Banks propose raise in deposit loss compensation

The Central Bank of Kenya headquarters in Nairobi. CBK data shows that the proportion of insured customer deposits has been dropping as savings grew to Sh1.7trn by the end of last year. FILE 

By GEORGE NGIGI
 

 

In Summary

• The insured deposits for bank account holders has remained at Sh100,000 since 1989, exposing savers with higher deposits to proportionately higher losses as the figure was not adjusted to capture changing economic realities over the period.

Banks have proposed an increase in compensation for depositors of collapsed banks to Sh250,000 in a move that could encourage customers to save more in their accounts.

The insured deposits for bank account holders has remained at Sh100,000 since 1989 (24 years), exposing savers with higher deposits to proportionately higher losses as the figure was not adjusted to capture changing economic realities over the period.

The proposed figure has been published by the Central Bank of Kenya (CBK) in draft guidelines released for public debate, which are expected to come into force with the establishment of the Independent Kenya Deposit Insurance Corporation.

The KDIC Act was passed last year, but the corporation has not been set up owing to absence of the guidelines.

“The figure needed review to a level that an adequate proportion of the savers are protected to encourage mobilisation of resources for the banks without making it unduly expensive for the banks. With the creation of KDIC, this is now proposed at Sh250,000, which in my view strikes a good balance,” said the Kenya Bankers Association chief executive, Habil Olaka.

Depositors in collapsed banks who have outstanding loan payments will only receive the balance after deduction of their unpaid dues.

“Considering that deposits are insured up to Sh250,000: If person A has Sh50,000 in a savings account, Sh10,000 in a fixed term deposit, and Sh5,000 in a loan due at the end of the month, the aggregate credit balance for person A is Sh55,000. Total insured deposits are Sh55,000,” reads an example published in the draft CBK guidelines.

Yet another example in the CBK draft states that a bank account holder who has total deposits of Sh600,000 and no outstanding loan would get Sh250,000 as the maximum guaranteed compensation.

Data by the banking sector regulator shows the proportion of insured customer deposits has been dropping as customer savings grew to Sh1.7 trillion as at the end of last year.

(Read: Deposit insurance cover set for first review in 24 years)

Only about Sh176 billion of this amount was covered by the insurance scheme, equivalent to 10.3 per cent of total deposits in 2012 from 11.5 per cent in 2011 and 12.8 per cent in 2009. The current figures cover 93 per cent of individual bank account holders.

Insurance of deposits in the country became crucial in the 1980’s and 90’s when several banks collapsed going under with lifelong savings of many. However with tightened regulatory environment since the change of government in 2002 there has been no collapse.

Only Charterhouse Bank has been put under statutory management in this period, over suspicion of involvement in money laundering activities.


To fund the settlement of claims banks are expected to pay an insurance premium equivalent to 0.15 per cent of their deposits.

Apart from autonomy the new Act also gives the fund supervisory powers which allow it to be proactive in addressing weaknesses identified in financial institutions in order to avoid their collapse.

The public has up to June 12, to give feedback on the draft policy.