A CRITICAL EVALUATION OF THE NECESSITY FOR EXPLICIT DEPOSIT INSURANCE IN MALAWI

Abstract

Many countries that faced banking crisis have adopted explicit deposit insurance (EDI) systems as a way of promoting financial stability. However, country experiences also show that EDI systems have inherent disadvantages which can produce counterproductive effects such as promoting instability of financial systems. The chief disadvantage is moral hazard. After years of research, the International Association of Deposit Insurers (IADI) and the Basel Committee on Banking Supervision (BCBS) formulated Core Principles for Effective Deposit Insurance Systems. The Core Principles if adopted plus a country’s strong institutional environment ensure that moral hazard is in check thereby enabling a country to leap the benefits of an EDI system. In 2014, following advice from World Bank and the International Monetary Fund (IMF), the Reserve Bank of Malawi (RBM) came up with a proposal for Malawi to adopt EDI. Even though Malawi has had a generally stable financial system the rationale for the RBM proposal was to be proactive by setting up EDI for future crisis situations. There has been no approval by government of the proposal three years down the line and Malawi has had no crisis that could have called EDI to use. The proposal by RBM is still pending up to now. The main objective of this paper is to critically examine the necessity for adopting the proposed EDI System.