Content: Introduction Chapte Theoretical aspects of deposit insurance


The establishment of insurance system in the Kyrgyz Republic



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The establishment of insurance system in the Kyrgyz Republic

The National Bank of the Kyrgyz Republic has begun work on the creation of the deposit protection system, relying on the Strategy of reforming the Kyrgyz Republic's banking system, one of the areas which is to increase public confidence in the banking system.

After the decision of the Security Council of the Kyrgyz Republic of 31 March 2003 No. 2, National Bank of our country began the development of the draft Law of the KR "On protection of deposits", which was supposed to be completed by June 2004. Also, the concept of the system of deposit protection and the draft law "On protection of deposits" was included as one of the terms of the investment Matrix approved by the decree of the President dated September 3, 2003 №290 "On measures on further development of the state policy in the sphere of supporting investment and other business activities".

In April 2003, the National Bank established a working group, which was to develop the Concept and draft Law of the KR "On protection of deposits", which also envisaged the development and discussion of "tree solutions". The construction of "tree of solutions" was based on international recommendations for the establishment of effective deposit insurance systems.

In the process of developing the Concept of system of deposits protection of KR, the working group examined the experiences of the countries of the CIS and the experiences of developed countries. The received the draft decisions after the analysis and discussions, were considered by the interdepartmental working group, whose membership included representatives of the Jogorku Kenesh of the Kyrgyz Republic, the Presidential Administration, Prime Minister's office, World Bank, National Bank, Association of banks and representatives of commercial banks. So as the deposit protection fund is the most important element of the system of protection of deposits, and due to the lack of available information on international experience regarding the calculation of the formation of deposit protection fund, the question of the relative funding and further operation of the deposit protection fund was a major, which was subject to detailed discussion.

To identify the opinion of the population regarding insurance of deposits and discussion of the main issues, at the end of 2003 the National Bank adopted the decision on carrying out of sociological survey among the public, representatives of legislative and executive authorities and heads of commercial banks. Sociological survey was conducted in both rural and urban areas, including the city of Bishkek and all seven regions of the country.

In addition, there were conducted individual interviews with residents and representatives of legislative and executive authorities, and expert interviews with representatives of legislative and executive power. In Bishkek were organized focus groups in the composition of which included the heads of commercial banks.

For the normal functioning of bank deposits insurance system should be achieved a certain macroeconomic condition in the country and complied with the relevant requirements in terms of financial and legislative nature. So, after the analysis of the financial system of our country in 2002 and identifying the gaps and weaknesses, international organizations have expressed concerns about the premature implementation of the deposit protection system. The forum for financial stability identified the following conditions necessary for the implementation deposit protection system:

-a stable economy and consistent monetary and fiscal policy;

-stable banking system;

-strong and effective regime of prudential regulation and supervision;

-an adequate system of accounting, auditing, and requirements on information disclosure;

-a strong legal environment and effective mechanisms for the application of measures supported by the judicial system.

In 2008, our country has implemented the deposit protection system creating by Decree of the Government of the Kyrgyz Republic of 18 July 2008 No. 387 the Agency for deposits protection of the Kyrgyz Republic. For the coherent functioning of the system, 13 August 2008 was adopted the Law of the Kyrgyz Republic "On protection of Bank deposits".

The Agency for deposits protection is a legal entity with independent legal form. The Agency is an independent, non-profit organization, not-for-profit, endowed with powers, rights and responsibilities established in the Law "On protection of Bank deposits" 7

International experience shows that introduction of the mechanism of deposit protection is important and justified, as it increases the level of trust from the population to the banks and engages in bank deposits money funds of the population, which at the moment are mostly kept outside the banking sector.

The Agency's governing bodies are the Board of Directors and the Executive Director of the Agency, the Board of Directors is the supreme management body of the Agency. It consists of 7 members:



Figure1. The organizational structure of the Agency’ for deposits protection Board of Directors

-3 representatives of the government: one representative from the Ministry of economy and 2 from the Ministry of Finance, appointed by the Prime Minister;

-3 representatives of the National Bank, appointed by the Board of the National Bank;

-independent expert in the field of banking, appointed jointly by the government and the National Bank

2 years after the establishment of the Agency for deposits protection, in 2010 certain changes and additions were made in the Law of the Kyrgyz Republic "On protection of bank deposits", in particular, was increased the threshold amount of compensation for guaranteed deposits, from 20 thousand to 100 thousand som. In addition, in the register of banks-participants of deposit protection system were simultaneously included operating commercial banks.

In accordance with the decree of the President of the Kyrgyz Republic dated October 26, 2010 №425 "About measures for ensuring implementation of the Law of the Kyrgyz Republic "About structure of the Government of the Kyrgyz Republic", the Agency for deposits protection of the Kyrgyz Republic transformed into the Agency for deposits protection at the Ministry of Finance of the Kyrgyz Republic. 4 December of the same year by decree of the Government of the Kyrgyz Republic approved “the Statute of the Agency for deposits protection at the Ministry of Finance”.

In 2011 March 5, in accordance with in force Law of the Kyrgyz Republic "On amendments to the Law of the Kyrgyz Republic" On protection of Bank deposits", expanded the possibilities of the Deposit protection Fund by allowing to invest not only in government securities and securities of National Bank, but also in marketable securities of domestic companies. Thus, the fund has the option of increasing the capitalization of its assets.

10 August of the same year there have been changes in the composition of the Board of Directors and the staff of the Agency for deposits protection. Also, for the effective functioning Agency for deposits protection improved organizational structure.

Thus, according to the changes and innovations we can say with certainty about the entry into force the deposit protection system in our country.

The main goal of the Agency for deposits protection of KR is to create a system for the protection of deposits and to promote the stability of the financial system of the country. To achieve the objectives and carry out the tasks the Agency has the following rights and powers:

-to develop regulations;

-to conclude agreements and contracts necessary for the implementation of the Agency's activities;

-to apply to the National Bank with the offer on application to banks of appropriate measures of responsibility stipulated by the laws of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic" and "On banks and banking activity in the Kyrgyz Republic";

-request from the National Bank the information necessary to perform the tasks;

-to attract, if necessary, representatives of state bodies and independent experts;

-to require banks to post information about the deposit protection system and the bank's participation in the system of deposit protection in the territory of the provision of bank services to depositors;

-to participate in the meetings and committees of creditors in banks, in respect of which commenced the procedure of compulsory liquidation and bankruptcy in accordance with the Law of the Kyrgyz Republic "On conservation, liquidation and bankruptcy of banks".

These powers and rights allow the Agency for deposits protection to obtain necessary reliable information about the situation, as some commercial banks, and about the situation in the banking system as a whole.

Based on this information, the Agency should monitor the current condition of banks, identify problems in their functioning and in a timely manner solve them.

In addition, the Agency for deposit protection performs the following functions:8

-conducts the register of banks-participants;

-maintains records of claims, amounts for payments and amounts of compensation paid on deposits;

-pays out to depositors, subject to the Law of the KR "On protection of Bank deposits, the amount determined by this Law;

-determines the size of contributions and collects the contributions to the deposit protection fund;

-carries out the necessary actions to ensure the timely and full payment of contributions;

-establishes and imposes fines and penny for late payment of contributions;

-manages the assets of the deposit protection fund in accordance with the above law;

-interacts with other state bodies and organizations;

-carries out the selection of agent bank to ensure payment of compensations on deposits;

-provides reimbursement of payments in fund of deposits protection with the liquidated bank in accordance with this Law;

-conducting activities to raise public awareness about deposit protection system;

-performs other functions, powers and rights necessary to ensure the efficient operation of the system of mandatory deposit protection provided by the position of his activities, approved by the Government of the Kyrgyz Republic.

Banks-participants of deposits protection system required to pay the following types of mandatory contributions to the deposit protection fund at the rate and in the terms defined by the Agency, in coordination with the National Bank:

-entry fee;

-initial fee;

-calendar fee;

-extraordinary fee

The newly-established banks must pay an entry fee, which is equal to one percent of the authorized capital, within 30 calendar days of receipt of a license to conduct banking activities. In the case of authorized capital increasing by banks, additional membership fees will not be accepted.

Existing banks are required to pay a fee in the amount of 0.2% per annum of the total deposit base of the bank. Fees must be paid by banks starting with the quarter following the date of entry into force of the Law of the KR "On protection of bank deposits".

The total deposit base is calculated on an average daily basis for a period of one year ending in the quarter, preceding the quarter in which the contribution is made.

After reaching the target value of the deposit protection fund, equal to 15 percent of the guaranteed deposits of all member banks, banks are required on a quarterly basis not later than the 15th day of the month following the billing quarter, to pay the calendar fees in the amount of 0.2% per annum of the total deposit base of the bank. The size of the contributions is calculated by the Agency together with the National Bank.

For newly established banks the size of the first calendar premium is determined by multiplying the total deposit base of the bank by 1 / 360, by 0.2% per annum and by the amount remaining before the end of the billing quarter days of the date of adoption of the deposit protection system. For the banks, in respect of which came guarantee event, payments are calculated on the date of the warranty case.

When in deposit protection fund it is not enough funds for a covering liabilities, the Board of directors of Agency can undertake one or multiple of the following measures:

-to increase the size of annual contributions, but not more than double the rate of the fee;

-to install a special one-time contributions not exceeding 50 percent of last year contributions;

-to borrow on the market under Government guarantee;

-use the provided grant funds;

-to obtain a loan from the Government at a rate not exceeding the refinancing rate of the National Bank

In case of problems at the bank because of the double contribution rate, the Agency may take a different decision.

Any increase in contributions, payment of extraordinary contributions or borrowing must be approved by the Board of Directors with the approval of the National Bank. Payment of special simultaneous payment does not suspend the obligations of the banks pay mandatory calendar premiums.

The Agency must inform the banks about the change of contributions at least 30 days before the last day of the quarter for which the calculation is made.

If the bank did not pay the contribution to the deposit protection fund, he is obliged to pay penalty at double rate of the annual discount rate set by the National Bank on the payment date determined in accordance with the Law of the Kyrgyz Republic " On protection of Bank deposits (deposits)", for each day of delay from the amount payable.

The following deposits of individuals not subject to protection in accordance with the requirements of the above act:

-deposits of insiders and affiliated persons of the bank deposits and their close relatives;

-deposits of persons who for the past three years were foreign consultants or external auditors of the bank;

-deposits of individuals placed by proxy of the legal entity;

-deposits in respect of which there is a decision of the court or the investigating authorities in connection with the financing of terrorism or "laundering" of proceeds of crime;

-deposits in branches of the bank - resident outside the Kyrgyz Republic

The ability of such a system to prevent mass withdrawal of funds from banks to a considerable extent also depends on the circle of insured deposits, the level of compensation paid and the speed of its payment, as well as the degree of confidence in the deposit insurance system in the country. Agency as the insurer of deposits, provides protection to depositors ' funds, engaging in relationships with the bank as of their faces, assessing the financial condition of the bank, the effectiveness of its operations, and the risks associated with its activities. An additional argument in favor of the need for the presence of internal mechanism of protection of deposits is important for the banking business - psychology of reliability, validity and stability.

The deposit insurance system actually started its activities in mid-2008. Examining the process of formation of the bank deposits protection system in our country we have traced the chronology of events since the beginning of works on creation insurance system up to the present time. Despite the fact that the insurance of bank deposits in the Kyrgyz Republic was introduced relatively recently in comparison with other countries, it is necessary to notice the work of both the legislative and executive authorities on the implementation of one of the most effective mechanisms of ensuring stability in the financial sector.




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