Kenya could raise cushion on savers’ deposits to $5,000

Kenya is seeking to instil confidence in the financial sector by proposing a larger monetary cushion for depositors with more than Ksh100,000 ($1,000) in commercial banks that collapse.

Since the late 1980s, Kenya has been compensating depositors of failed institutions up to a maximum of Ksh100,000 ($1,000).

While this amount fully covers small depositors who constitute over 90 per cent of the total deposit accounts, it leaves medium to high net worth savers who control over 90 per cent of an estimated Ksh2.76 trillion ($27.6 billion) worth of deposits highly exposed in the event of bank failure.

Just a proposal

However, The EastAfrican understands that the National Treasury is looking at the option of increasing the compensation to Ksh500,000 ($5,000).

“There is a proposal to increase it to Ksh500,000,” a government source said.

The Treasury’s director general in-charge of the Budget, Fiscal and Economic Affairs department Dr Geoffrey Mwau told The EastAfrican that the proposal is still under discussion by the National Treasury and the board of the Kenya Deposit Insurance Corporation.

“The current amount of the insured deposits has not be reviewed for a long time and many things have changed since. There is a proposal to increase the amount but it first needs to be discussed by the board,” said Mwau.

The Kenya government considers its financial sector as critical in the country’s plan to attain a middle income status by 2030.

But the country has been trailing Uganda in terms of depositors’ insurance coverage despite suffering a series of bank failures.

Receivership

While Kenya has been paying off depositors of collapsed banks up to Ksh100,000 ($1,000), in Uganda the depositors are covered up to Ush5 million ($1,321), and the law provides that all depositors be paid within 90 days of a bank failing.

The failed institution should also have its assets auctioned within six months of its takeover by the central bank.

In Tanzania, the Deposit Insurance Board has increased the amount of protected deposits from Tsh500,000 ($218) to Tsh1,500,000 ($654), while the Deposit Guarantee Fund of Rwanda protects eligible deposits up to Rwf500,000($573) per depositor per member bank and microfinance institution.

In 2016, the Kenya Deposit Insurance Corporation (KDIC), the state-owned agency mandated to act as the principal receiver for failed member institutions and implement failure resolution mechanisms to troubled institutions jointly with the US-Treasury carried out a study on the possibility of reviewing the insured deposits to boost confidence in the banking sector.

Compensation to depositors is made from the levies that banks pay to KDIC every year.

Banks currently pay premiums to KDIC at the rate of 0.15 per cent of their total deposits in a year but plans are underway to switch this model to a risk-based one where high risk and unstable lenders pay more compared with the stable institutions.

Currently, if a bank is wound up in Kenya depositors are paid the maximum of Ksh100,000 ($10,000) and any extra cash above this amount is realised from the proceeds of the sale of the assets of the lender during liquidation.

This has subjected large depositors to the agony of waiting and uncertainty over whether the proceeds from the sale of the bank’s assets will be enough to compensate them.

Massive transfers

In August 2015, Kenya’s Dubai Bank collapsed, followed by Imperial Bank (October 2015) and Chase Bank (February 2016) shaking depositors’ confidence in the banking sector and leading to massive transfers of deposits from small banks to large banks.

East Africa’s deposit insurers have started sharing information on best practices as a first step towards merging the rules and regulations governing the protection of depositors’ cash in the region.

East African banking regulators are working to improve the operations of their deposit protection insurance schemes to boost confidence in the banking industry.

This comes after the member states through the Monetary Affairs Committee resolved in 2016 in Kigali to jointly put in place measures to deal with troubled banks.

The measures included increased surveillance of the cash position of banks with intentions of intervening early to deal with problems arising.

The member states also agreed that each country develops a Resolution Funding Framework and improve prompt corrective actions for banks within East Africa.