Depositors' protection scheme, in vogue in many countries for the last so many years, has also been introduced in Pakistan. According to the Depositors Protection Act notified by the State Bank on 24th October, 2016, a Depositors Protection Corporation (DPC) will be set up as a subsidiary of the SBP for the protection of small depositors in order to ensure financial stability and maintain public trust in the financial system. The main objective of the DPC was to compensate depositors for loss incurred by them to the extent of protected deposits in the event of failure of a member institution. All scheduled banks, unless exempted or excluded by the board, would have to be member institutions of the Corporation and liable to pay the prescribed premium. The DPC, under the overall supervision and control of the board, will collect contributions from members and acquire, hold, manage and invest resources of the Corporation. The Corporation will guarantee full payment of funds held in depositors' accounts up to an amount prescribed by the Corporation from time to time. The Shariah-compliant mechanism of deposit protection in respect of Islamic banking institutions shall be provided in a manner as approved by the State Bank's Shariah Board. The authorised share capital of the Corporation will be Rs 1 billion or such other amount as the SBP may determine and shall be divided into shares of Rs 1 million each. However, no dividend will be payable to the shareholders of the Corporation. According to the Act of the Corporation, the Corporation will be administered by a seven-member board of directors and a Deputy Governor of the SBP will be the Chairman of the board. A professional person will be appointed Managing Director of the Corporation by the State Bank for a term of 5 years which could be extended for another term of 5 years on the basis of his performance.
The details about establishing and the proposed functioning of the DPC show that though the setting up of the Corporation has been delayed for a considerable length of time, a lot of efforts including the review of experience of such arrangements in other countries must have gone into finalising the terms of the establishment of the Corporation. All over the world, banking system is seen as a major vehicle for the promotion of economic development by mobilising savings from households spreading in all corners of the country and channelizing them into investment by extending credit lines for the entrepreneurs. Obviously, if such a financial intermediation is less than the potential or deficient in certain ways, the country cannot expect an optimum growth. This calls for all out efforts to attract maximum number of savers for placing their savings at the disposal of banks and the potential depositors will only be interested if their savings are totally safe which can only be ensured by setting up an insurance scheme or deposit protection corporation to guarantee the repayment of the deposited money to maintain public trust in the financial system. The main features of the DPC as circulated by the SBP appear to be wholesome, well-grounded and in conformity with this criteria. Since the DPC is to be managed by the SBP and all scheduled banks are obliged to take the insurance cover, the scheme will extend almost to the whole system and be subject to supervision of the most trusted financial institution (ie the SBP) in the country. The depositors, therefore, will be fully satisfied and have no fear about the safety of their funds. Complete trust in the safety of their deposits, even if a bank becomes insolvent, would induce the depositors to place more savings in their accounts, enabling the banks to extend higher level of credit for the development of the country. However, it is very clear that, like other countries, a limit has to be prescribed for the protection of deposits and deposits above that limit would continue to remain uninsured. Obviously, if such a limit is not prescribed, the premium for insurance could rise to unaffordable levels. Another issue could be the uniformity of treatment for all the scheduled banks for premium purposes irrespective of their status in terms of soundness and management of funds. If the same premium is prescribed for all the institutions, it could be considered as a favour to the weak institutions at the expense of strong institutions. Hopefully, the SBP will analyse these kinds of issues more closely before the DPC becomes operational and the scheme is actually put in place.
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