IMF pushes for insurance on bank deposits

Bank depositors may sleep more soundly if the Kenya government adopts IMF proposals to speed up the introduction of deposit insurance as part of reforms to strengthen the financial sector.

The new deposit insurance law, drafted in 2007, is yet to be taken to parliament.

The law would enable customers to increase their savings knowing that they would be paid back all their money if the bank collapsed.

The move would raise clients’ confidence, including small financial institutions which have tended to collapse without prior signal.

The Deposit Protection Fund currently refunds a maximum of Sh100,000 when a bank goes bust.

The Kenya Deposit Insurance Bill seeks to create a Deposit Insurance Fund that will ensure that a customer can be refunded sums of more than Sh100,000 after deducting all the liabilities a customer may be holding at the time of collapse.

The bill specifies that members of the fund, including banks and non-bank financial institutions, will contribute a minimum of Sh300,000 each month but the fund may increase the contribution of an institution beyond the amount set out.

IMF managing director Dominique Strauss-Kahn, at the end of his two-day visit to Kenya, said that structural reforms will need to be stepped up to enhance the competitiveness of the economy and attract investment needed to diversify the economy.

“To strengthen the financial sector further, it will be crucial to enact several pieces of legislation that are still pending, including banking, new deposit insurance, and importantly the anti-money laundering bills,” he said.

Ways of financing the deposit insurance fund, as practised by other countries, include banks keeping a higher proportion of deposits or cash ratio with the Central Bank.

Since the global financial crisis hit western countries, the issue has also been debated widely and recently US President Obama suggested the imposition of a “responsibility fee” on banks — over and above their contributions for deposit insurance — to avert excessive risk-taking and enable federal intervention in case of a crisis.

IMF’s call showed the fund wanted more than just the December 2009 directive by the Central Bank of Kenya through the Deposit Protection Fund Board (DPF) to banks to enhance their deposits insurance by segregating accounts.

The order required banks to restate and segregate liabilities in the form of customer deposits held in each savings and current accounts they run in a bid to assess the nature and extent of risks associated with each product.

Lack of such a deposit insurance fund has deprived small banks of customer confidence, a development that has seen most of the deposits taken by the big, especially foreign, banks — a move that has dampened competition on the local banking scene.

Currently, the top 13 largest banks hold more than 80 per cent of commercial bank deposits and the top 10 local banks have remained virtually unchanged for decades despite the entry of top multinational banks such as Bank of Africa and Eco Bank.