Economy

CMA, deposits insurer in bondholders cash limbo

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Capital Markets Authority regulatory and policy director Luke Ombara. PHOTO | SALATON NJAU | NMG

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Summary

  • The capital markets regulator has since 2019 been seeking the support of KDIC and the Central Bank of Kenya (CBK) to amend the deposit protection law to have cash invested in banks by fund managers through instruments like bonds are separated from customer deposits and other bank liabilities.

The Capital Markets Authority (CMA) and the Kenya Deposit Insurance Corporation (KDIC) are locked in a two-year-long stalemate over a proposed compensation policy for bondholders in event of a bank failure.

The capital markets regulator has since 2019 been seeking the support of KDIC and the Central Bank of Kenya (CBK) to amend the deposit protection law to have cash invested in banks by fund managers through instruments like bonds are separated from customer deposits and other bank liabilities.

The proposed policy, the CMA insists, will see investors in corporate bonds such as pension schemes — whose cash is largely invested by fund managers — paid when a bank collapses since their funds will not be spent on compensating depositors.

The current law gives depositors priority during compensation from funds recovered from a collapsed bank to a limit of Sh500,000 per account.

Bondholders, like other creditors, are paid what remains after insured depositors have been compensated.

“The bigger issue is really what happened with Chase Bank and Imperial Bank bonds in that they were co-mingled with the deposits,” said CMA director for regulatory policy and market development Luke Ombara.

“In normal circumstances, such products need to be ring-fenced or segregated under custodial arrangements within the bank to the extent that should anything happen to the bank, they (bonds) are already segregated.”

Chase and Imperial banks went under with cumulative Sh6.8 billion in bonds — whose sale to the public had been cleared by the CMA in 2015 — leaving investors, especially fund managers who are contracted by pension schemes to manage workers’ savings, bruised.

The KDIC and CBK have been reluctant to support the proposed changes to Section 29 of KDIC Act, which are intended to de-risk investment in corporate bonds by giving them a status similar to senior debt.

“According to our law, those (bondholders) are creditors and so they will be catered for under the residual (cash). If you look at our law, we first pay the depositors then the creditors,” KDIC chief executive Mohamud Mohamud said in a past interview.

The collapse and subsequent default on bonds by Chase Bank (Sh4.8 billion) and Imperial Bank (Sh2 billion) exposed the gaps in Kenya’s investor compensation laws and policies, leaving bondholders with no clear recourse in the event a company is liquidated.