The pioneering sovereign deposit insurer, the Ethiopian Deposit Insurance Fund (EDIF), is undertaking a major step to enhance its operational efficiency vying to deploy an automatic payout system for depositors. Aimed at bolstering public confidence in the financial system, the one-year-old Fund looks to revolutionize how depositors are reimbursed in the event of a financial institution’s failure.

EDIF’s leadership is optimistic that the automated payout system will streamline reimbursement processes, offering immediate financial relief to depositors impacted by sudden bank failures. Desalegn Ambaw, CEO of EDIF, noted that the fund is preparing a request for proposal (RFP) document with the assistance of experts from the Commercial Bank of Ethiopia (CBE) and the National Bank of Ethiopia (NBE).

“The cost required will be very high,” Desalegn stated, indicating that the fund is also pursuing development financing options with discussions ongoing with the World Bank and other financers to secure funding for the system.

Since its inception last year, EDIF has amassed 6.51 billion Br in premiums from all commercial banks and microfinance institutions (MFIs) over four instalments, constituting 0.3pc of their average deposit balances. CBE is the largest contributor, accounting for 49pc of the total funds raised. Last year, deposit mobilisation across the country's 85 financial institutions reached 2.05 trillion Br.

To optimize returns on its assets, EDIF has invested a significant portion—5.94 billion Br—into treasury bill bonds and 540 million Br in a Mudaraba account with CBE, strategically aiming for profitable yields while expanding the bank's portfolio.

The Fund’s recent performance report, presented at Zemen Bank’s headquarters building where its main office resides, underscores its commitment to fortifying depositor confidence and enhancing financial stability, according to Desalegn. The global financial crisis of 2008 underscored the critical need for robust deposit insurance frameworks worldwide, and Ethiopia is the 148th country to establish such a mechanism. This initiative is particularly timely, given the recent challenges faced by the country’s banking sector, which has experienced failures that put depositor funds at risk.

Experts argue that Ethiopia's banking sector has consistently faced risks to depositor funds but has seemingly survived due to accommodations and regulatory forbearance. Some contend that this approach may have masked underlying vulnerabilities.

The Ethiopian government allocated an initial 50 million Br to EDIF out of a total of 200 million Br earmarked by the Ministry of Finance (MoF). Desalegn states that this initial startup capital of the Fund only serves as a contingency plan to ensure timely disbursement to depositors when necessary. The fund aims to grow its direct collection from banks to approximately 7.3 billion Br while expanding its investment strategies to strengthen its financial position.

Currently, only deposits of up to 100,000 Br are covered by the Fund. Lack of resources has forced this limitation. Still, 97pc of depositors have less than 100,000 Br in their accounts. "We have covered most of the population," he said.

The Fund provides deposit insurance with certain exceptions. Deposits between financial institutions, deposits by government agencies and state-owned enterprises, deposits of financial institution executives, foreign auditors, court-revoked deposits, and deposits by major shareholders are not covered by EDIF.

In addition to improving operational efficiencies, EDIF is working to enhance its connectivity with financial institutions through a digitized platform and also plans to reassess fixed premium rates based on each institution's size and risk profile, thus creating a more prudent regulatory environment.

Last year, EDIF commenced its operations by issuing a directive to regulate the financial sector's participation in the deposit insurance scheme, aiming to strengthen the fund's regulatory capabilities. This followed the enactment of the first deposit insurance legislation by the Council of Ministers four years ago.

Merga Wakeya, the operational manager and key architect of EDIF’s formation, highlighted the intention to tailor premium rates according to the risk assessments of individual financial institutions in the long run. This approach could potentially strengthen the financial sector’s resilience but requires the institutional capacity of the Fund to grow. However, some financial veterans warn that such measures could inadvertently create instability if not managed carefully.

While acknowledging the limited coverage of the 100,000 Br insurance, he noted that the collected funds have been too small and expressed plans to expand the Fund, emphasizing the upcoming capital market's potential for investment growth. "Managing our liquidity is important to us," Merga said.