Role of deposit insurance in promoting financial inclusion

This is a continuation from last week
Building confidence in financial institutions Deposit protection promotes financial inclusion by fostering confidence in financial institutions and potentially leading to greater savings among the poor provided they are informed about safe places to store their money.

A deposit protection scheme provides peace of mind and security to depositors in knowing that their deposits will be reimbursed in the event that their contributory institution becomes illiquid or insolvent.

Deposit protection reduces financial uncertainty, thereby building confidence in the financial system, and enhance financial intermediation on a nationwide basis, thereby promoting financial inclusion.

Promotes competition in financial sector

Traditionally, larger banks because of their size, track record and brand visibility have an edge over smaller banks in attracting deposits at lower interest rates. Deposit protection makes depositors of smaller banks feel safe and protected hence neutralise the advantages that accrue to big banks.

Potential depositors may have greater trust in banks if they believe their savings are insured and this may lead to more individuals to open bank accounts.

Financial literacy and public awareness

Most deposit protection systems carry out financial literacy and public awareness campaigns to raise awareness among the banked and unbanked public on the merits and limitations of deposit protection, deposits which are protected, coverage limits, types of providers and products are covered (or not), and safe methods of storing their money thereby promoting the use of the main stream banking.

Through various campaigns, the public are conscientised on various issues. Such campaigns are conducted through a variety of media channels, including internet, print, electronic, point of purchase, roadshows and billboards.

Compulsory coverage of financial intermediaries

Membership to DPS is compulsory to any registered deposit-taking institution.

Any depositor who banks with an insured deposit-taking institution is automatically covered, notwithstanding whether the depositor is sophisticated or not.

In some jurisdictions, deposit protection was extended to cover such financial intermediaries as credit unions, mutual funds, and informal and formal microfinance institutions and microfinance banks.

Extending protection to these institutions affords broad access to safe and affordable financial services and products to the marginalised and the unbanked public, thereby promoting financial inclusion.

Providing protection to a wide range of financial products

Deposit insurers do insure financial innovations provided by members, as long as the financial innovation meets the definition of a covered deposit.

Extending protection to these financial institutions and products offers depositors peace of mind knowing that their money is protected and may allow the marginalised to have access to basic financial service especially through microfinance institutions.

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