Deposits insurer mulls new fund following recent bank failures

The Kenya Deposit Insurance Corporation (KDIC) has set up a target fund to strengthen the parastatal and prevent it from insolvency as it addresses failure of deposit-taking institutions.

The fund will be financed by KDIC members, deposit-taking financial institutions licensed by the Central Bank of Kenya, through contributions to be determined on the basis of the risk each carries, including the type and amount of deposits.

KDIC acting chief executive Mohamud Mohamud said the organisation is expecting to use the fund especially in cases of bank failure, which adversely impacts small depositors.

The need to pay the affected depositors has the potential to drain the resources of the KDIC, hence the new fund.

The intensified activity around the KDIC comes against the backdrop of the latest failures and weaknesses of several commercial banks. Between last July and April this year, three commercial banks —Dubai, Imperial and Chase banks — fell, but the latter two are being rescued. Banks have also been forced to provide for massive losses arising from nonperforming loans (NPLs).

“The KDIC has established a Fund, and the purpose of the target fund is to provide us with a benchmark that safeguards the exposure level of the Fund in the event of a systemic crisis,” said Mr Mohamud.

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The KDIC — previously called the Deposit Protection Fund Board (DPFB) — has over the years overseen liquidation of several commercial banks that failed.

It is undertaking the liquidation of 16 institutions, including Dubai Bank, having completed liquidation and winding up of a number of other banks.

Mr Mohamud said the amounts that would be paid by various institutions towards the target fund is being determined.

A consultant and the office of the Technical Assistance of the US Treasury is also involved, not only in establishing the required amounts but also in reviewing the cover for depositors.

The point of the review is to instill confidence in the financial system especially at a time Kenya wants to be the financial hub of the region.

“The results of the ongoing study will inform us as to how much needs to be placed into the Target Fund. The members are to contribute into this Fund through the normal levying of premiums, which shall be based upon the nature and number of deposits that they hold in their books,” said Mr Mohamud.

The target fund is part of the initiatives being undertaken by the KDIC – including the setting of the maximum of the amount of deposits that can be refunded to a depositors in the event of a collapse of a bank – so as to improve the operations of the financial system.