ISLAMABAD, Pakistan: The Senate on Friday unanimously passed ‘The Deposit Protection Corporation Bill-2016’ to ensure an effective banking system in the country.
The Bill was moved in the Upper House of the Parliament by Minister for Law and Justice Zahid Hamid on behalf of Minister for Finance Muhammad Ishaq Dar.
The statement of objects and reasons of ‘The Deposit Protection Corporation Bil-2016’ says the deposit insurance is considered an integral safety-net tool to ensure the soundness of the banking system and protect small depositors of a bank in case of its failure.
The banking system in Pakistan has become increasingly private owned sector through the privatization of the once dominant state-owned banks and the entry of new banks.
Consequently, the share of public sector banks has dropped from 92 per cent in 1990 to around 19 per cent in March 2015.
However, the legal framework originally promulgated for nationalized banks has not kept pace with these developments. While the deposits of all state-owned banks were protected through government guarantees at the time of nationalization, de-nationalization coupled with entry of new banks has left the safety of deposits to an arbitrary and implicit depositors protection by the government or the State Bank of Pakistan in case of private-sector owned bank fails.
The existing system of implicit deposit protection creates huge moral hazard. In order to reduce the moral hazard implicit in the present system and to protect small depositors, it is proposed to introduce an explicit depositor insurance schemes through DPC which will compensate depositors up to prescribed limited amount in case of a bank’s failure.
The DPC will be fully owned subsidiary of the State Bank and ensure the soundness of the banking system. The arrangement will yield maximum synergy and cost-saving due to close coordination of the DPC with the State Bank’s supervisory functions and resources.
