The South African Reserve Bank has launched the Corporation for Deposit Insurance (CODI) which manages the country’s new Deposit Insurance Fund (DIF). This is a dedicated insurance fund that provides protection for bank deposits of up to R100 000 should a bank fail.

The fund became operational on 1 April 2024, and brings South Africa in line with other countries which introduced deposit insurance in response to the 2008 global credit crisis. By 2014 around 113 countries had instituted some form of explicit deposit insurance.

While the Reserve Bank has stepped in to support retail depositors in the past, with the collapse of African Bank and VBS Mutual Bank, this was on a case-by-case basis and was funded by taxpayers. This put pressure on government’s reserves and there was no explicit guarantee that the state would step in to assist.

Creating a fully funded insurance scheme means that the Reserve Bank will have the working capital needed to resolve bank failures quickly and provide confidence in the market. This confidence can reduce the risk of a run on the bank.

Deposit insurance limited to R100 000

The guarantee has been set at R100 000 per qualifying depositor per bank, which covers around 90% of depositors according to the Reserve Bank. However, given that there are large depositors such as businesses, investors, and high-net-worth individuals, in terms of rand value, only about 23% of deposits are insured.

As Reserve Bank governor Lesetja Kganyago explained at the launch, most people don’t think of themselves as investors in banks. “Depositors believe that the money is put in a vault and kept for when they need it,” he said.

Few people understand that their deposits become assets of the bank, which the bank lends out to earn interest. If a bank mismanages its loans, this puts depositors’ funds at risk.

Which banks are included?

All banks, including mutual banks, cooperative banks and local branches of foreign banks will be members and the cover will be automatic. This means qualifying depositors will not have to apply to be covered.

The big winners here will be the smaller banks. Until now the larger banks have benefited from the trust advantage. Depositors have worried about the risk of depositing their savings with smaller banks despite the higher interest rates or lower fees offered.

Premiums to the fund will not be based on risk profile, so smaller banks will not be paying a higher premium per deposit covered, which means the large banks, which have more depositors, will be paying substantially more for the cover, although the risk of default is lower.

What if I have more than one account?

The deposit insurance will only cover up to R100 000 per depositor per bank. If, for example, you have two accounts with the same bank, each containing R100 000, you will still only receive protection on the first R100 000.  A depositor can claim balances of more than R100 000 from the estate of a failed bank, which will be handled by the liquidator.

Are business accounts included?

The good news is that qualifying accounts held by businesses or sole proprietors will be covered separately from an individual’s personal bank account. This is more reason for a sole proprietor to keep a separate business account as the business would qualify for deposit insurance.

Will it cover my fixed deposit?

The insurance covers current accounts and savings accounts such as call accounts, fixed deposits and money market accounts. It also includes accounts in foreign currencies.

It does not cover investment accounts such as unit trusts, exchange-traded funds or shares. It is important to note that money market funds offered by unit trusts would, therefore, not be protected.

Deposits by banks, investment managers, government or municipalities will not be covered.

How deposit insurance works

The Corporation for Deposit Insurance (CODI) is a subsidiary of the Reserve Bank but its affairs are managed by an independent board. SARB covers some operational costs to keep CODI’s operational costs low.

Banks will pay a deposit insurance levy to CODI and a monthly premium to the Deposit Insurance Fund (DIF). CODI will use the annual levy to cover its running costs, while the DIF premiums will be used to reimburse covered depositors.

The premium will be 0.2% of the bank’s covered deposits, divided by 12 months. This cost is likely to be absorbed by the banks and will not be charged directly to qualifying depositors.

Initially, all member banks’ contributions to CODI will be based on the same percentages irrespective of the risk of the bank. This means there will be some cross-subisidation of risk between large banks and smaller banks.

However, according to SARB, CODI intends developing a risk-based contribution system over time.

Banks will submit depositors’ information (names, accounts and balances) to CODI regularly. CODI will use this information to calculate what the bank must pay to CODI for deposit insurance protection.

When a bank is liquidated, CODI will use the DIF to pay out the failed bank’s covered depositors by using electronic funds transfers (EFTs) or through a payout agent bank.

Currently the timeframe is to pay out the funds within 20 days, however this is to be reduced by three to seven days in line with global best practice.

Guarantees for stokvels

Under CODI a stokvel account is seen as a single entity and therefore irrespective of the number of members, only the first R100 000 will be guaranteed. This is an important consideration for stokvel members.

Some banks like Bank Zero offer stokvel accounts where there are separate profiles for each member of the club, thus providing R100 000 of total cover for each member across their club contributions and other Bank Zero accounts.

This article first appeared in City Press.