Tanzania deposit insurance system law and practice: a comparative analysis of deposit insurance in Tanzania and United States.

"After all there is no such important thing in a financial system than to have the confidence of the people in it" This work attempts to discuss the law and practice relating to the Deposit Insurance system (DIS) in Tanzania as compared to that in the U.S.A. It is focused on their legal and practical aspects with a view to identifying aspects in the Tanzania law in need of reform and making necessary recommendations therefor. In Tanzania the DIS was initiated by the BFIA, 1991 with the aim of protecting depositors and allow for the growth of banks and other financial institutions on sound lines. As a result, the Deposit Insurance Fund (DIF) was established for banks and financial institutions by the BFIA, 1991 and came into operation in 1994. Apart from acting as insurer by securing depositors against bank failure, the DIF is supposed to act as a liquidator in case of bank insolvency. However, the study revealed that the powers conferred on it to act as a liquidator are not absolute but limited in the sense that it will act as a liquidator of a default bank or financial institution if so appointed by the Bank of Tanzania. This is contrary to the USA Deposit Insurance System whereby the Federal Deposit Insurance Corporation has been provided absolute powers of liquidating troubled institutions to ensure that the corporation is not subjected to unnecessary interventions to hinder its effectiveness. This study investigates one hypothesis that a DIS creates market indiscipline in the banking industry and, that is why, increasing banks run have been the order of the day and have thus rendered the system unuseful. Federal Deposit Insurance Corporation, The fifty years: a History of the FDIC, 1933 (Washington D.C, 1984), p.36.