Deposit Insurance is one of the mechanisms employed by governments to promote the stability of the banking systems and consequently stability of financial system. It is a complementary element of an extensive financial safety net that includes banking law and regulations, lender of last resort and banking supervision. Deposit Insurance Systems are intended to protect small depositors from losses resulting from a failed banking institution.
Deposit Insurance System was first introduced in the United States in 1933 following the Great Depression. Deposit Insurance has since then been established in more than 100 countries, spanning to all continents. In many countries, the main objective of the deposit insurance system has been to protect small depositors of banks and deposit taking financial institutions from loss since most of them cannot cost-effectively analyze information on financial statements of banks and deposit taking financial institutions where they deposit their money.
Deposit Insurance in Tanzania
The financial sector reforms of the 1990s in Tanzania recognized the importance of having a Deposit Insurance System in the country for the purpose of contributing to financial stability and public confidence in the financial system. Accordingly, private foreign banks and financial institutions were allowed to operate under the market-driven principles.
The Deposit Insurance Board (DIB) and the Deposit Insurance Fund (DIF) were established under the Banking and Financial Institutions Act, 1991 (BFIA,1991). The operations of DIB started in 1994 under the auspices of the Bank of Tanzania (BoT). The DIB is vested with pay box plus mandate and is responsible for policy formulation, management, and control of the Fund (DIF). Following the repeal of the BFIA, 1991, the DIB continue to operate under the Banking and Financial Institutions Act No. 5 of 2006.
Like other deposit insurance institutions in the world, the main objective of DIB is to provide protection to small depositors against the risk of loss of their deposits arising from failure of banks or financial institutions and thereby maintaining public confidence in the banking and financial system.