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Deposits insurer needs more transparency

Imperial Bank depositors
Imperial Bank depositors outside a branch in the past. FILE PHOTO | NMG 

The Kenya Deposit Insurance Corporation (KIDC) that was until recently known as the Deposit Protection Fund of the Central Bank of Kenya was to give us some good news this week.

In a statement, KDIC said they had taken decisions they touted as “a three-point economic incentives to cushion cash flows, reduced earnings of banks and to safeguard deposits from the effects of the Corona Virus pandemic.”

Pardon me if I come through as a cynic. The truth of the matter is that the offering by the deposits insurer does not amount to much.

Take the move to raise the maximum deposit cover from Sh100,000 to Sh 500,000, for instance. On the surface, it looks as a good move because it means that any a depositor who loses money in a fallen bank will get a maximum of Sh500,000.

To appreciate the number of people who will benefit from the offering from KDIC you need to ask the following: What is the average balance in a deposit in a retail bank?

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The truth is that the average balance is way below the existing maximum cover of Sh100,000.

We have observed that when a bank goes down, virtually all customers get their balances in full.

Two years ago, we witnessed this during the payouts to depositors of both Imperial Bank and Chase Bank.

So, when you increase the protection to Sh500,000 like KDIC has done, all it means is that only a very small number of large deposits have been added the protection.

The new enhanced cover does not help the ordinary depositor, known as Wanjiku in Kenya.

THE LAW

The second offering in KDIC’s Covid-19 mitigation measures is the extension of the premium payment period for banks. The background to this is as follows.

Banks usually pay annual insurance premium to the KDIC in August.

KDIC’s argument is that to support banks and to ameliorate cash flow pressures during the pandemic, it has extended the premium payment period by six months.

This means that the annual payment period has been pushed to December 31.

Which begs the question: Is it possible to have a cover without payment of premiums?

The law in Kenya is clear. Insurance cover does not start until premiums are paid.

The measures by KDIC may end up destabilising the sector. It means that if a bank was to collapse tomorrow, the absence of the cover means that it is the taxpayer that will bear the brunt.

The third offering was postponement of risk-based premium regime for a year. And, the background to this is the following.

In 2019, KDIC rolled out a risk-based premium model for assessing the annual premium payable by banks.

In simple, moving to a risk-based deposit insurance framework means banks perceived as more risk would pay more to KDIC. It is to discourage banks from being risky.

Thus, this approach would have seen the revised premium charged to banks go up, depending on its risk profile. The transition to the new model was to start in July 2020.

HARD TIMES

KDIC now says that in recognition of the hard economic times that have impacted earnings by banks and given the sacrifices they have made to support the economy through restructuring of loans, it has now postponed implementation of risk-based premiums by one year.

Which begs the question: What if a depositor of a fallen bank wakes up one morning to read in newspapers that assets of the bank that closed down with his deposits, especially property, have changed hands?

You don’t know whether you will ever get your money back after disposal of these assets.

We still remember the controversy surrounding the case of Integrity House.

In the first place, KDIC must be made to operate with more transparency and disclosure.

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