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KARACHI: The State Bank of Pakistan (SBP) on Friday launched the Deposit Protection Corporation (DPC) to provide protection for the depositors in the event of a bank failure.

The DPC is a wholly-owned subsidiary of SBP and is a deposit protection mechanism for depositors. The protected amount has been determined to be Rs250,000 per depositor per bank. “All commercial banks are members of this scheme and will be paying the required premium,” said the SBP in a press release.

The establishment of DPC was envisaged as one of the important objectives in SBP’s strategic plan 2016-2020 under the strategic goal titled “strengthen the financial system stability regime”. The idea of introducing deposit insurance was first introduced through the IMF facility that Pakistan signed in November 2008. It has been a work in progress ever since.

The financial system faced a severe liquidity crunch in those days, prompting extraordinary steps from the SBP to shore it up. Even though a bank failure did not occur, the experience was enough to put deposit protection onto the policy radar.

“The objective of DPC is to compensate the small and financially unsophisticated depositors to the extent of protected deposits in the unlikely event of a bank failure,” said the SBP.

The SBP said the stability of their financial systems is of paramount concern for policymakers around the world. The SBP has a comprehensive framework to ensure safety and soundness of the banking system of Pakistan, it added.

Establishment of a formal deposit protection scheme will be beneficial for Pakistan as it will build up sizable funds, through premium payments from banks that can be used to provide immediate liquidity to small depositors in case of a bank failure, said the SBP.

The scheme will not only reduce burden on the exchequer, the SBP claims, but will also improve the financial stability in the system.

“The SBP’s effective supervisory regime has ensured that depositors do not lose their money and that public confidence in the system remains strong,” said the SBP.

The SBP said the implementation of deposit protection will further strengthen the overall regulatory architecture and safety of deposits.

While key pillars of this framework, namely strong banking laws and regulations, and effective supervision have been in place for a long time; the introduction of deposit protection is a recent addition, which will reinforce the bank resolution regime of SBP

The design features of deposit protection mechanism in Pakistan are mostly in line with the principles laid out in the ‘Core Principles for Effective Deposit Insurance Systems’ issued by International Association of Deposit Insurers (IADI).

Published in Dawn, June 23rd, 2018