The National Bank of Ethiopia (NBE) has drafted the initial documents to establish a mammoth insurance company which will offer an insurance policy that will cover commercial banks in Ethiopia against any risk on the deposit that they accepted from their customers.
The new insurance company will be established as a state-owned company that will offer insurance policy to commercial banks providing coverage for risk on deposits. According to sources, the draft document has been circulating among commercial banks for comments and feedback.
The insurance policy is believed to encourage depositors and increase their trust on the financial system. According to the same sources, the insurance policy will be an exclusive business segment to the state-owned company and other insurance entities will not be allowed to participate.
Nevertheless, the operation of the company is a bit out of the regular sense of insurance business since the 0.18 percent of deposit, which will be required to be paid as a premium, carries a sense of compulsory reserve.
The document also indicates that in an event of loss of the deposits from the side of the banks, the insurance company will provide a loan to the banks so that they will honor their deposit liabilities. Furthermore, the basic aim of the insurer or the fund-manager company will be to protect depositors from unforeseen loss and failure of banks.
Nevertheless, the proposed state insurance company will not be operated as a typical insurer since buying the deposit policy is not optional to banks. The premium payment has also been treated as formal reserve requirement that the NBE has in place already.
According to industry analysts that talked to The Reporter, the proposed insurance system is something that cannot be rejected altogether but the need assessment should have been conducted thoroughly before proposing the company.
In fact, they are not sure if the Ethiopian banking sector is vulnerable to risk on its deposit or due to eventual failure of the banking system.
Thus far, NBE has two reserve directives that commercial banks have to adhere to. One is the legal requirement that obliges banks to deposit five percent of their deposit at an account in NBE. The other is what they call the liquidity requirement which requires banks to have a liquid assets reserve in order 15 percent of its assets and liabilities.
The new insurance company and the 0.18 will be over and above the 20 percent reserve requirements that banks pay at the moment.
