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KDIC sees moral hazard in push for compensation per bank account

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KDIC chief executive Hellen Chepkwony. FILE PHOTO | NMG

Kenya Deposit Insurance Corporation (KDIC) is warning that switching the compensation model from per customer to per account and increasing insured deposits above Sh500,000 would encourage recklessness among lenders and trigger more bank failures.

KDIC chief executive Hellen Chepkwony said in an interview with the Business Daily that the corporation’s latest review shows the coverage is adequate for the sector and that a further raise would lead to a moral hazard.

“We want to prevent a moral hazard. If we cover everyone and all the deposits, then banks will haphazardly lend knowing KDIC will pay all the deposits,” said Ms Chepkwony.

“It is a common practice worldwide in deposits insurance that we cover per depositor because if we were to cover per account, people will be opening many accounts to split their deposits to be fully covered.”

Ms Chepkwony was speaking on the sidelines of a two-day inaugural KDIC conference themed ‘Building a strong financial system through a savings culture and deposit insurance.’

KDIC has been facing pressure from different parties, including parliamentarians, to increase the coverage and also shift the compensation from per customer to per bank account.

The corporation in 2020 reviewed the amount of deposits that are fully protected from Sh100,000 to Sh500,000 in what was the first increase in 30 years.

“Deposit insurance is structured in a way that motivates banks to put their risk profile in order as opposed to just lending out money and causing a failure,” said Ms Chepkwony.

The 2020 review also saw KDIC switch from charging a flat rate of 0.15 percent of the average total deposit liabilities or Sh300,000 per bank, whichever is higher, to a range of between 0.15 percent and 0.2 percent, depending on the risk profile.

Ms Chepkwony said several small lenders had improved their risk profile while others classified as weak benefited from acquisitions to become strong and pay less for insurance.

“We have seen some movement on banks that were initially rated as weak. Banks have been taking heed of the risk-based premium assessment because they know they pay more when they are found to be carrying a higher level of risk,” said Ms Chepkwony.

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