Monday, June 25, 2007

Less than 6% of total bank depositors in Jordan control 83% of overall deposits

(MENAFN - Jordan Times) AMMAN — Less than six per cent of total depositors in the Jordanian banking system control 83 per cent of the overall deposits, the head of the Deposit Insurance Corporation (DIC) said in a lecture.

DIC Managing Director Mohammed Al Jafari told a seminar, held recently at the Association of Banks in Jordan, that the JD10,000 deposit insurance ceiling covers 94 per cent of depositors who hold 17 per cent of overall deposits.

He clarified that the JD10,000 insurance ceiling does not mean that large depositors would lose everything because the DIC is responsible to follow up on the situation of the bank under liquidation. If a surplus of funds is found, it will be distributed to the rightful persons.

There is no law for large depositors because deposit insurance puts the responsibility on them to follow up the situation of their banks and choose the one suitable for depositing money at.

"When the DIC was established six years ago, the government and the taxpayers became no longer responsible for the cost of rectifying a troubled bank for any reason," Jafari said.

The government is obliged to protect the interests of small depositors and ensuring that large depositors and shareholders get their entitlement after the liquidation of a bank, he added. Accordingly, the DIC is only responsible to compensate small depositors immediately and directly as the government of Jordan is no longer responsible or obliged to pay one dinar to sort out the mess of a troubled bank. The banking system is responsible to pay the cost of handling troubled cases.

The regulations of deposit insurance take responsibility for maintaining the rights of remaining depositors from the bank's own assets and not from public funds.

"In the Jordanian banking system, the average deposit is less than JD4,000," he pointed out.

"This means that the deposit insurance is 2.5 times the average size of deposits in banks," Jafari stressed to show that the JD10,000 ceiling is sufficient and in conformity with the main objective for establishing a deposit insurance.

According to the DIC head, the international standard of deposit insurance is double the average deposit volume. "In this regard, we are much higher," he remarked.

Moreover, he highlighted the insurance ceiling in Jordan to be more than fivefold the average annual per capita income describing the ceiling as high compared to those in the United States, Europe and other countries.

For example, the average per capita income in Jordan is around JD2,000 and the insurance ceiling is approximately five times the average per capita income in the Kingdom.

The international practice points to 3-4 times. In the United States, for example, the insurance ceiling is $100,000 but the average per capita income there is $33,000. Therefore, the $100,000 in the United States is less than the JD10,000 in Jordan.

In the European Union countries, the insurance ceiling is 20,000 euros, but the amount, measured by the per capita income in Jordan, is less than the JD10,000.

"In other countries like Sudan and Bangladesh, we speak about hundreds of dollars. Speaking about Lebanon, the Arab World's first depository system, the amount is $5,000 which is very high measured by this standard or according to the general income in Jordan," he indicated.

Noting that deposits of the government and inter-bank deposits are excluded from the insurance, Jafari said the corporation insures only deposits that are in Jordanian dinars although the type of currency remains an open issue as the legislator anticipated cases of widening the scope of insurance to other currencies.

The lecturer told the large group of bankers, interested persons and guests who attended the seminar that the insurance experience, in accordance with clear legislation and a ceiling to put a portion of responsibility on the depositor, goes back to the 19th century. But the more evident institutional form appeared in the 1930s and, specifically, when the Federal Deposit Insurance Corporation was established in the United States to face major troubles.

"The problem was always in the anxiety and widening concern of trust failure in the banking institutions if there was no deposit insurance," he said.

The managing director added: "Accordingly, governments gradually formulated an explicit system to insure deposits whereby the responsibilities of various parties were specified, such as the accountability of the bank, the responsibility of the depositor and the duty of the official party that looks after the objectives of public policy like the DIC."

By specifying the responsibility of the government and that of deposit insurance institutions with a fixed ceiling towards the depositors, large depositors have to shoulder the responsibility of monitoring and following up on the situation of banks. The philosophy and the positive results sought from deposit insurance lies in what is not insured by the system and not what the regulations guarantee.

Noting that deposit insurance in brief is about adopting an explicit compensation system with specific ceiling for all depositors in the banking system, the managing director indicated that there are more than 100 deposit insurance institutions in the world.

"Most world countries which have advanced banking systems, adopt an explicit method for deposit insurance," the lecturer elaborated. "The concept is very simple. If deposits are not insured, no one will trust a bank and place money in it."

The main concern regarding deposit insurance is that it encourages irregular banking practices. In other words, if the deposit is insured and the bank's funds are secured, the depositor's motive to search for the bank that is more safe and sound would be weaker as long as the money is explicitly guaranteed by the Treasury.

Consequently, deposit insurance encourages prudent practices in the banking system as long as this insurance remains specified at a certain ceiling. Even competition will have a flavour that is different from the traditional competition that relies only on return and interest rate.

Jafari emphasised that there is no explicit insurance in the world that guarantees the deposits in full because such insurance kills incentives.

He mentioned that governments intervened to guarantee explicitly all the money of the depositors in extraordinary cases, the last was that of Kuwait, when Iraqi forces invaded Kuwait. Once the extraordinary case ended in that country, the decision was withdrawn.

As deposits are no longer guaranteed by the government, Jafari said the availability of insurance is a problem and its non-availability is also a problem.

"There is a segment of the public that does not have substantial amounts of funds and, at the same time, it is not reasonable to have this segment responsible for studying the situation of banks and do the analysis for it as well as examining the risks of a certain bank in order to determine whether to deposit money in it," he explained.

As such, "we are talking about a system that guarantees the continuity of the incentives structure in the banking system and prevents risky and unsound practices while, at the same time, protects the interests of small depositors."

Going into further details about deposit insurance, Jafari said that membership in the DIC is mandatory for all banks operating in the Kingdom. But branches of Jordanian banks operating abroad are not subject to the mandatory membership in accordance with the law.

The membership is mandatory for all banks operating in Jordan whether they are Jordanian banks or foreign banks licenced to operate in the Kingdom. The sole exception from membership are Islamic banks noting that Jordan is the only exception from the international practice in this regard.

The gross total of fees collected from member banks amounted to JD18.8 million of the deposits under coverage at the end of 2006. Consequently, the corporation's reserves increased to JD109.5 million representing 1.4 per cent of the gross amount of deposits subject to the law's provisions.

The institution's resources are limited according to the law but the basic or received capital, amounting to only JD1 million, was paid by the Treasury.

The JD1 million was the government's contribution in the DIC's capital and each bank licensed to operate in the Kingdom is obliged by the law to pay JD100,000 to the corporation's capital which amounts now to JD3.1 million — JD1 million paid by the Treasury and JD100,000 from each bank.

The subscription fees that banks pay annually to the corporation are its main resource for financing and building the reserve. The subscription fee in Jordan is JD2.5 per thousand of the overall deposits subject to the law. These cover all deposits except those of the government, inter-bank deposits and deposits in overdraft accounts which represent the ceiling of credit facilities extended to clients.

Noting that the corporation's law aims at forming reserves up to 3 per cent of the total deposits subject to the provisions of the law, the lecturer said such a level is estimated to be reached when the DIC completes 13-14 years of operations. At that time, the DIC will stop collecting fees from the banks.

At present, the size of the reserves is JD110 million, which equals nearly 1.4 per cent of the overall deposits subject to the provisions of the law. "We are today at midway after six years from establishing the corporation. Once the reserves reach 3 per cent of total deposits subject to the provisions of the law, the corporation will stop collecting fees," he said.

However, Jafari indicated that the growth rate of deposits when compared to the return on investment may destabilise the balance prompting the corporation to go back to collecting fees from banks.

The DIC is not linked to any party as it is an institution that is financially and administratively independent. After the establishment of the DIC in 2000, the corporation became the only legal liquidator to any bank which the Central Bank decides to liquidate.

Upon issuing a liquidation decision, a bank's management is immediately transferred to the DIC which is concerned with safeguarding the interests of all parties associated with the bank.

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