Bank Resolution and Deposit Insurance in Mozambique
Project Development Objective ( PDO )
The objective of this project is to support the Bank of Mozambique’s efforts to strengthen regulatory framework for bank resolution and the capacity for implementation of the deposit insurance scheme.
Mozambique’s economy has grown rapidly since the end of the Civil War in 1992, but with only a moderate impact on poverty reduction. Mozambique is now entering a period of acute challenges and slower economic growth brought on by lower commodity prices, drought, internal conflict, and governance challenges, particularly in the area of public finances. The challenging macroeconomic, fiscal, and financial environment has contributed to a significant exchange rate volatility. Bank soundness and performance is adversely impacted as a result of the deteriorating fiscal situation and public arrears. Banks dominate the financial sector in Mozambique, accounting for almost all the financial sector assets and more than 95 percent of total credit in the financial system.
The current bank resolution framework is limited. It allows only temporary administration or liquidation and lacks alternatives such as partial or total asset transfers and bridge banks. Given the fragilities in the banking sector, the Bank of Mozambique (BM) needs to urgently develop its crisis management capacity. The deposit insurance system is weak and back-up funding is non-existent. BM’s intervention in the pay-out of a recently closed bank highlighted the importance of deposit insurance and demonstrated the need to improve the scheme’s functionality and capacity.
BM has requested technical support from the World Bank to strengthen its bank resolution framework and operationalize its deposit insurance scheme. This TA is closely coordinated with the IMF.
Activities / Output
The envisaged outputs of this technical assistance are as follows:
Component 1: Bank resolution legal framework enhancement
Component 2: Bank Resolution Training/Capacity Building
Component 3: Deposit insurance legal framework enhancement
The expected outcomes of the project are:
1. Legal framework for resolution of distressed financial institutions updated/amended to provide the Central Bank with adequate legal power and tools to intervene timely and effectively
2. Institutional arrangement and capacity for implementing resolution of distressed financial institutions in place
3. Deposit Insurance system functioning with adequate staff, guidelines, manual, tools and reserve funding