Deposit Insurance at the Base of the Pyramid: Pioneering a Regional Approach in the West Africa Economic and Monetary Union

Date Published: 
Feb 2014

Highlighting the approach to deposit insurance in the West Africa Economic and Monetary Union

The West African Economic and Monetary Union (WAEMU) - a customs and monetary union of the republics of Benin, Burkina Faso, Cote d'€™Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo - will be the first group of countries to introduce a deposit insurance system at a regional level. This week, we present some of the key characteristics of the regional deposit insurance system in the WAEMU, as well as the challenges of implementing deposit insurance in jurisdictions with a diverse array of deposit-taking institutions.

What is a Deposit Insurance System?

The Core Principles for Effective Deposit Insurance Systems, developed by the Basel Committee on Banking Supervision (BCBS) and the International Association of Deposit Insurers (IADI), list three elements of financial safety nets: prudential regulation and supervision, a lender of last resort, and deposit insurance. A deposit insurance system acts as a financial safety net for bank account holders in case of bank failure and aims to protect retail depositors against bank insolvencies, thereby preventing bank runs. In this respect, deposit insurance systems complement effective regulation and supervision and rules for lenders of last resort.Maisha Goss-John, a policy expert with the Federal Deposit Insurance Corporation, highlights the following pre-conditions for a deposit insurance system to work effectively: (1) Sound economic environment; (2) Strong legal and accounting framework; (3) Strong governance; (4) Effective supervision and resolution mechanisms (liquidation of failing institutions); and (5) Mandatory audited financial statements.

Deposit Insurance and Financial Inclusion

Deposit insurance is generally designed to protect less sophisticated depositors and those not well-positioned to assess the safety and soundness of the institution in question. Therefore, it can increase confidence and trust in the financial system, potentially contributing towards financial inclusion.However, despite its potential to promote financial inclusion, the expansion of coverage to other deposit-taking institutions (ODTIs), such as non-bank microfinance institutions, credit unions/financial cooperatives, and postal banks, remains a challenge.

A survey by IADI reveals that few jurisdictions accept ODTIs as part of their deposit insurance systems. Barriers include the need for the development of adequate supervision methods and resolution regimes for covered entities, the supervisory capacity and costs related to such supervision methods and resolution regimes, and the funding of deposit insurance systems. It is the area of €œdeposit-like products such as e-money (which will not yet be addressed in the WAEMU deposit insurance system) where the greatest potential lies to support financial inclusion.

Regional Approach Taken by the BCEAO

Historically, it has been the implicit responsibility of individual countries in the WAEMU to reimburse depositors when licensed deposit-taking financial institutions failed. However, this was not in line with IADI'€™s core principles, so the leaders of the WAEMU countries decided to establish an explicit regional deposit insurance system. Implementation is expected by mid-2014 and the system will be managed by the BCEAO, the regional central bank for the WAEMU countries.

At an event in May 2013 focused on the BCEAO regional deposit insurance system, Mr. Homialo Gbeasor, Director of Financial Stability Department at BCEAO, presented that the BCEAO is determined to take into consideration the specificity of each country in the development of the regional deposit insurance system, as the member-states differ in terms of level of development and prudential supervisory capacity.  He outlined the parameters of the regional deposit insurance system as follows:

  • Membership: The regional deposit insurance system will have two compartments: one for the banking sector and another for ODTIs to mitigate transmission of risk within the two parts of the financial sector. 
  • Coverage: The BCEAO still needs to define clearly the maximum level of deposit to be protected per customer, as well as the type of depositors to be covered (individuals, small medium-sized, large businesses). But its goal is to reimburse at least 80 percent of depositors (in the case of both banks and ODTIs).
  • Funding and premium setting: At the start, premiums will be determined based on the value of deposits mobilized by the financial service provider in question.  However, in the long run, the premium could be graduated according to risk (i.e., a system that seeks to differentiate premiums on the basis of individual bank risk profiles).
  • Relationships with other safety-net participants: The deposit insurance system to be put in place will not supervise financial service providers; its role is only to compensate depositors. The prudential and market conduct supervision of financial service providers will remain under BCEAO and the regional banking commission.

- Contributed by Djibril Mbengue, CGAP