Deposit Insurance scheme is an insurance system support by insured bank and administered by either a government agency or a private sector organization for the purpose of protecting the banking system and offering some financial guarantee to depositors.
It not mainstream insurance show in such misconstrued by some people,The different with ordinary insurance show in such area as admissibility for cover,rating system ,off site surveillance and on site examination of institutions covered ,among other area.
The financial guarantee function of a deposit insurance scheme tends of secondary important when compare to the protection to be offered by the scheme to the banking system against runs emphasized the insurance function of a deposit insurance scheme and have given prominence to the protection function in the naming of their scheme.
For example in the united kingdom, the nomenclature adopted is deposit protection funds which gives prominence to bank deposit protection function.
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Reasons for Deposit Insurance Scheme
The main reasons for establishing deposit insurance scheme are for protective measure .I.e. protecting bank depositors ensuring financial stability and promoting competitive efficiency and equality ,some of the reasons identified are:
1 Against Risk: the deregulation of the financial in Nigeria in 1986, opened the way for many banks in the country.It encourage competition among the institutions also it was expected to encourage risk taking by banks. such risk were bound to put depositors funds at risk.It was then necessary for deposit insurance scheme to protect the depositor funds and the banking system.
2. Against bank failure: The establishing of deposit insurance scheme serve as a signal of change in government in protecting and supporting both the customers and the banking sector against bank failure.It serve as an insurance for the depositors as protection of customers is being carried out in an increasing competitive banking environment, even when bank failure were being expected.There is that confidence that deposit insurance scheme can protect their deposits.
3. To boost Confidence: The protection of the banking system from runs and depositors from losses , was expected to ginger greater confidence in the banking system.In turn the increasing public confidence in banks was expected to attract even more deposits and as well encourage banking habit
Banks are expected to profit from greater volume of deposit and the larger number of loan customers in a stable and competitive banking environment.
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4. As a moral duty by the government : Before the establishment of central bank of Nigeria CBN in Nigeria most depositors suffered greatly ,especially when 21 banks failed between 1930 and 1954.
Based on that government don’t want such to repeat itself any longer, looking at the hardship that are faced by depositor, especially as the banking system was bound to be competitive and sophisticated following deregulation. Government has moral duty to protect the unsophisticated bank customers through the establishment of a formal deposit insurance scheme.