Financial sector of Bangladesh is dominated by the banking.The poor performance of capital market emphasizes the importance of the bankingsector's stability. It requires multilayer protective mechanism; depositinsurance system is one of them.
The deposit insurance system is designed to eliminate the risk of losingdeposit with a bank as it offers protection to, at least, the small savers.Generally, the lower amount of deposit that remains under the coverage of thescheme represents whole or bulk share of savings of small depositors.
The Bank Deposit Insurance Ordinance, 1984 was first promulgated as a part of the government safety net programs. Subsequently, an Act of the Parliament called the "Bank Deposit Insurance Act, 2000" passed repealing the ordinance of 1984. Another new ordinance "The Bank deposit insurance ordinance 2025" is expected any time.
For example, if a person had Tk 500,000 in a bank that went bankrupt, the depositor would only be entitled to recover say Tk 100,000 out of the Tk 500,000 deposited. However, once the bank is liquidated, whatever funds are recoverable will be used to pay off creditors and shareholders. After that, if any funds remain, they will be used to pay the remaining depositors on a proportionate basis, depending on their deposited amounts.
Bangladesh has the lowest deposit insurance coverage in South Asia.At present the insurance coverage is for Tk1 lach and a new ordinance propose to increase the coverage to Tk 2 lach. Now only 19% of deposits in the entire banking system were fully protected under the Deposit Insurance Trust Fund as of the end of December 2023, the lowest among South Asian countries, down from 23% in 2021, as per Bangladesh Bank data.
In Pakistan, a country that far behind Bangladesh in economic parameters, use to protect over 98% of depositors in scheduled banks by the Deposit Protection Corporation, which covers deposits up to Rs5,00,000 per depositor per bank. In terms of value, 55% of deposits in member banks are eligible for protection. In Sri Lanka, the deposit insurance coverage is a maximum of Rs11,00,000 per depositor in the event of bank failure.
Globally, deposit insurers cover approximately 41% of total eligible deposits, leaving 59% uninsured, according to the International Association of Deposit Insurers (IADI). In Europe, 70% of deposit insurers start paying out within seven days, compared to 40% in Asia.In Bangladesh, the reimbursement provision is set at three months after the liquidation announcement of a bank.
In many countries, deposit insurance is managed by a separate body rather than the central bank. Major economies such as the US, UK and Japan have independent entities handling deposit insurance. In some developing countries, deposit insurance bodies operate as subsidiaries of the central bank but remain distinct from it. In Bangladesh, however, the central bank directly manages the system.
In the US, the Federal Deposit Insurance Corporation (FDIC) insures depositors up to $250,000 per depositor, per insured bank, for each account ownership category. FDIC also plays a key role in facilitating the purchase and assumption of failed banks, ensuring minimal disruption for the depositors. If no buyer is found, the FDIC may liquidate the bank's assets.
In Japan, the Deposit Insurance Corporation covers transactional accounts in full, while other deposits are insured up to 10 million yen per bank, which is close to the double of 5.7 million yen per capita GNI. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India, insures all types of bank deposits up to 500,000 rupees per depositor, per bank-while the per capita GNI is around 210,000 rupees.
The Bangladesh Bank (BB) has drafted a new Deposit Protection Ordinance, proposing a maximum payout of Tk 2 lakh per depositor if a bank undergoes liquidation. The limit will be reviewed every three years.The proposed Deposit Protection Ordinance will replace the Bank Deposit Insurance Act-2000, under which the maximum payout is Tk 1 lakh.
About 95 per cent of account holders have deposits that are less than Tk 2 lach. BB data shows that there are currently 15.71 crore bank accounts in the country.Of these, 14.71 crore accounts hold Tk 2 lakh or less, this covered 95 per cent of depositors.
According to the draft, the responsibilities of the authority will be separate and independent from the Bangladesh Bank's regular responsibilities, such as regulatory, supervisory, and resolution-related functions.The draft proposes the formation of a Deposit Protection Department under the supervision of Bangladesh Bank to implement the deposit protection system. A seven-member board of directors will be formed for the deposit protection system with the governor of BB's as the chairman.The board will be the highest decision-making authority.
The Deposit Insurance Department under the Bangladesh Bank shall collect premiums from all scheduled banks, including foreign branches, and deposits these funds into the Deposit Insurance Trust Fund (DITF). DITF's resources shall be invested in government securities.
The fund will comprise initial, annual risk-based, and special premiums received from banks, penalties collected from member institutions, profits earned from investments, adjusted funds from liquidated banks, and other unconditional funds designated for payment.
The ordinance will in consistent with the standards of the International Association of Deposit Insurers (IADI). If the law is implemented, it will provide insurance protection to the deposits of all categories of financial institutions. The position of Shariah based bank is not clarified as Shariah based insurance has different mode of protection.
Researchers often recommend that the insured amount should be equivalent to one to two times the per capita GDP. The proposed coverage of Tk2 lach is not as per international standard to gain confidence of the depositors. The currentproposed insured amount in the country is significantly lower than the provisional per capita income of Tk 306,144.
According to a Bangladesh Bank's internal report, more than two-thirds of the banks in the country are now weak. The banking sector continues to face a liquidity crisis.Primary causes of the crisis include a high volume of non-performing loans (NPLs), slow deposit growth, slow loan recovery and a lack of confidence in the banking sector due to rampant scams, especially at Shariah-based lenders.But policy makers are trying to rescue the ailing banks to avoid liquidation of the banks.If the overall banking environment does not improve, people may once again choose to keep their money outside the system. Bangladesh now needs a better deposit insurance scheme to regain confidence of the depositors.
