Confidence in medium-sized and small lenders could be restored if protected deposits were raised to Sh5 million per bank account, a Nairobi-based investment firm has said.
Dry Associates Ltd, an investment advisory firm that is also a fund manager, said such level of deposit insurance would ensure that small banks had liquidity and cash flowed into the private sector to beat the current credit squeeze brought about by the law capping interest rates.
“Doing so would immediately restore confidence in Tier II and Tier III banks, meaning money would again flow to these banks who would then be in a position to start lending to the private sector again.
“It would also reintroduce competition among banks for deposits of which there is little today,” the firm said.
Currently, bank accounts in Kenya are insured up to Sh100,000, which is not realistic, the firm said.
The fund manager said interest rate-capping legislation that came into effect in September 2016 had good intentions, but it had also caused serious economic disruption in the financial sector and also adversely impacted on the private sector access to credit.
The firm said the capping legislation could be replaced with other alternatives such as having the Kenya Deposit Insurance Corporation introduce a law to guarantee all commercial bank deposits up to Sh5 million per bank account.
“Anytime there are artificial price controls on a commodity or service, there will be a shortage,” the firm said in an investment report.