The Deposit Protection Corporation (DPC) has announced the release of its fourth Annual Report for the fiscal year ended June 2024, whereby domestic bank deposits in Pakistan surged to Rs. 31 trillion, marking a 22 percent year-on-year growth, driven by Rs. 23.8 trillion in conventional banking and Rs. 7.4 trillion in Islamic banking deposits, according to the annual report of DPC for the year 2023-24.
Eligible deposits rose 20 percent to Rs. 16.9 trillion, with Rs. 12.2 trillion in conventional accounts and Rs. 4.7 trillion in Islamic accounts, reflecting strong public trust in the banking system.
As of June 30, 2024, there exist 79.2 million depositors of scheduled banks, out of which more than 78 million are eligible depositors and their deposits are protected up to the extent of the protected deposit amount.
The report indicates DPC’s robust deposit protection fund standing at a total of Rs. 148 billion.
There are several factors that have contributed to the remarkable growth in deposits during FY 2023-24. A key driver was the tight monetary policy stance during FY 2023-24, which kept interest rates at elevated levels to bring inflation down. This incentivized savers to deposit more funds in banks to take advantage of higher returns. Additionally, efforts to enhance financial inclusion, such as expanding branch networks and initiatives targeting unbanked populations, also helped bring more people into the formal banking sector.
Technological innovations have also played a significant role. The proliferation of mobile banking applications and online banking platforms has made managing deposits more convenient, attracting a larger customer base.
Furthermore, the increase in foreign remittances from the Pakistani diaspora during FY 2023-24 has also contributed significantly to the deposit growth, as these inflows were channeled through the banking sector.
As of June 30, 2024, there were 79.2 million depositors of member banks. These include 64.8 million depositors of the conventional banking system and 14.4 million of the Islamic banking system. Of these depositors, 78.3 million, equivalent to 98.9 percent, were eligible for deposit protection. A segment-wise analysis reveals that 98.9 percent of conventional banking depositors and 98.6 percent of Islamic banking depositors were covered by the current deposit protection mechanism of the Corporation.
In terms of value, 51.3 percent of total conventional banking deposits and 63.4 percent of Islamic banking deposits are eligible for deposit protection in the unlikely event of a bank failure.
In terms of the International Association of Deposit Insurers (IADI)’s Core Principles for Effective Deposit Insurance Systems, the guarantee amount or the coverage should be limited, credible and cover the majority of depositors having substantial amount of deposits exposed to market discipline.
The percentage of eligible depositors in both conventional and Islamic banking institutions of Pakistan complies with this principle where majority of depositors are being covered under existing deposit protection mechanism while a small number of depositors having large value of deposits are exposed to market discipline. This also confirms the standing of the Corporation with its objective of protecting small or financially unsophisticated depositors.
As of June 30, 2024, the segment-wise analysis shows that 9.3 percent and 11.6 percent of conventional and Islamic banking deposits, respectively, are fully protected.
In terms of numbers, 95.1 percent of conventional banking-eligible depositors are fully protected while 91.7 percent of Islamic banking-eligible depositors are fully protected.
Fully protected depositors are those with balances below or equal to the coverage limit of Rs. 500,000, therefore, the aforementioned statistics imply that in the event of a bank failure, fully protected depositors would be reimbursed in full. For those with balances exceeding Rs. 500,000, the coverage limit applies, with the excess amount of the deposits recoverable through a regulatory-assisted process.
It is pertinent to highlight that the current deposit protection mechanism in Pakistan fully protects 93.4 percent of total domestic depositors of scheduled banks by the end of June 2024.
The primary source of income for the Corporation is the premiums collected from member banks. These premiums are based on the eligible deposits disclosed in the annual audited financial statements and AGM-approved accounts of DPC’s member banks. Due to the higher proportion of eligible deposits in conventional banks compared to Islamic banks, the premium collection from conventional banks remained dominant.
In FY 2023-24, private sector scheduled banks contributed significantly to the premium pool, followed by the public sector banks. Private sector banks contributed Rs. 19.6 billion, while public sector banks contributed Rs. 2.4 billion.
A segment-wise analysis reveals that premium collec- tion from Islamic Banking Institutions has been on an upward trend, outpacing that of conventional banks since the inception of the Corporation.
In conclusion, the growth in deposits and premiums reflects the increased confidence in both conventional and Islamic banking segments, underpinned by a strong deposit protection mechanism.