Tuesday, November 06, 2012

Bahrain changing its deposit insurance fund

The Central Bank of Bahrain held its first meeting to revise its deposit insurance for both conventional and Shari'ah-compliant financial institutions.  Bahrain has had a deposit insurance program in place since 1994, but it was a post-paid system (if a bank failed, the funds needed to repay depositors for their insured deposits would be collected ex post).  In a speech at the BIS in November 2008, Central Bank of Bahrain governor Rasheed Al Maraj acknowledged that "one of the lessons of the recent financial crisis is that it is important that depositors should be compensated promptly after their bank fails".  As a result, the CBB planned a new deposit insurance program:
Reflecting the lessons of the financial crisis, and also the recent development of international best practice standards on deposit insurance, the Central Bank is in the process of finalizing a new regulation on reform of the existing deposit protection arrangements. The purpose of this reform will be to establish a pre-funded scheme. This will be a scheme in which a fund of money is accumulated in advance of the scheme needing to make any payouts to depositors. The fund will be accumulated by regular contributions from the banks that are members of the scheme.
While it has taken a while from when Al Maraj acknowledged the need for a new deposit insurance fund (including coverage for Islamic bank deposits), it is good to see the wheels beginning to turn.  I wrote about Islamic deposit insurance--including the post-funded version used in Bahrain several months ago.

One additional point that is not directly connected to deposit insurance, but is also important to recognize from Al Maraj's speech at the BIS.  He was not naive about the spillover of the financial and subprime crisis to the GCC:
Even in the GCC the crisis has begun to have an impact. Although the GCC countries enjoy strong fundamentals, this has not shielded them from the crisis. Several have experienced significant stock market corrections. Some GCC members have needed to provide support to their banking sectors, either in the form of recapitalization funds, or by providing blanket guarantees of deposits, or by a combination of both. There is plenty of anecdotal evidence that investment projects are being delayed or scaled back.
There was some acknowledgement at the time that Islamic finance and the economies where it is most prevalent (the GCC and Malaysia) were not going to escape the credit crisis, there remained an ostrich-like obstinacy among many commentators who believed that Islamic finance could emerge from the financial crisis unscathed (it was able to weather the crisis fairly well, but was still significantly impacted).  And Governor Maraj acknowledged that likelihood, without distinguishing between conventional and Islamic banks.  So, kudos to him. 


Elaine Housby said...

I thought that accepting any form of guarantee on deposits was haraam? In the UK scholars have taken this view of the FSA scheme which guarantees all savings up to £85k. Islamic banks are legally obliged to offer it but customers are told that religiously they ought to decline it. Have I misunderstood what Bahrain are doing?

Blake Goud said...

It would be if it were a conventional deposit insurance fund, but it is separate fund from the conventional deposit insurance fund. Think of it as a takaful fund between the banks. And the funds would be invested in only Shari'ah-compliant assets.