An Examination of the Law on Deposit Guarantee and Resolution Fund in the Burundian Banking Sector

ABSTRACT 

Deposit Insurance schemes are currently recognised by the general consensus as being vital to financial system’s stability by protecting depositors from incurring large losses due to deposit taking institutions’ failures and preventing them from engaging simultaneous withdraws when these institutions’ solvency is questioned; provided that the scheme is well established by a clear legal framework. Burundi also took a significant step toward Deposit Insurance, when in August 2017 the Financial Institutions Act introduced a Deposit Guarantee and Resolution Fund through two provisions. However, in order to be credible for the stakeholder, a Deposit Guarantee or Deposit Insurance, as it is most commonly referred to, has to be well provided legally. There are even basic aspects of the Deposit Insurance that must be clearly set by law and that are recognised by international standards. Unfortunately, the provisions on the Burundian Deposit Guarantee and Resolution Fund in Burundi do not seem to meet these criteria. This research therefore highlights the deficiencies that should be adjusted in the banking sector toward depositors’ protection and the deficiencies of the law on Deposit Guarantee and Resolution Fund in Burundi and proposes enhancements based on Deposit Insurances Funds’ key provisions in selected countries which the Burundian law-makers and law enforcers can use as references in improving the law governing the Deposit Guarantee and Resolution Fund.

TABLE OF CONTENTS

DECLARATION ................................................................................................................ i

APPROVAL........................................................................................................................ii

ACKNOWLEDGEMENT .................................................................................................iii

LIST OF STATUTES ........................................................................................................iv

STATUTES ........................................................................................................................iv

ABBREVIATIONS............................................................................................................ v

LIST OF CASES ................................................................................................................vi

TABLE OF CONTENTS ..................................................................................................vii

ABSTRACT....................................................................................................................... x

CHAPTER ONE............................................................................................................... 1

GENERAL INTRODUCTION ....................................................................................... 1

1.1. Background to the study.............................................................................................. 1

1.2. Statement of the problem ............................................................................................ 4

1.3. Research objectives.....................................................................................................5

1.3.1 General objective.......................................................................................................5

1.3.2 Specific objectives.....................................................................................................5

1.4. Research questions...................................................................................................... 5

1.5. Significance of the study.............................................................................................6

1.6. Scope of the study .......................................................................................................6

1.7. Research methodology ................................................................................................7

1.8. Literature review .........................................................................................................7

1.9. Research structure .....................................................................................................13

CHAPTER TWO............................................................................................................ 14

THE LEGAL NATURE OF THE BANKING SECTOR OF BURUNDI................. 14

2.1. Introductory background ........................................................................................... 14

2.2. The Central Bank of Burundi....................................................................................15

2.3. The Financial Institutions Act 2017 .......................................................................... 18

2.4. The Commercial Banking environment .................................................................... 20

2.5. Development banks and non-bank financial institutions ..........................................21

2.6. Microfinance institutions...........................................................................................21

2.7. An overview of the conditions surrounding banks’ failures in Burundi ...................23

2.8. The collapsed banks’ profile ..................................................................................... 24

2. 9. The legal remedies to customers of failed Banks..................................................... 27

2.10. Conclusion............................................................................................................... 32

CHAPTER THREE ....................................................................................................... 33

LEGAL ANALYSIS OF THE DEFICIENCIES OF THE DEPOSITORS’ PROTECTION IN THE BURUNDIAN’S BANKING SECTOR ............................. 33

3.1. Introduction ...............................................................................................................33

3.2. The legislative developments....................................................................................33

3.3 The deficiencies..........................................................................................................41

3.3.1. The deficiencies in the protection of depositors before failures ............................41

3.3.2. The deficiencies of the provisions on the Deposit Guarantee and ResolutionFund48

3.4. Conclusion.................................................................................................................50

CHAPTER FOUR ..........................................................................................................52

PERSPECTIVE ON DEPOSIT INSURANCE FUND IN SELECTED COUNTRIES ................................................52

4.1. Introduction ...............................................................................................................52

4.2. Generalities on Deposit Insurance.............................................................................52

4.2.1. The main subdivisions of Deposit Insurance schemes...........................................54

4.2.2. Some arrangements’ models of explicit DIS..........................................................57

4.2.3. The Financial safety net .........................................................................................58

4.3. The International Association of Deposit Insurance (IADI).....................................60

4.4. Deposit Insurance Funds Models ..............................................................................62

4.4.1. The Ugandan Deposit Protection Fund ..................................................................62

4.4.2. The Kenyan Deposit Insurance ..............................................................................66

4.4.3. The Malaysia Deposit Insurance Corporation........................................................71

4.5. Conclusion................................................................................................................. 77

CHAPTER FIVE............................................................................................................ 79

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS ................................. 79

5.1. Study findings ........................................................................................................... 79

5.2. Recommendations..................................................................................................... 81

5.2.1. To enhance the efficiency of the laws governing the banking sector toward depositors’ protection in order to enhance this protection and to lay solid foundation for the introduction of the Deposit Guarantee and Resolution Fund in the Burundian banking sector ............................. 81

5.2.2. To provide further and better on the Deposit Guarantee and Resolution Fund .....82

5.3. Conclusion................................................................................................................. 84

BIBLIOGRAPHY .......................................................................................................... 86