Customers to get up to Sh500,000 payment if banks fail

Depositors in collapsed banks will from next year receive compensation of up to Sh500,000, marking the first increase in 30 years.

Kenya Deposit Insurance Corporation — an independent agency that manages the deposit refund in collapsed banks — says the increase from Sh100,000, which has remained constant since 1989, will apply from July 2020.

The low compensation had exposed wealthy savers to higher losses in the event of bank closures because the refund was not adjusted to take into account changing economic realities over the three decades.

“With this move we will increase coverage from 90 per cent of the deposits to 98 per cent and in terms of value we will increase cover from eight per cent of deposits to 20 per cent,” KDIC CEO Mohamud Ahmed Mohamud said in a telephone interview.

This means 90 percent of bank deposit have less than Sh100,000, which is in line with CBK data which shows less than one percent of savings accounts have more than Sh1 million.

Annual premium

KDIC is funded by charging commercial banks a small percentage of their deposits in the form of insurance.

Currently, all banks pay an annual premium at a flat-rate of 0.15 per cent of the average total deposit liabilities or Sh300,000 per bank, whichever is higher.

The fee is applied uniformly and assessments are carried out in July and premium payments are expected by August of each year.

Kenyans had saved Sh3.5 trillion in banks at the end of June 2019, says the Central Bank of Kenya (CBK), adding that the lenders had issued loans of Sh2.6 trillion, and had recorded defaults worth Sh335 billion.

MPs had earlier proposed to raise the amount of bank deposits guaranteed in case of a collapse by 20 times to Sh2 million per customer.

Risk averse

Mr Mohamud said a rise in deposit refunds will encourage Kenyans who had become risk-averse to return money into the banking system. This is in turn expected to ease the flow of money in the economy.

“It shows confidence in the banks that people do not keep money in their mattresses,” he said.

Patrick Mumu from Genghis capital investment bank said the law as is currently framed allows KDIC to vary the premiums to a maximum of 0.4 per cent of the average of a bank’s total deposit liabilities in a twelve month period prior to assessment which can cover any additional costs.

Kenya Bankers Association CEO Habil Olaka said that not all banks will pay more since changes from a flat rate to a risk-based mode of payment starting from next year will reward those that are good at managing risks.

“There was no motivation to improve the level of risk when banks were paying at a flat rate,” he said.

Lenders

Depositors and investors in Kenya were rattled three years ago when the Central Bank of Kenya took control of three mid-sized lenders after they failed to meet their statutory obligations.

Out of the three lenders placed under receivership in 2015 and 2016, Dubai Bank is facing liquidation but Chase Bank and Imperial Bank had their good loans and deposits transferred to State Bank of Mauritius (SBM) and KCB respectively.