Consumer protection essentially involves the apportionment of losses arising from the failure of a set of existing contracts and the recognition of a fresh set of contracts. These can be broadly categorized into civil and social contracts.
- Between the depositor and the bank in which the bank borrows funds from the depositor and pledges to pay the nominal value of the deposit plus interest, in some instances, on demand or at a given date.( liability-side liquidity promising contract).
- Between the bank and the borrower on a loan in which the bank deploys depositors’ funds (asset-side loan contract).
This is a contract where the citizens expect that the state will protect individual property rights by enforcing the civil contract through regulatory agencies, in the same manner an impartial judiciary does.
Why deposit insurance?
- Restore public confidence;
- Preserve the sanctity of social contract; and
- Provide an opportunity to build a banking system that can better provide efficient services necessary to enhance the growth of the economy.
KDIC gives priority to the claims of “depositors” in financial institutions in the unlikely event of bank failure.
Deposit Insurance exists to form a second layer of protection for depositors and reinforces the efforts of the primary regulator/supervisor in ensuring safety and soundness of the financial institutions.