EFC closure: The fate of depositors with over Shs10M

by Christopher Kiiza
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The Deposit Protection Fund of Uganda (DPF), a government agency that provides deposit insurance to customers of deposit-taking institutions licensed by Bank of Uganda has initiated the process of refunding customer deposits of EFC depositors following its closure.

Bank of Uganda on January 19, 2024, placed EFC Uganda Limited under liquidation, revoked its license, and ordered for the winding up of its affairs.

The Central Bank announced that it acted to close EFC Uganda Limited after it determined that the continuation of EFC’s activities was detrimental to the interests of its depositors due to the institution’s failure to resolve its significant undercapitalization and poor corporate governance.

The Central Bank said it would together with DPF inform depositors of the arrangements that would be put in place to enable them to access all of their deposits.

According to Sections 111A and 111C (5) of the Financial Institutions Act 2004 as amended, the Deposit Protection Fund will pay the protected deposits while Bank of Uganda as statutory liquidator of EFC Uganda Limited, will pay the unprotected deposits.

Protected deposits refer to funds held in financial institutions that are insured by government-backed deposit insurance scheme. In many countries, these schemes aim to safeguard depositors’ money up to a certain limit in case the financial institution shuts down.

Unprotected deposits, on the other hand, lack such insurance, exposing depositors to a higher risk of loss in the event of a bank or financial institution’s failure.

In Uganda, the deposit insurance limit is 10 million shillings. This means that if a bank closes, depositors can reclaim up to 10 million shillings of their deposits. Depositors with deposits of up to 10 million and below receive their entire amount.

Accordingly, Bank of Uganda and DPF have established mechanisms to ensure that depositors of EFC Uganda Limited receive their funds as soon as possible, DPF announced on Tuesday.

The DPF statement reads that depositors who have protected deposits of up to UGX 100,000 will be paid using mobile money with effect from January 29, 2024, after verification of their National Identification Number (NIN) and mobile phone numbers.

All other depositors with balances of up to UGX 10 million (the deposit insurance limit) will be paid effective February 5, 2024, through an Agent Bank to be communicated.

For the case of depositors whose deposits is beyond the deposit insurance limit, DPF said, “BoU will inform depositors with more than UGX 10,000,000 of the arrangements for paying their deposits within fourteen (14) days from the date of this notice.”

What Happens to Depositors Whose Deposits Exceed Shs10M Deposit Protected Limit?

The Deposit Protection Fund only insures up to 10 million shillings per depositor per bank. This means that if, for example, you have 15 million shillings across savings and current accounts, only 10 million is guaranteed by the DPF.

Deposits exceeding the 10 million limit become unsecured deposits.

According to DPF, deposits exceeding 10 million shillings will only be paid out after liquidation of the EFC’s remaining assets.

“For those with more than UGX 10m, the current deposit-protected limit, the balance will be paid from the liquidation proceeds by the liquidator appointed by the Central Bank,” DPF said.

This means that depositors with deposits above 10 million shillings will have to wait until EFC’s assets are sold off.

It is, however, worth noting that the recovered amount could be significantly lower, or even completely lost, depending on the bank’s financial situation. The amount that will be paid out to depositors with deposits exceeding 10 million will depend on the recoveries made.

Additionally, liquidation can be a lengthy and complex process. Receiving any compensation for unsecured deposits could take months or even years, with no guarantee of full recovery.

To mitigate risk, depositors often consider diversifying their savings across different banks. This ensures no single bank holds more than deposit protected limit (10 million shillings) of their deposits, maximizing their insurance coverage. 

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