Regulatory Regime Governing Deposit Insurance under the Ethiopian Law: A Comparative Review in Light of International Core Principles’ Perspectives

Abstract

Adopting deposit insurance has become an increasingly custom to ensure the stability of banking systems and protect bank depositors from incurring large losses due to bank failures. Almost in all jurisdictions there are financial safety nets in place to guarantee the safety of the banking system and its depositors. It also inspires trust in the system and safeguards against any shocks. It has got a global recognition which has got the status of international core principles of deposit insurance. Unlike its previous trend, Ethiopia is recently taking significant measures to liberalize the previously state owned service sector. In September 2022, the Ethiopian council of ministers have approved the long awaited act the national financial policy that allows foreign banks to engage in banking business in Ethiopia. This measure is very significant as it marks a breakthrough in the opening of the door for foreign banking investment in Ethiopia. It was revealed in many studies that countries which undergone a finance liberalization have encountered a financial crisis. In most of the states, explicit deposit insurance has been adopted after they have encountered a banking crisis. Unlike these states, Ethiopia has not yet experienced any events of bank failure. However, the country has enacted a regulation that governs the Establishment and Operation of Ethiopian Deposit Insurance Fund ahead of banking liberalization to foreign banks. Hence, this step can be quantified as a wise approach measure that has drawn lessons from other states’ failure. In this paper, a modest attempt is made to comparatively review the Ethiopian deposit insurance regulation in light of the international core principles that serve as standard for harmonization. The Ethiopian deposit insurance legislation stepped miles to accommodate most of the core principles of the IADA and BCBS. The law governs deposit insurance by explicitly separate legislation in addition to the prudent legislation provided for regulating the financial sector. Most of the contents of the legislation comply with core principles of DI. However, there are also loopholes and vagueness in governing specific issues of deposit insurance that should require reconsideration in the subsequent legislation.