By Dr. Philomena Dadzie
The introduction of Deposit Guarantee Schemes (DGS) has emerged as a transformative tool for fostering financial stability and depositor confidence within Ghana’s credit union sector. These schemes, aimed at safeguarding member deposits and mitigating systemic risks, represent a vital framework for ensuring the stability of the financial ecosystem. In Ghana, the Credit Unions Association (CUA) in 2000 pioneered the Deposit Guarantee Scheme, which has become a cornerstone of risk management and financial protection for credit unions and their members.
Globally, deposit insurance has proven to be a critical mechanism for preventing bank runs and restoring depositor confidence during financial crises. Today, more than 113 countries, including Ghana, have implemented similar frameworks to protect depositors from losses due to institutional failures and ensure financial system stability. In the credit union context, deposit insurance schemes have gained prominence due to their unique operational models. Credit unions prioritize member welfare over profit maximization, making them less susceptible to moral hazards.
However, systemic risks such as economic downturns and liquidity challenges necessitate robust protection mechanisms. The CUA’s Deposit Guarantee Scheme exemplifies this approach by offering a safety net for member institutions and their depositors.
Ghana Deposit Protection Act, 2016, Act 931 aims to establish a Deposit Protection Scheme, Fund, Corporation, and related matters. The Act provides a Deposit Protection Scheme as a sort of insurance to protect the deposits of “small depositors” in order to meet the long title’s goal. Section 3 of Act 931 indicates that the Scheme’s purpose is to protect “small depositors” from events that are insurable under the Act, as well as to promote the establishment of a secure, sound, and stable financial system. This is a two-pronged object that can be smoothly implemented.
The Deposit Guarantee Scheme (DGS) is designed to provide comprehensive coverage across Ghana’s credit union sector. Membership in the scheme is mandatory for all affiliated credit unions, ensuring sector-wide participation and risk-sharing. The scheme accumulates funds through annual premiums, which are calculated based on the savings and grading of participating credit unions. Premium rates range from 0.20% to 0.40% of total savings, depending on the institution’s financial grade. For instance, a Grade A credit union contributes 0.20%, while Grade E contributes 0.40% of their audited savings.
As of December 2023, the scheme’s stability fund had grown to over GH₵15.7 million, marking a 25% increase from its position in December 2021 when it stood at GH₵12.5 million. This growth is attributed to consistent premium collections from 128- member credit unions, which collectively manage savings of over GH₵5.5 billion.
Investments in secure financial instruments, such as Bank of Ghana Treasury Bills and other money market securities, ensure a prudent balance between risk and return. As of December 2023, 60% of the fund was allocated to short-term instruments, providing liquidity for emergency interventions, while 40% was invested in long-term securities to capitalize on higher yields. This strategy underscores the scheme’s ability to support distressed credit unions, disbursing concessionary loans worth GH₵1.85 million to stabilize operations over the past five years.
The operational activities of the Deposit Guarantee Scheme (DGS) are managed separately from CUA’s primary accounts, ensuring transparency and accountability in its financial operations.
This segregation protects the scheme’s resources from being diverted to unrelated activities and fosters stakeholder trust by demonstrating financial discipline. Additionally, the DGS enforces compliance through penalties for nonpayment, encouraging credit unions to meet their premium obligations promptly. This mechanism promotes financial discipline while safeguarding the fund’s stability. To support credit unions facing temporary financial difficulties, the scheme allows flexible payment plans, balancing enforcement with practical considerations.
While the CUA’s Deposit Guarantee Scheme has demonstrated success, there is room for improvement. Continuous regulatory compliance, enhanced risk management practices, and increased public education about the scheme’s benefits and limitations are essential for its continued effectiveness. Informing depositors about the scope and protections of the scheme will help prevent irrational withdrawals during crises and reinforce trust in the financial system.
The Deposit Guarantee Scheme by the Credit Unions Association of Ghana represents a significant milestone in the country’s financial sector. By mitigating risks, protecting depositor funds, and ensuring sector-wide stability, the scheme has become an indispensable tool for fostering confidence and resilience within the credit union industry. Moving forward, its success will depend on sustained commitment to transparency, effective governance, and proactive stakeholder engagement, ensuring that it continues to serve as a vital pillar of financial security in Ghana.
The writer, Dr. Philomena Dadzie is a Senior Lecturer in the Banking and Finance Department and also serves as the Dean of Student Services at UPSA (University of Professional Studies, Accra). She has expertise in banking, finance, and financial risk management.
