves as one of the complementary supervisory agencies employed by the monetary authorities for effective management and orderly resolution of problems associated with both failed and failing depository institutions.

In addition, the scheme also offers some form of deposit guarantee to depositors such that their confidence in the banking system is not eroded in situations where deposit-taking financial institutions fail. The scheme also provides government with a framework for intervention and sterilization of disruptive effects on the economy following the failure of deposit- taking institutions.

Policymakers have many choices regarding how they can protect depositors. Some countries have implicit protection that arises when the public, including depositors and perhaps other creditors, expect some form of protection in the event of a bank failure.

This expectation usually arises because of the governments’ past behaviour or statements made by officials. Implicit protection is, by definition, never formally specified. There are no statutory rules regarding the eligibility of bank liabilities, the level of protection provided or the form which reimbursement will take.

By its nature, implicit protection creates uncertainty about how depositors, creditors and others will be treated when bank failures occur. Funding is discretionary and often depends on the government’s ability to access public funds. Although a degree of uncertainty can lead some depositors to exert greater effort in monitoring banks, it can undermine stability when banks fail. Statutes or other legal instruments usually stipulate explicit deposit insurance systems.

Typically, there are rules governing insurance coverage limits, the types of instruments covered, and the methods for calculating depositor claims, funding arrangements and other related matters. A deposit insurance system is preferable to implicit protection if it clarifies the authorities’ obligations to depositors and limits the scope for discretionary decisions that may result in arbitrary actions.

A deposit insurance system can also provide countries with an orderly process for dealing with bank failures. The introduction of a deposit insurance system can be more successful when a country’s banking system is healthy.

A deposit insurance system can contribute effectively to the stability of a country’s financial system if it is part of a well-designed safety net. To be credible, a deposit insurance system needs to be properly designed, well implemented and understood by the public.

It also needs to be supported by strong prudential regulation and supervision, sound accounting and disclosure regimes, and the enforcement of effective laws. A deposit insurance system can deal with a limited number of simultaneous bank failures, but cannot be expected to deal with a systemic banking crisis by itself.

A well-designed financial safety net contributes to the stability of a financial system; however, if poorly designed, it may increase risks, notably moral hazard. Moral hazard refers to the incentive for excessive risk taking by banks or those receiving the benefit of protection.

Such behaviour may arise, for example, in situations where depositors and other creditors are protected, or believe they are protected, from losses or when they believe that a bank will not be allowed to fail. In these cases, depositors have less incentive to access the necessary information to monitor banks.

As a result, in the absence of regulatory or other restraints, weak banks can attract deposits for high-risk ventures at a lower cost than would otherwise be the case. Moral hazard can be mitigated by creating and promoting appropriate incentives through good corporate governance and sound risk management of individual banks, effective market discipline and frameworks for strong prudential regulation, supervision and laws. These elements involve trade-offs and are most effective when they work in concert.

Specific deposit insurance design features can also mitigate moral hazard. These features may include: placing limits on the amounts insured; excluding certain categories of depositors from coverage; using certain forms of coinsurance; implementing differential or risk-adjusted premium assessment systems; minimizing the risk of loss through early closure of troubled banks; and demonstrating a willingness to take legal action, where warranted, against directors and others for improper acts.

Many of the methods used to mitigate moral hazard require certain conditions to be in place. For example, differential or risk-adjusted differential premium assessment systems may be difficult to design and implement in new systems and in emerging or transitional economies. Early intervention, prompt corrective action and, when warranted, bank closure require that supervisors and deposit insurers have the necessary legal authority, in-depth information on bank risk, financial resources, and incentives to take effective action.

Personal-liability provisions and availability of sanctions can reinforce incentives of bank owners, directors, and managers to control excessive risk, but they depend on the existence of an effective legal system that provides the necessary basis for action against inappropriate behaviour.

Mandates of Deposit Insurance Scheme:

  Pay Box mandate is limited to the role of collecting premiums, managing insurance funds and reimbursing insured depositors. A pay-box system requires appropriate authority, as well as access to deposit information and adequate funding, for the timely and efficient reimbursement of depositors when banks fail.

Narrow mandate systems that are only responsible for the reimbursement of insured deposits (“paybox” mandate) – seven members (Australia, Germany, Hong Kong, India, Netherlands, Singapore, Switzerland; Ghana);

In Pay-box Plus mandate, the deposit insurer has additional responsibilities such as certain resolution functions (e.g. financial support and liquidation).  Paybox plus” mandate, where the deposit insurer has additional responsibilities such as resolution functions – three members (Argentina, Brazil, United Kingdom);

• Loss Minimizer has all the duties of Pay-Box Plus and much more resolution options. It determines resolution and receivership strategies as well as manages claims and optimizes recoveries. In most cases do not have supervisory powers. “Loss minimizer” mandate, where the insurer actively engages in the selection from a full suite of appropriate least-cost resolution strategies – nine members (Canada, France, Indonesia, Italy, Japan, Mexico, Russia, Spain, Turkey);
• Risk-minimizer Mandate has the powers of a Pay-Box Plus with added responsibility of supervision, enforcement and prompt corrective actions. It has a full suite of early intervention and resolution powers as well as prudential oversight responsibilities.  It has powers to set regulations and undertake their enforcement through supervision and failure-resolution activities. Banking Supervision •
• DIC supervises banks to protect depositors, ensure monetary stability, promote an effective payments system, and promote competition & innovation in the system • Supervision is undertaken to minimize the risk of failure of the insured institution and to ensure that unsafe and unsound practices are curtailed• Supervision– On-Site Examination– Off-Site Surveillance • Adoption of Risk-Based Supervision in collaboration with Central Bank. Risk minimizer” mandate, where the insurer has comprehensive risk minimization functions that include a full suite of resolution powers as well as prudential oversight responsibilities – three members (Korea, United States; Nigeria)

Overview of Ghana Deposit Protection Corporation

The Ghana Deposit Protection Corporation was established by Ghana Deposit Protection Act, 2016 (Act 931) as amended by the Ghana Deposit Protection (Amendment) Act, 2018 (Act 968).

The scheme seeks to protect a small depositor from loss incurred by the depositor as a result of the occurrence of an insured event. The object of the scheme is to support the development of a safe, sound, efficient and stable market-based financial system in Ghana, by ensuring prompt payouts to insured depositors on the occurrence of an insured event.

Ghana’s Deposit Protection Scheme was conceived based on feasibility studies conducted in the year 2012 and with collaboration between the Bank of Ghana and the Government of Ghana. Financial support and technical assistance was also provided by the German Government through KfW, a German state-owned development bank. Ghana’s Deposit Protection Scheme has the Pay box mandate and became operational by end of September 2019.

Ghana’s Deposit Protection Scheme has a two fund-structure; Fund A, from which reimbursements of depositors of banks shall be made, and Fund B, from which reimbursements of depositors of Specialized Deposit Taking Institutions shall be made. Principal Activities.

The principal activities carried out by the Corporation during the year under review are within the limits permitted by the GDP Act which are:• To manage the Deposit Protection Scheme efficiently and effectively to protect a small depositor from loss incurred by the depositor as a result of the occurrence of an insured event and • to support the development of a safe, sound, efficient and stable market-based financial system in Ghana by ensuring prompt payouts to insured depositors on the occurrence of an insured event.

The initial capital of the GDPC Scheme was required to be (and has been) provided by the Government of Ghana and the Bank of Ghana. Beyond that, the GDPC Scheme is funded primarily by premiums paid by the FIs and returns on investments made by the GDPC. Each FI is required to pay an initial premium (of 0.1% of its required minimum capital) and an annual premium (ranging from 0.3% to 1.5% of its total deposits less any ineligible deposits).

GDPC Deposit Protection Fund

Act 931, as amended, establishes the Deposit Protection Funds for the scheme. There are two Funds. The Deposit Protection Fund “A” and Fund “B• Fund “A” is for premiums paid by a bank that is a member of the Scheme and any other fee paid by that bank to the Scheme and returns on investment of Fund A.• Fund “B” is for premiums paid by a Specialized Deposit-Taking Institution that is a member of the Scheme and any other fee paid by that Specialized Deposit-Taking Institution to the Scheme and returns on investment of Fund B.

The effectiveness of a deposit insurance system is influenced not only by its design features but also by environment within it operates. The operating environment must include stable macro-economic environment, financial system structure, prudential and supervision, the legal and judicial framework, accounting and disclosure system.

The main policy objective of a GDPC for Ghana was to protect less financially sophisticated depositors in the event of a bank failure, thereby contributing to customer protection and enhancement of the stability of the Ghanaian financial system. By protecting the covered deposits in all banks and SDIs, the GDPC could also contribute to the development of a less concentrated banking sector and support financial inclusion and transformation of the sector.

The GDPC Scheme was required to invest the premiums and other funds received to accrue sufficient funds to reimburse depositors of eligible deposits if an FI fails. However, since the inception of GDPC has operated in very harsh and difficult macro-economic environment of high inflation, persistent depreciation of local currency, high fiscal deficits, higher interest rates and low economic growth. In addition, GDPC did also operate in unsustainable debt environment which resulted in domestic debt exchange as well as external debt restructuring.

Key operational challenges for the GDPC since in 2019

1. Difficult macroeconomic environment.

Macro-economic instabilities have affected the ability of financial institutions ability to absorb and manage the risks and behavior of depositors. Stable macro-economic conditions influence the effectiveness of markets, the ability of the financial system to intermediate resources, and economic growth.

Persistent macro-economic instabilities have hampered the functioning of financial markets and such conditions have also affected the ability of financial institutions to absorb and manage their risks. Over the past five years, macro-economic instabilities, market volatility had led to destabilizing creditor runs (including deposit runs).

Moreover, uncertainties about future movements in relative prices including asset prices and exchange rates could make difficult to determine the medium to long term viability of the Ghana Deposit Protection Corporation (IADI, 2014).  Over the past five years the macroeconomic environment deteriorated rapidly, reflecting a confluence of a food and energy crisis and an expansionary fiscal policy.

As fiscal deficits widened, inflation accelerated, interest rates rose to around 30 percent, investors became skittish and began to exit the debt market, and the exchange rate began to depreciate, thereby creating conditions for asset price deterioration. Macroeconomic conditions have fundamentally changed, with a steep increase in consumer price pressures causing central banks to tighten monetary policy. For Ghana deposit protection corporation, the current macroeconomic environment comes with two major challenges.

First, sudden or persistently high inflation may present rationale for deposit insurers to review the appropriateness of their coverage level. Second, the tightened monetary policy necessary to reduce inflation has exacerbated economic downturns, with associated risks to deposit insurers.

The Ghanaian economy was characterized by large budget deficits, inflation, higher interest rates, depreciation of the local currency and low economic growth. Ghana for the past three years has been classified as a hyperinflationary economy with three-year cumulative inflation for the country being 128%. (IMF World Economic Outlook 2023).

Ghana has been on the hyperinflation watch-list for a while. Effective 31 December 2023 the International Practices Task Force (IPTF) determined that with a 3-year cumulative inflation of 133% it is now there.  When a country becomes hyperinflationary, all entities having the local currency as its functional currency must apply IAS 29.

All reported balances and transactions are adjusted to compensate for the currency losing its purchasing power. This has to be achieved by adjusting the values reflected for the country’s general price index at reporting date compared to the general price index at transaction date. Macroeconomic instabilities over the past three years had impacted negatively on the financial sector.

The rate of inflation remained high and volatile during much of the period 2022-2024. The rate of depreciation of the local currency, the cedi, increased over same period and the budget deficit situation has persisted.

These unstable conditions impacted negatively on the operations of GDPC and the financial depth of the economy. The financial sector has not yielded the intended effects, primarily because of the lack of sustained improvements in the macroeconomic environment. However, weaknesses in the fundamental structure of the economy have also affected the outcome of financial sector reforms over the period 2019 -2023.

High budget deficits led to increasing interest rates on government debt (Treasury Bills Market) reorienting credit away from the private sector to the government. The underlying real economy also showed structural weaknesses which made it vulnerable to instability and poor agricultural sector and trade performance

2023. Ghana’s unsustainable debt environment 2019- 2023.

Ghana Deposit Protection Corporation has operated in an unsustainable debt environment which impacted negatively on their operations. Ghana’s economic and financial crisis of the last three years has been the most severe crisis that a developed economy has ever experienced in modern history, both in terms of output and employment loss as well as duration. In 2012, Ghana’s debt increased sharply from GH?35.1 billion or 48.4% of GDP to GH?122.6 billion or 73.3% of GDP in 2016, indicating an increase of GHC 87.5 million or 24.9 percentage points of GDP in four years. However, Ghana’s nominal debt has increased from GH?122.6 billion or 73.3% of GDP to GH?546 billion or 88.1% of GDP in 2022 and further increased to GH?610 or 72.5% of GDP despite a comprehensive and painful domestic debt exchange program in September 2023. The situation in Ghana is a testament to the catastrophic effect that excessive borrowing has exerted on an economy and the disastrous consequences on the social fabric as well as high poverty levels. One of the core issues in this contemporary Ghana tragedy has been public debt.

When the crisis started in 2022 with a debt-to-GDP ratio of around 100%, it was interpreted by most economists and policymakers as a public debt crisis. The result of these efforts will be a slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio. Ghana experienced one of the most challenging economic times in recent years.

Like many other countries around the world, the economic challenges in Ghana have been exacerbated by external shocks including the Covid-19 pandemic and the war in Ukraine/Russia. The country experienced anemic economic growth, high unemployment, elevated inflation, severe currency depreciation, loss of external capital market access, deteriorating gross international reserves and a looming public debt crisis.

The Ministry of Finance through a debt sustainability analysis (DSA) has declared public debt to be unsustainable. The present value (PV) of Public and publicly guaranteed (PPG) debt to GDP ratio as at November 2022 stood at 100.34%. The government has set a PV of PPG debt to GDP ratio of 55% by the end of 2028 to achieve debt sustainability. To restore debt sustainability and macroeconomic stability, the government requested for assistance from the IMF. As part of the condition to unlock about US $3 billion of IMF extended credit facility.

The government was tasked to restructure public debt. It is obvious that the government intends to restructure both domestic and external debt.  Foreign debt accumulated rapidly with corresponding interest payments between 2019- 2023, as the country ran into economic difficulties and suspended payments on foreign debt on December 2022, private and public investment collapsed, with total investment to GDP by as much as 5 percentage points.

Ghana registered the largest fiscal deficits in the past decade, which reached its peak in 2020 with an unprecedented deficit of 15.2% of GDP and 12.3% in 2021 thus sharply increasing the country’s debt stock and debt service costs, thereby creating enormous budgetary difficulties, the government of Ghana naturally aimed at achieving fiscal consolidation in the original 2022 budget.

In December 2022, the government defaulted on the external debt and began the domestic debt restructuring which has just been completed. In 2022, Ghana faced significant challenges partly due to the Covid 19 pandemic, the Ukraine / Russia war and excessive government expenditures. These three events led to unsustainable debt levels which in turn eroded the confidence of international investors.

As the time of writing, details of the external debt restructuring had been restructured with both bilateral and euro bonds. On 3^rd October 2024, Ghana achieved over 90 pct external debt restructuring of US$13 billion and it is said to have saved nearly US$4.7 billion. The government initiated the exchange offer and consent solicitation, which marks a critical step in restoring Ghana’s debt sustainability and international financial relations. “The Eurobond exchange was designed with fairness in mind, reflecting agreements made with bondholder representatives on June 24, 2024.

The process involved two main investor options: the PAR Option, which had no nominal haircut but a lower interest rate of 1.5%, and the DISCO Option, which carried a 37% nominal haircut but offered higher interest rates between 5% and 6%”.  As a result of these events, Ghana was cut off from the access to international capital markets which led to domestic debt exchange which impacted negatively on GDPC operations in 2022/2023. GDPC suffered NPV loss of GHC 296 million in the participation of DDEP in 2022/2023.

1. Negative Impact of Domestic Debt Exchange Program on Ghana Deposit Protection Corporation

The Domestic Debt Exchange involved exchanging existing government of Ghana bonds with new bonds which come with coupons ranging from 5% to 10%, which, compared to existing bonds, had coupons between 16% to 30%. The Corporation’s NPV losses of GHC296 million due to the coupon rate reduction.

This NPV losses impacted negatively on both profitability and solvency of GDPC (Annual report, 2022). The Corporation assessed the bonds eligible for exchange under the DDEP as credit impaired under IFRS 9 standards. As a result, the carrying amounts of the existing bonds were reduced to the fair value of the new bonds calculated as the present value of the cash flows using average discount rate of 22%.

1. Governance has been a key issue with Ghana Deposit Protection Corporation operations.

Critical review of current governance practices of GDPC has been non- compliant with the Core-principle 3 of the IADI (2014) best practices where government appointees including that of Central Bank governor must all be ex-officio members of the board. There is no evidence of substantive implementation of Core Principle 3 of IADI (2014). There was lack of operational independence as a result of the inability of GDPC to use the powers assigned to it without undue influence from external parties like Ministry of Finance and Bank of Ghana.

The Ghana Deposit Protection Corporation has not been operationally independent, transparent, accountable and insulated from undue political and industry influence as per the Core Principle 3 of IADI 2014). Ghana Deposit Protection Corporation has not been non-compliant with the international best practice as stated by Principle 3 of IAD1 2014.

This contentious issue with the Ghana Deposit Protection Corporation is governance structure which is enshrined in Act 2016 Act 931 as amended in 2018 concerning the appointment of the Governor of Bank of Ghana as a chairman of the Board and the appointment of representative of Ministry of Finance to board. The Core Principle 3 of IADI (2014) appeared to be in contrast with Act 2016 Act 931.

The Core Principle 3 states that deposit insurer should be operationally independent, well governed, transparent, accountable and insulated from external interference. Under external interference there should be no government, Bank of Ghana or industry interference that compromises the operational independence of the scheme.

While it is important to have the Ministry of Finance and possibly also the Bank of Ghana represented as ex-officio on the board of the Ghana Deposit Protection Corporation, the government members should not dominate the board by constituting the majority of its members or by holding the position of chairman.

According to IMF working paper (WP/99/55) and Garcia (1999), the chairman and majority of the board of directors should be worthy, experienced but independent members of the public with no current ties to the banking industry that would present a conflict of interest.

Garcia (1999) posited that while it is important to have the Supervisory agency like Bank of Ghana and Ministry of Finance be represented as Ex-Officio on the board of GDPC, the government members should not dominate the board by constituting the majority of its board members or by holding the position of board chairman (IMF, WP, 99/55; 1999). The deposit insurer must be operationally independent, transparent, accountable and insulated from undue political and industry influence

1. Low limited coverage of GHC6250 and GHC1250 for Banks and SDIs respectively.

The banking crisis in 2017-2019 has sparked debate on the financial stability risk of uninsured deposits and on adequate deposit insurance coverage. Coverage refers to the level and type of deposits that is guaranteed by the program. Coverage ratios, measured as a share of the value of eligible deposits that are insured by deposit insurance.

As coverage is perhaps the most evident indicator of perceived protection exhibited by a deposit insurance scheme, policymakers strike a balance by establishing realistic coverage limits which cover the vast majority of small depositors, while leaving larger institutional depositors exposed to market discipline.

With high inflation, high interest rates and persistent depreciation of the local currency against the major trading currency over the past five years, the deposit insurer should be allowed to revise the limits yearly to compensate for loss. The maximum compensation payable to a depositor of a bank shall be GHC 6,250.00; and the maximum compensation payable to a depositor of a Specialized Deposit-Taking Institution, shall be GHC 1,250.00.

However, where the compensation paid is less than the deposit standing to the credit of the claimant, the claimant may recover the difference from the liquidator or receiver of the bank or Specialized Deposit-Taking Institution.

A pay-out or reimbursement is the amount that the deposit insurer (GDPC) will pay to an insured depositor, when the bank or Specialized Deposit Taking Institution (SDI) of which the depositor is a customer, fails and the Bank of Ghana revokes the licence and appoint a receiver. This is called an insured event.

The DP Scheme became operational on 30 September 2019. It is mandatory for all FIs to be members of the DP Scheme and pay premiums regarding eligible deposits. According to the website of the GDPC, all the FIs have signed up and are paying the premium. Another vital reform that is needed to increase the threshold from its current low base of GH¢ 6,250 and GH¢ 1,250 for banks and specialized deposit taking institutions respectively to reflect inflation and persistent currency depreciation since the passage of Ghana Deposit Protection Insurance Act in 2018.

An important issue to my mind is going to be the issue of adequacy of insurance coverage for customer deposits. At present, limited coverage option is adopted in Ghana with uniform deposit insurance coverage limited to an amount of GHC6250 and GHC1250 per depositor of insured bank and insured Sdis .

Considering multiple factors like growth in the value of bank deposits, economic growth rate, inflation, increase in income levels etc., a periodical upward revision of this limit may be warranted. This means that the deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same

1. Another operational issue on Ghana deposit insurance coverage has not been driven by reflections on the growing overall share of uninsured deposits.

According to Bank of Ghana reports showed that the total deposits increased from GHC148.8 billion as at end of 2022 to GHC213 billion as at ending of 2023. Looking at the deposit growth rate what has been the insured deposits as against the unsured deposits. The coverage limit must be adjusted upwards over time to reflect higher GDP growth as well as the higher inflation that prevailed over the past years.

More specifically, factors being considered include the variations in the degree of concentration of uninsured deposits between banks, the sectoral concentration of deposits within banks, and the impact of potential losses to uninsured deposits on the real economy or on certain parts of the population. Uninsured deposits include funds held in businesses’ payment accounts. Losses to these accounts or limitations regarding the access to funds held in these accounts can cause hardship to   are generally not in a position to assess the default risk of the bank where businesses hold accounts, additional protection may be warranted.

Key emerging issues for the GDPC operations

This study has identified eight key emerging issues for the Ghana deposit protection corporation to pay close attention to in the short to medium term.

 

1. One of the emerging issues for the Ghana Deposit Protection Corporation has been the licensing of Fintech in the financial space over the past few years.

Recent developments in technology have fast-tracked the digitization of financial services sector in Ghana. Many of these new services have improved efficiency, ease of use and competition in the financial sector. However, at the same time, concerns have risen regarding financial stability and competitive distortions as a result of regulatory arbitrage and platform economies.

This has exposed supervisors and deposit insurers to new challenges and presented a sense of urgency in terms of progressing relevant policy debates. Fintech developments have fast-tracked the digitization of financial services, helped enhance competition, efficiency financial inclusion.

E-money products have become increasingly popular in recent years. Should the funds backing the e-float be covered by deposit insurance schemes? In most developing countries’ frameworks like Ghana, e-money is not considered a deposit and, thus, is not covered by deposit insurance.

They have improved access to digital financial services for people previously unserved or underserved by the traditional banking sector.  Policy discussions concerning the extent to which deposit insurers (DIS) cover these products yield considerations regarding several models, including the direct, pass-through and exclusion approaches.  DIS coverage leads to challenges regarding the identification and pricing of risks as well as safeguards for timely reimbursement.

E-money service providers operate fundamentally different from traditional banks. As such, they are exposed to unique risks via (at times) difficult-to- characterize transmission channels

However, concerns have risen regarding financial stability and competitive distortions. At times, these policy goals may be in conflict with other ones such as financial inclusion and consumer protection.

Fintech affects deposit insurers through numerous direct and indirect channels, which may touch upon the very fundamentals of the banking sector such as payment systems and the role of traditional deposits. There is an apparent sense of urgency in terms of progressing policy and standard-setting debates which may also affect deposit insurers (Van-Roosebeke & Defina, 2021).

The global standard setting community is continuing to keep abreast of key issues and work on improving best practices in addressing financial stability considerations, all while seeking to retain accommodating conditions for innovation and profitability in the private sector. Issues such as improving levels of financial inclusion and consumer protection have added additional layers of nuance to discussions and have made clear the at times conflicting policy goals.

Ghanaian banking services have been undergoing technological modernization. Digitalization has significantly improved the ease of accessing banking services and has increased competition in the sector, all of which has worked to the benefit of bank customers. Notable in the field of payment services is the availability of 24/7 instant payment solutions in both non-bank and bank environments.

Although fast payment systems contribute to a better quality of service in stable times, recent bank failures have fueled discussions about the risk they may pose to financial stability by technologically enabling bank runs at a very rapid pace and at marginal costs for depositors. The impact of digitalization in communication (e.g., social media) and payment technology on depositor behavior and financial stability may not yet be fully understood and therefore merits continuous close monitoring.

Technological developments have the potential for fundamental and lasting changes in many markets, including in financial markets. The modern fintech landscape is broad and each segment has implications for consumers and financial institutions alike. One important characteristic of Fintech is that its drivers are not limited to changes within the financial sector. Rather, digitization as a megatrend is re-shaping existing value chains across existing sectors.

The role of data is of great importance as a facilitator of this reshaping. Through their original business activities, big-techs or other non-financial companies may have preferential access to data, which may enable them to start offering financial services which are more appealing to some parts of the public than offers by traditional financial service suppliers.

Also, big-tech players may have significant market power on non-financial markets and may attempt to transfer this power to financial markets as well by bundling traditional products with new, financial ones. These competition issues as well as their potential impact on financial stability and intermediation have drawn significant interest of policy makers across the world

Fintech has the potential for fundamental and lasting changes in financial markets and is thus a key emerging issue of strategic importance for deposit insurers. As it may significantly impact on the use of insured deposits as well as on the financial conditions and risk profile of deposit insurer members, there is a self-interest for the deposit insurance community in following up on evolutions in the field of e-money, mobile money wallets and central bank digital currencies (CBDCs).

Moreover. fintech developments may also cause risks to deposit insurers emanating from unclarity as to the existence of coverage for new products and deposit insurers may face challenges regarding the operationalization of any such coverage.

Fintech is an emerging issue of strategic importance for deposit insurers for two reasons. Firstly, over the medium term, it may have significant impact on deposits as the product we insure as well as on the financial position and risk profile of deposit-taking institutions (DTIs) as traditional suppliers of this product and hence on financial stability.

Without cooperation with fintechs and in the absence of (regulated) access to data, traditional business models of deposit-taking institutions (DTIs), around which deposit insurers have been designed and implemented, are at risk of disruption.

Deposit insurers thus have a self-interest in following up on evolutions in the field of e-money, mobile money wallets, stable coins and central bank digital currencies (CBDCs). Depending on the design and the regulation (or the lack thereof) of these products and their suppliers, consequences for bank deposits and their insurance may arise.

Secondly, fintech developments may affect deposit insurers in their core business. Referred to as “deptech”, technology may be helpful in ensuring timely reimbursement within the 7-working-day limit as set by the IADI Core Principles; in further refinement of data-based risk assessments and corresponding differential premium-setting; or in supervision and resolution activities by deposit insurers.

At the same time, fintech developments may also cause significant risks to deposit insurers. New business models blur the lines between financial products and services offered within and outside the traditional financial system. This has the potential to introduce confusion as to whether a product or service is guaranteed by the deposit insurer. For example, in some jurisdictions, fintech firms directly compete with DTIs to provide lending and payment services, but are not covered by the deposit insurance system.

In other jurisdictions, fintechs may offer their products and services in partnership with DTIs and as such may be covered by the deposit insurance scheme. In still other jurisdictions, fintech products and services may by directly covered by deposit insurance. Consumer confusion could lead to a reputational risk for the deposit insurer if fintech products are believed to be insured when they are not. This may impact on all deposit insurers irrespective of their mandates.

1. Interconnectedness of financial flows and the dominance of foreign telephone company in borderless digital finance

The linkage between mobile financial services and banking industry have created interconnectedness challenges for the financial system.  Lessons from the financial sector clean up in 2017-2019 confirmed that the inter-linkages embedded in the financial system could amplify systemic risk (contagion risk). Given the dominance of foreign telephone company providing mobile banking services has already created cross-border contagion which has created important risk.

The foreign telephone company providing financial services in the financial services space is not subjected to both the Bank of Ghana’s banking regulation and supervision under (BSDI Act 2016 Act 930) and to the Ghana Deposit Protection (Amendment) Act, 2018 (Act 968) thus undermine the security of such deposits in case of a bank failure or financial crisis or collapse of foreign telephone company.

The growing inter-connectedness of global financial flows and the increasingly borderless and digital nature of financial services make cross-border issues to become increasingly relevant for deposit insurers’ activities.

In this context, the importance of cross-border arrangements between GDPC and South Africa Deposit Insurance Company has risen and is expected to continue to so in the future. Digital innovation eases cross-border supply of financial services through a more dynamic suite of distribution channels, thus increasing the likelihood for deposit insurers to incur member banks with a significant share of non-domestic depositors.

In the case of a payout following bank default, this may create additional challenges to deposit insurers. Cross-border activities may also facilitate additional financial stability risks, making cross-border cooperation between deposit insurers and other financial safety net participants all the more relevant.

iii. Lack of Public awareness of GDPC operation in the financial sector scape.

Ghana Deposit Protection Corporation has not been able to create the needed awareness in the financial sector space since 2019. IADI Core Principle 10 (2022) provides that the deposit insurer is “responsible for promoting public awareness of the deposit insurance system, using a variety of communication tools [this could include social media] on an ongoing basis as part of a comprehensive communication programme”.

Public awareness of the existence of deposit protection and confidence in the capacity of the deposit insurer to deliver when called upon is a key element to prevent bank runs and support the stability of the financial system.

Public awareness of deposit insurance contributes to decreasing bank run risk. There is a role for deposit insurers in actively monitoring the level of public awareness in their jurisdiction, including through periodic independent evaluations.

A collaborative element also manifests in this regard: working diligently with banks, other financial safety-net participants, and (if cross-border issues are relevant) institutions beyond their jurisdiction to maximize awareness on an ongoing basis. Critically, the” on-going basis” component cannot be over-emphasized – public awareness should not be an issue that is prioritized only periodically. Public awareness:

In order for a deposit insurance system to be effective it is essential that the public be informed on an ongoing basis about the benefits and limitations of the deposit insurance system. It is not yet a common practice for Ghana deposit insurer to conduct regular monitoring of public awareness levels, potential information gaps, or the perception of the DIS by depositors.

The need for public awareness is particularly acute in cases where the depositors are simultaneously protected by multiple DISs (whether a local or a foreign scheme) and where the same banking group operates with different franchises whose deposits come under a single maximum aggregate protection limit. Public awareness of deposit insurance contributes to decreasing bank run risk.

A recent IADI (2024) sponsored study offered empirical evidence that public awareness of deposit insurance can decrease the propensity of depositors to run on their bank by 67%. Just over three quarters of deposit insurers have a formal public awareness program in place. For nearly all of these, the objective is to promote public awareness on an ongoing basis, i.e., not only during periods of crisis.

The IADI Core Principles underscore the importance of public awareness in the provision of effective deposit insurance systems, which is fundamental to achieving the public policy objectives of protecting depositors and contributing to financial stability.  However, given recent banking turmoil and the potential impact of digital innovation on depositor behavior, there is merit in better understanding the relationship between public awareness of deposit insurance and bank-run risks.

1. Cross-border issues and challenges:

Cross-border considerations are increasingly affecting deposit insurers’ operations as these pose challenges regarding depositor reimbursement and resolution activities. This is driven by the growing inter-connectedness of global financial flows and the increasingly borderless and digital nature of financial services.

Currently, the rate of prevalence of cross-border arrangements between deposit insurers is relatively low, but this is expected to continue to rise and with it the need to focus more attention in this area. Recent failures have reiterated the importance of cross-border cooperation also in failure management of non-G-SIB banks.

Banks that are not global systemically important banks (non-G-SIBs) may also operate in a financial environment with significant international exposure. A prominent recent example was Silicon Valley Bank, which had a subsidiary in the UK.

The UK and US authorities used existing relationships to ensure that their responses were not counterproductive to each other’s resolution efforts. The benefits of formal information sharing and coordination arrangements between deposit insurers and with other participants in the financial safety-net where there is a significant presence of foreign banks in a jurisdiction are well established in the IADI Core Principles.

Provided confidentiality is ensured, all relevant information should be exchanged between deposit insurers in different jurisdictions and possibly between deposit insurers and other foreign safety net participants when appropriate. In circumstances where more than one deposit insurer will be responsible for coverage, it is important to determine which deposit insurer or insurers will be responsible for the reimbursement process. The deposit insurance already provided by the home country system should be recognized in the determination of levies and premiums.

1. Lack of Insurance Cover for Digital Products

The rapid technological developments in the financial sector have resulted in introduction of various innovative digital financial products and services for the customers. The country with deposit insurance generally could adopt three different approaches for digital “deposit-like” products based on their market structure, legal and regulatory frameworks and their assessment of risks associated with the widespread adoption of these product.

While the direct approach clearly defines the digital deposit-like products as insured deposits, under the exclusion approach, these accounts are explicitly not covered by the deposit insurance system due to digital payment services accounts being regarded as primarily instruments of temporary value storage to make payments or transfers.

The third approach provides deposit insurance cover to these products indirectly if the “float” collected by providers of digital payment services is placed in pooled custodial accounts with an insured depository institution. However, in Ghana, the definition of ‘deposit’ has an inclusive character to cover all unpaid dues to a depositor by whatever name called.

The innovations in financial sector are generally facilitated by the regulators as they play a critical role in expanding the reach of financial products and services to the hitherto excluded sections of the population. These innovations have also immensely benefited the financial inclusion initiatives.

Even as digital products become more pervasive, there would be a need to consider whether coverage of such digital deposit-like products should also be an option for the Deposit Insurer.  DIS must review of customer service standards in its regulated entities in its recent report has recommended extending deposit insurance cover to money kept in wallets of pre-paid card issuers. While there is clearly no “one-size-fits-all” solution to cover digital products, we need to choose a suitable approach which is consistent with the primary objective of the deposit insurance function

1. Operational risks of cybersecurity

Increased use of digital services comes with numerous advantages, but also entails operational risks e.g. in the form of cybersecurity risk. The unavailability of essential technical infrastructure or criminal activity against such infrastructure has the potential to significantly impairs banks’ and deposit insurers’ business continuity and could make resolution action necessary

vii. Leveraging on Deposit Insurance for Effective Digital Financial Inclusion

One emerging issue that which is crucial for the Ghana Deposit Protection Corporation would the ability to leverage on digitalization for financial inclusion. Ghana Deposit Protection Corporation since 2019 adopted the exclusion approach but looking the appearance of electronic wallet, online transaction, other value-storing instruments and the astronomical growth of mobile money market with huge floats with local partner banks both GDPC and Bank of Ghana could not overlook.

The rapid scaling of digital stored-value products coincides with a sustained interest (initially triggered by the 2008 global financial crisis) in establishing or strengthening deposit insurance systems, and with emerging frameworks that extend deposit insurance coverage to financial products with characteristics similar to deposits in multiple countries.

CGAP (2016) define “what is a deposit?” is becoming more difficult as digital financial services continue to evolve rapidly, and as unserved and underserved customers use products in new ways. The appearance of electronic wallets, prepaid plastic or virtual cards, online transaction accounts, and other value-storing instruments is making it harder for authorities, providers, and consumers to identify clearly what products are, or should be, considered deposits—and which are “deposit-like” enough to consider insuring.

The wide range of digital stored-value products and differences in design and implementation of deposit insurance systems across jurisdictions make general prescriptions on deposit insurance treatment of digital deposits and deposit-like stored-value products challenging. CGAP (2016) and Lauer and Lyman. (2015) posited three general approaches to deposit insurance for digital stored-value products merit policy maker consideration:

(i) The Exclusion Approach, whereby such products are explicitly excluded from deposit insurance coverage, although other measures to protect customers’ stored value are adopted. Under this approach, the term “deposit” specifically excludes digital stored-value products (e.g., in Ghana, Peru and the Philippines), and these products are therefore explicitly excluded from deposit insurance coverage.

Customer funds are still protectable from some risks associated with the failure of their provider, for example, by requiring that the digital float be held in a custodial account, although many factors may limit the certainty and expediency for customers to recover their balances in case their provider fails.

 (ii) The Direct Approach, whereby such products are directly insured by a deposit insurer and their providers must be or must become members of the deposit insurance system. The direct approach includes digital stored-value products in the definition of “insured deposits” and is applied by countries where such products are provided by prudentially regulated and supervised financial institutions that are members of the deposit insurance system. Colombia, India, and Mexico have adopted this approach.

They have not only permitted banks to offer insured digital stored-value products, but also created new specialized categories of prudentially regulated and supervised institutions that are allowed to offer such products, while being subject to less costly prudential requirement.

 (iii) The Pass-Through Approach, whereby deposit insurance coverage “passes through” a custodial account at a depository institution that is a deposit insurance member and holds customer funds from deposit-like stored-value products, to the individual customer of the digital product provider (although this provider is not a deposit insurance member).

The pass-through approach, the most complex and the least explored approach to date, allows for deposit insurance coverage to be extended to digital deposit- like products even when the provider of such products is not a member of the deposit insurance system.

This approach is being implemented in countries like Kenya and Nigeria where deposit-like products may be provided by nonfinancial firms, including MNOs and technology companies. With the pass-through approach, the float collected by providers from customers through the issuance of stored-value products is placed in one or more pooled custodial accounts with a bank (or other insured depository institution).

Ghana Deposit Protection Corporation must strive hard to achieve the Pass -through Approach which countries like Kenya and Nigeria where deposit-like products may be provided by non-financial firms, including MNOs and technology companies.

Policy makers worldwide are increasingly appreciating the expanding role that digital financial services play in reaching financially excluded and underserved customers. Though models vary widely, all have at their heart a low-cost digital financial product—such as e-money issued by a mobile network operator (MNO) or financial institution—that permits customers to make payments, to transfer money, and to store value in small amounts.

This value-storage functionality enables the offering of additional services such as digital credit and off-grid electricity on a “pay as you go” basis—services better tailored to the unpredictable cash flow of poor households and microenterprises.

5.0 Conclusion

To conclude, let me re-emphasize the fact that Ghana deposit protection insurance scheme is an essential component of a stable and trustworthy financial system. It not only helps in maintaining public confidence by protecting depositors but also play a crucial role in promoting overall economic growth.

By providing a financial safety net, the deposit insurer contributes significantly to financial stability. It has become imperative for the regulator and the deposit insurer to realign their policies and regulations to enable banks to better manage and enhance their risk management capabilities, especially liquidity risk management.

The financial sector clean- up in 2019 emphasized the fact that a GDPC could have played an important role in reducing the likelihood of bank runs and maintaining financial stability by working in tandem with the other elements of the financial sector safety net. However, the Ghana should have exercised caution in determining when and how to implement a deposit insurance framework.

Experience has shown that implementing a DIS in a weak environment will likely undermine the effectiveness of the scheme. Ghana should have ensured that the necessary preconditions are in place. Furthermore, there is no one-size-fits-all approach to establishing a DIS.

Countries must adapt design features suited to their unique context to prevent unintended consequences, such as the increase of moral hazard. Once GDPC was established, the authorities have to regularly assess the framework to ensure that its public policy objectives are still in line with its operating environment. This will enable the DIS to become a central pillar of the financial safety net and a key enabler of financial stability.

For GDPC operate efficiently and effectively the Government of Ghana and Bank of Ghana must be committed to promoting a strong, stable, and viable banking industry to support robust macro-economic growth in terms of stable exchange rate, lower inflation, lower policy rate, lower fiscal deficits, positive terms of trade and manageable public debts that could impact positively on the GDPC operation.

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