Concerns over the security of bank deposits have persisted among South Africans, particularly in the aftermath of previous banking upheavals such as the VBS Mutual Bank collapse. Addressing these apprehensions head-on, a novel depositor insurance initiative has been unveiled to furnish confidence and safeguard for bank clientele. Effective April 1, 2024, the Corporation for Deposit Insurance (CODI), an entity under the auspices of the South African Reserve Bank (SARB), has launched operations, furnishing coverage of up to R100,000 for eligible depositors in the event of institutional insolvency. This innovative scheme also encompasses accredited South African digital banks, ensuring comprehensive protection for depositors across the financial landscape.

Operational Framework

The inception of the deposit insurance scheme follows the establishment of CODI and is rooted in provisions outlined in the Financial Sector Laws Amendment Act 23 of 2021. According to SARB, CODI’s core responsibilities encompass the establishment, maintenance, and administration of a deposit insurance fund. This fund serves to shield covered depositors in the event of a bank’s collapse, thereby instilling confidence among consumers in the banking sector. Governed by the International Association of Deposit Insurance, CODI adheres to global standards in deposit protection, ensuring a comprehensive framework for safeguarding bank funds and savings.

Several major banks, including Nedbank, Discovery Bank, Investec Bank, TymeBank, and First National Bank, have enrolled in the scheme.

Sabihah Mohamed, CEO of CODI, emphasized the integration of the scheme within South Africa’s financial safety net, aligning with regulatory bodies such as the Prudential Authority and the Financial Sector Conduct Authority (FSCA). Central to CODI’s operation is a depositors’ insurance fund, funded by member banks’ premiums and contributions, alongside a deposit insurance levy.

Protection Measures

Under CODI, qualifying depositors, including individuals and non-financial businesses, are entitled to protection for balances up to R100,000 across various banking products, encompassing savings, transactional, current accounts, and fixed deposits. In the event of a bank failure, depositors will be provided access to their funds, with CODI aiming to streamline the process within three to seven days, aligning with international best practices.

Lesetja Kganyago, Governor of SARB, underscored CODI’s role in mitigating the risk of “bank runs,” where depositors withdraw large sums amidst concerns of a bank’s solvency. Such incidents, reminiscent of the 2002 Saambou Bank crisis, undermine financial stability and erode public trust. With CODI in place, depositors are encouraged to have faith in the safety of their funds across all member banks, fostering a more resilient and diversified banking sector.

Despite the comprehensive coverage provided by CODI, concerns linger regarding the extent of protection offered, with the R100,000 cap representing less than 23% of total deposits. Nevertheless, SARB estimates that over 90% of depositors will be fully covered under the scheme.

Historical Context and Regulatory Imperatives

South Africa’s history of banking failures, including notable cases like Saambou Bank (2002), African Bank (2014), and VBS Mutual Bank (2018), underscores the need for robust deposit protection mechanisms. The fallout from the VBS saga, termed “the great bank heist,” exposed systemic vulnerabilities and prompted calls for regulatory reform.

Finance Minister Enoch Godongwana emphasized the imperative of restoring public trust in financial institutions, citing global trends of declining confidence post-2008 financial crisis. Structural reforms, including the establishment of CODI, signal a commitment to accountability and transparency within the financial sector, vital for fostering long-term stability and investor confidence.

Coverage and Participation

CODI’s mandate extends to all registered banks in South Africa, encompassing commercial banks, mutual banks, co-operative banks, and local branches of foreign banks. Notable South African digital banks like TymeBank, Bank Zero, and Discovery Bank are among its members, showcasing diverse participation in the banking landscape and a commitment to accept liabilities in case of failure.

However, fintech companies not classified as banks are excluded from CODI’s coverage, subject to regulatory approval for contractual arrangements with banks. While this presents limitations for fintech customers, partnerships with traditional banks offer avenues for extending coverage to a broader customer base.

Implications for Consumers

The implementation of CODI signifies a pivotal shift in consumer behavior and market dynamics. Yatin Narsai, CEO of Bank Zero, emphasizes the potential of deposit insurance to instill trust in newer banks, challenging the dominance of traditional players. With explicit protection for deposits, customers are empowered to explore alternative banking options, driving competition and innovation within the sector.

Moreover, CODI’s operationalization introduces novel features benefiting consumers, such as individual protection for minors and automatic coverage for club accounts like stokvels. 

The launch of CODI heralds a new era of stability and confidence in South Africa’s banking sector, particularly among South African digital banks. By fortifying deposit protection mechanisms and fostering trust among consumers, CODI paves the way for a resilient and competitive financial ecosystem. As regulatory frameworks continue to evolve, CODI stands as a cornerstone of financial resilience, safeguarding the interests of depositors and ensuring the integrity of the nation’s banking system.

Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert. As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard.