The Central Bank of Kenya headquarters in Nairobi. The Deposit Protection Fund Board will be mandated to resolve problems in banks instead of waiting for their collapse. Photo/FILE
What you need to know:
CBK's Deposit Protection Fund Board arm will get increased mandate to resolve problems that arise in banks instead of waiting for their collapse.
The aim of DPFB’s entry is to avoid the collapse of banks as far as possible by resolving emerging problems before they become a crisis.
Central Bank of Kenya (CBK) could soon post officers to help manage stressed banks instead of waiting for them to sink into statutory management.
The bank’s independent Deposit Protection Fund Board (DPFB) arm will get increased mandate to resolve problems that arise in banks instead of waiting for their collapse.
Currently, DPFB is charged with liquidating institutions that collapse and paying out creditors including depositors whatever can be salvaged, a model called “pay box-plus”.
DPFB will move into what is called the risk-minimisation model that allows it to enter into a stressed bank and restructure it into a “good” or a “bad” bank.
The good bank continues to carry out its functions and maintains its performing assets, while a bad bank is injected with new supervision from the DPFB until it stabilises.
During the restructuring period, the bank is not closed or put under statutory management, a doubtful process that has only rescued one bank — Kisumu-based United Bank, the predecessor of the now robust Chase Bank.
The aim of DPFB’s entry is to avoid the collapse of banks as far as possible by resolving emerging problems before they become a crisis.
“We have completed formulating regulations on changing the way the board operates, we have also subjected them to stakeholder input. The rules are now with the Treasury awaiting to be gazette,” said Jane Ikunyua, the legal secretary at the DPFB.
Ms Ikunyua said such restructuring of an institution was intended to keep up with developments in the deposit insurance industry, which has seen some countries move to not only paying depositors but also preventing crises.
“We want to be in a position to deal with problem banks early enough. We will be able to separate the good from the bad bank and so we may manage to prevent having to close down any institution,” said Ms Ikunyua.
The model was used at the Kenya Commercial Bank when the lender was suffering from bad debts following years of mismanagement.
Former Barclays Kenya CEO Gareth George was appointed in 2002 to reform the bank, but it would not emerge from the dud debt crisis until after 2004.
The predecessor of DPFB, the Deposit Protection Fund — formed after the 1980s banking industry crisis — was notorious for liquidating banks whose owners were ready to revive them and was seen more as an industry undertaker.
Ms Ikunyua was speaking to the media on the sidelines of a two-day workshop at the Kenya School of Monetary Studies (KSMS)in Nairobi starting on Thursday.
Deposit insurance
During the workshop, DPFB director Jonathan Bett, who recently replaced Rose Detho, said there were less than 10 countries in Africa without any deposit insurance, while the majority that have the insurance use the pay box or pay box-plus system.
The pay box system only pays out insured deposits, unlike the pay box-plus which also liquidates a bank and pays out any cash that may be realised.
“Less than 10 countries in Africa have deposit insurance fund.
‘‘The DPF is ready to help other countries set up such an insurance fund,” said Mr Bett at the workshop.
He said that regulations for Kenya were almost in place and DPFB was ready to implement them.
Jerzy Prusky, President of the International Association of Deposit Insurers (IADA), said that deposit insurance often increases in importance during financial crises.
“As financial crises arise and banks get affected, people realise that they need to insure deposits,” said Mr Pruski.
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