Markets & Finance

Deposit insurer set to review refunds to fallen banks customers

IMPERIAL

Collapsed Imperial Bank depositors demonstrate outside the lender’s headquarters in Nairobi on May 31. They are being refunded up to Sh1 million. PHOTO | SALATON NJAU

The Kenya Deposit Insurance Corporation (KDIC) is reviewing the amount of cash paid back to a depositor of a collapsed bank.

The figure has been set at a maximum of Sh100,000 since the late 1980s when the deposit insurance law was first put in place.

KDIC has appointed a consultant to do a feasibility study before setting the amount to ensure that it is sustainable, the corporation’s acting chief executive Mohamud Mohamud told the Business Daily.

Many analysts have criticised the existing maximum amount payable saying that it is too little in a country where some people have deposited billions of shillings in banks.

“Currently, there is a feasibility study that is being undertaken to assist KDIC in reviewing the maximum amount possible. This is at an advanced stage and is to be completed in due course,” said Mr Mohamud, who was KDIC’s assistant director of liquidations before assuming the position of the acting CEO.

Three banks have collapsed in a period of nine months — between last July and April this year — with depositors left to hold the short end of the stick.

While depositors are being paid up to Sh1 million at the collapsed Imperial Bank and the revived Chase Bank, many have not come out to claim their cash for unknown reasons.

Dubai Bank, which was the first to collapse last July in the latest wave of bank failures, is currently set for liquidation after it was discovered to have ran fraudulent operations where corporate governance was also thrown out of the window.

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Neil Murphy, a US-based deposit insurance expert who has consulted for the EAC, has in the recent past advised on the need to harmonise the amounts insured within the East African Community since Kenyan banks are operational in the region.

The amount insured in Uganda is about Sh115,000 while it is about Sh12,000 in Tanzania. “Kenya should take account of the regional situation. It should draw some lessons from the crisis in European countries.

When it formed a monetary union, they failed to adequately take account of deposit insurance and this has now been brought out by the crisis realised in some banks in Europe,” said Dr Murphy during a workshop in Nairobi. Harmonisation is yet to take place within the region.

For Kenya, the expected changes in the payable amounts is supposed to instill more confidence in a banking sector that has recently faced a crisis, even though the regulator has maintained that it has not affected the whole system.

However, the massive loan loss provisions by several banks have indicated that the entire banking system has struggled to meet the regulator’s elevated standards.

The winding up of a bank normally means depositors are paid the maximum of Sh100,000 and any extra cash, if any, realised from its liquidation.

Often collapsing banks are mismanaged to the extent that hardly any net assets are available for redistribution to the depositors or shareholders after liquidation.

The KDIC can also pay more than Sh100,000 when a bank is determined to have more cash to repay the depositors as was the case for Chase Bank and Imperial Bank.

In the case of Chase Bank, the Central Bank of Kenya (CBK) said it had discovered a lot of the assets were traceable and therefore the institution was in a much better position for revival and payment of its depositors than was in the case of the others.

Mr Mohamud said that the consultant had not yet determined what would be an adequate cover for depositors.

But given the numerous recommendations by experts over the years that it be reviewed upwards, chances of it being pushed downwards are lower than those of being maintained or raised.