An explicit deposit insurance scheme as an instrument to promote financial inclusion in South Africa

Abstract

This dissertation explores the potential of an explicit deposit insurance system (“EDIS”) to promote financial inclusion in South Africa. Financial inclusion, encompassing not only access to formal financial services but also the nature and utilization of such services, is crucial for societal economic development. Originating in the United States before the Global Financial Crisis (“GFC”), the EDIS gained significant momentum and widespread recognition during the GFC for its pivotal role in maintaining financial stability. An EDIS fully reimburses depositors up to a predetermined limit in the event of a bank failure, instilling confidence in the financial system. Guided by the "Core Principles for Effective Deposit Insurance Systems" issued by the International Association of Deposit Insurers (“IADI”) and the Basel Committee on Banking Supervision, most countries worldwide have implemented deposit insurance schemes to safeguard depositors and maintain financial stability. Notably, some of these Core Principles, if appropriately implemented, can promote financial inclusion. Although IADI's primary mandate does not explicitly extend to financial inclusion, it acknowledges the EDIS's potential to enhance it. Central to promoting financial inclusion through the EDIS is the confidence instilled in customers, reducing bank runs and encouraging participation by those previously excluded due to mistrust in banks. Awareness of the EDIS and its mandate significantly contributes to building this confidence. Furthermore, the EDIS’s presence has the potential to stimulate bank competition, levelling the playing field for smaller banks. By fostering confidence in smaller banks, the EDIS encourages innovation among larger banks, ensuring diverse services that cater to the entire market. Despite South Africa’s progress in enhancing financial inclusion, a segment of the population still faces exclusion. Against this backdrop, this research examines how the recently established EDIS can contribute to promoting financial inclusion in South Africa.