Depositors who lose money in failed banks may soon draw up to Sh1 million in compensation, according to recommendations of a study commissioned by Kenya Deposit Insurance Corporation (KDIC), which are currently under review by the Treasury.
The study was undertaken by Zamara Actuarial Services on behalf of KDIC, the statutory institution that provides a deposit insurance scheme for customers of member institutions, provides incentives for sound risk management, and generally promotes stability of the financial system.
A source privy to the findings of the study told the Business Daily on Monday that the study has recommended various deposit protection limits, including a Sh1 million compensation initially proposed by KDIC.
"Yes, that (Sh1 million target) is one of them, and there are many others (options). We are giving the pros and cons of each one of them. We have done a lot of scenarios on all of them.
“There are many other scenarios that we are looking at so that you just don’t go with one,” a source who declined to be named because the findings of the study are yet to be made public said.
According to the source, the consultant has recommended an upward revision of the value of protected deposits from the current Sh500,000 to boost depositor confidence and ensure stability of the financial system.
However, the extent of the compensation is still under discussion by the National Treasury, which is considering the impact of the increased limit on the economy, including the moral lending hazards associated with higher deposit protection values.
If approved, the increment will be the second in four years after KDIC increased the value of protected deposits to Sh500,000 from Sh100,000 starting from July 1, 2020, in recognition of the decline in real value over time to depositors.
This is after three banks—Dubai Bank, Imperial Bank, and Chase Bank—collapsed in quick succession in 2015 and 2016 with an estimated Sh100 billion in customer deposits.
Coverage limit refers to the maximum amount protected by the deposit insurer per person per bank in the event of a bank failure, and this amount is reimbursed to depositors by the insurer immediately a bank is placed under liquidation.
“Yes, it (deposit protection limit) is going up, it is going up definitely. The assessment is now on the risks. Of course, higher coverage is important for the economy, but you know we also have to balance with the impact of moral hazard because if we increase it so high some of the banks will be covering all their deposits so they can lend in whichever way or they can do anything knowing that all their depositors are covered by us (KDIC),” said source.
“Those are the balancing situations that the Treasury may have to look at because, in case of bank failures again, they wouldn’t want KDIC to foot all of it (compensation) and the banks have gone.
“These are private companies here that are using government money. It will be like we are supporting private institutions to do careless lending, knowing that KDIC will just pay all their money.
“So those are some of the things that we will be looking at. We are giving them (Treasury) options, the scenarios and recommendations, and pros and cons of each one of them, and then a decision will be made.”
