IT has been a decade in the works, but the eventual announcement by the State Bank of the launch of a deposit protection scheme for banks is a big achievement and was much needed. The scheme provides for protection for depositors in the event of a bank failure. Such an event has never happened in Pakistan’s history, a fact rarely appreciated in commentary on the economy. But on a few occasions, matters have come close to it. The biggest example is from the crisis of 2008, when the financial system was hit by large-scale withdrawals of liquidity, leading to the closure of the stock market and the near freezing up of the overnight lending market between banks. A few emergency steps taken by the State Bank in those days, under the leadership of the current interim Finance Minister Shamshad Akhtar, helped stop a trend that was fraught with systemic risk for the banking system. That is when the idea of extending deposit protection was first floated, in discussions with the IMF, and launching the scheme has been an important part of the two Fund programmes Pakistan has had since then.

Now that the scheme has finally been launched, it is important that its scope be extended over time. The quantum of protection it provides — up to Rs240,000 per depositor — must be raised with the passage of time to cover almost the full amount. The stronger the protections afforded to depositors, the more confidence our banking system will command, and the greater the incentive will be for each individual bank to ensure its balance sheet retains sufficient strength even in high-stress situations. Such a scheme is badly needed in the stock market, and the broker community must also be tied to mutual and reciprocal commitments in order to ensure that investors are protected against flight risk. The stock market has seen far more instances of the trust of investors being violated by unscrupulous brokers and needs protections of this sort, the cost of which should be borne by the broker community itself to encourage self-policing. Of course, such protections cannot be extended to losses suffered on the trading floor. Another question mark over the scheme concerns foreign currency accounts. It is undoubtedly difficult for the State Bank to furnish similar protections to these, even though this is one area where there is a real example of freezing having occurred. In time, this question mark should also be addressed.

Published in Dawn, June 24th, 2018