The Treasury building in Nairobi. Treasury wants assets and liabilities of problem lenders transferred irrevocably to more stable ones. The highest ranking shall be a bank’s debts followed by insured deposits, staff wages and uninsured deposits. FILE
A new amendment to the law is set to give State agencies sweeping powers to transfer customer accounts from financially stressed banks to more stable lenders.
Treasury secretary Henry Rotich, through the Kenya Deposit Insurance (Amendment) Bill 2013, has proposed the exclusion and transfer of customer deposits, loan accounts and other business from a “problem” bank to a stable lender.
This will potentially save depositors from huge losses where they are caught up in the collapse of a bank, but it will also make it harder to revive lenders that are declared to be “problem” banks since they will be stripped of their most important assets.
“The process shall consist of exclusion and transfer of part or total deposits and liabilities from a problem institution to another solvent and well-managed institution; exclusion and transfer of part or total assets to the institution receiving the liabilities and liquidation of the residual assets and liabilities,” reads the proposed amendment to the Act.
The Act, which is set to be debated in Parliament, defines a problem lender as one that places the interest of its depositors or the banking sector at risk.
Bank debts
The Treasury wants the transfer of such assets and liabilities to be irrevocable and shall not require the consent of debtors, creditors or any security holders.
A collapsed bank’s debts shall be the highest ranking during the process of winding up, followed by insured deposits, staff wages, uninsured deposits, statutory obligations and then any other creditors in that order. Currently the insured deposits are capped at Sh100,000. “The object of this bill is to strengthen the regulatory framework of the Kenya Deposit Insurance (KDI) Corporation.
It aims at enhancing the protection of depositors’ savings by conferring on the corporation the appropriate mandate and ensuring its good corporate governance,” said Benjamin Langat, chairperson of the committee on Finance, Planning and Trade, which is expected to table the Bill in Parliament.
Central Bank uses capital and liquidity ratios to assess an institution’s financial strength. It has set minimum thresholds to be observed by the lenders. “It creates flexibility where liabilities of a problematic institution can be transferred to another and managed from there rather than the customers being tied up. It does not have a net change in the industry so we cannot be opposed to it,” said Habil Olaka, the CEO of industry lobby the Kenya Bankers Association.
Other amendments in the Act give the corporation powers to take loans from other institutions apart from the Central Bank while increasing its borrowing limit to 25 per cent of the fund. Currently the corporation can only borrow from the CBK a maximum of Sh500 million. KDI will be required to settle claims from persons whose deposits were insured in a maximum period of thirty days. Previously the corporation did not have a time frame in which to have settle claims.
The time frame will ensure the corporation does not hold unclaimed deposits.
As at June 2011 the Deposit Protection Fund had paid out Sh1.1 billion of total protected deposits of Sh1.5 billion following liquidation of 24 institutions with the unpaid amount representing unclaimed deposits.
Unpaid deposits
The Act has also been amended allowing the corporation to call future premium contributions from the industry in order to help it settle unpaid insured deposits that it does not have immediate funds to pay.
The deposit insurance will be required to finance its expenses as the funding, which it used to receive from the exchequer, will be withdrawn. Its investment options have, however, been expanded as initially it could only put money in government securities.
Membership of the fund’s board is recommended to be expanded to include the Attorney General or a representative, with six appointees by the Cabinet Secretary.
Insurance of deposits in the country became crucial in the 1980s and 90s when several banks collapsed, with depositors’ savings.
