Written by Yusto Habiye, Consultant
Have you ever asked yourself about the security of your deposits should the bank fail? Yes, you have a bank account and you bang for the buck, but it happens, banks close shops, though it happens on very rare occasions, but it happens!! The bank community of Tanzania has not forgotten the closure of banks in 2018 where Efatha Bank LTD, Covenant Bank for Women Tanzania LTD, Meru Community bank LTD, Njombe Community Bank LTD, and Kagera Farmers Co-operative Bank LTD were entirely closed after they failed to rise to core capital prescribed by the BOT.
Failure of a bank can have greater and more widespread costs to the economy and indeed to clients, that being the case, the ascertainment of depositors’ protection is an integral part of the measures that must be taken in the banking business.
Basically, the laws of Tanzania have played a prominent role in regulating and securing depositor’s reserves, section 5 of The Bank Of Tanzania Act, 2006 gives the BOT power to supervise institutions that have been authorized to accept deposits, also section 6 of the Banking and Financial Institutions Act, 2006 provides that a person cannot engage in banking business or accept deposit from the general public unless that person has a
license issued by the BOT, essentially, only licensed banks or financial institution are allowed to accept and maintain deposit from the general public. Likewise, Sections 31 to 35 of the Banking and Financial Institutions Act, 2006 confer BOT with enormous powers to control and regulate banks activities in protection of maintenance of deposit-taking by banks amongst other activities, equally, whatever customers deposit in banks and financial institutions is protected by law, as protected deposit, section 39 (1) of the same act.
On the same note S. 43(1) of the act prohibits banks to take deposits while they are insolvent, also upon winding up of a bank or financial institution the law requires all depositors’ claims to be paid in full to depositors. The law sanctions a person accepting a deposit without a license, to a fine of 20m/ or imprisonment of 5 years; BOT may as well direct the defaulter to repay funds collected to depositors as specified in section 65(3), (4) of the act. On the same note S. 43(1) of the act prohibits banks to take deposits while they are insolvent, also upon winding up of a bank or financial institution the law requires all depositors’ claims to be paid in full to depositors.
Principally, the deposit insurance fund (the fund), is the specific body, organized and established as an insurance scheme for bank deposits which is managed by the deposit insurance board (DIB), the fund receives a statutory contribution from banks and
financial institutions, to heighten repayments of customer deposits in case banks fail. S. 38 (5) of the act, states that each bank and financial institution must contribute to the fund, one percent of the average of the annual total deposit liabilities (annual).
Ideally, when the bank is about to close its shops and it has commenced liquidation or the BOT has initiated liquidation of a bank, DIB may approve the deposit insurance fund to repay back deposits of the customer of a bank, provided that the customer has lodged a claim to DIB pursuant to section 39(2) of the act. The bitter truth though remains the size of the fund, depositors/bank customers can only be paid 1.5m/, each per account, even though they deposited with their bank’s hundreds of millions, it goes therefore that, the maximum coverage of the fund per individual per account is 1.5m/.
The article is written by Yusto Habiye, Consultant – at Linex Attorneys