SOUTH Africans can now rest assured that their bank funds and savings are safeguarded, thanks to a new depositor insurance scheme officially launched on Thursday.
The scheme, governed by the newly established Corporation for Deposit Insurance (Codi), became operational on 1 April 2024. Codi is a South African Reserve Bank (Sarb) subsidiary and a member of the International Association of Deposit Insurance, which sets the global standard for deposit insurance schemes. The association has 98 members worldwide.
Sarb Governor Lesetja Kganyago said at the launch event Codi has been years in the making, and officials at the central bank and the National Treasury have been planning it since 2002.
Codi CEO Sabihah Mohamed said Codi is integrated with the financial safety net of South Africa’s financial system, including the Prudential Authority and the Financial Sector Conduct Authority (FSCA).
It is underpinned by a depositors’ insurance fund, using member banks’ premiums and loan contributions. Banks will also pay a deposit insurance levy to Codi.
Qualifying depositors, which include individuals and non-financial businesses, will be protected for up to R100 000 for the balances in their bank accounts through Codi.
The banking products that the scheme covers include savings, transactional and current accounts and fixed deposits.
“In the unlikely event of a bank failure, depositors will be told exactly how and when they could access their funds. Initially, they will get access within 20 days, but Codi aims to shorten this to between three and seven days to align with international best practice,” she explained.
Avoiding a ‘bank run’
Kganyago said depositors are essentially investors in a bank, and usually, they have little choice but to accept the risk of this ‘investment’. He added that Codi would remove the need for people to do a “bank run” – when depositors withdraw large portions of cash from a bank that they believe might go out of business. This happened in 2002 when panicking customers withdrew more than R1 billion in less than two days because of rumours that Saambou Bank was bankrupt.
According to Kganyago, Codi will also encourage South Africans to be more trustworthy of newer banks. “A depositor might be eyeing a better rate from another bank but refrain from doing so out of fear that the new bank might fail. With Codi, there is safety in any member bank.”
Mohamed agreed that the depositor insurance scheme could lead to a better-diversified banking sector. “Codi protects qualifying deposits of all banks – large, small, new, or old. It may improve the confidence of the public to bank at smaller and newer banks,” she noted.
Bank failures
South Africa has had several bank failures in the past two decades, including Saambou Bank in 2002, African Bank in 2014, and VBS Mutual Bank in 2018. Significant overseas bank failures have also occurred, such as Credit Suisse in Switzerland and three small-to-midsize American banks that collapsed in 2023.
“Who can forget the images of the elderly sleeping overnight at VBS Mutual when it collapsed?” said Mohamed.
Adv Terry Motau, who investigated the collapse, called the VBS saga “the great bank heist” and found that 53 individuals and companies received R1.9 billion over three years due to the collusion among the executive, the board, and external auditors involved with VBS.
Finance Minister Enoch Godongwana said trust is fundamental to any financial system’s effectiveness and existence. Yet global trends, especially post-2008, show a marked decline in trust in financial regulators because of regulatory failures and the perceived alignment with financial elites rather than the public.
Regaining the public’s trust in financial institutions requires deep structural reforms and a shift towards greater accountability and transparency. “Codi is an essential safety net in our rapidly evolving financial landscape,” he added. – moneyweb.co.zw
