High value bank accounts triple to 1.1m in 10 years

Corporate News

A KCB banking hall. The number of cash deposits paints a picture of rising inequality. FILE PHOTO | NATION MEDIA GROUP 

By VICTOR JUMA, vjuma@ke.nationmedia.com

In Summary

• The high-value accounts held Sh2 trillion in 2014, placing the average deposit in each account at Sh1.8 million, according to a Central Bank of Kenya report.
• This means Kenya now has several hundred thousand millionaires given that the bulk of the accounts are held by individuals.

The number of bank accounts holding more than Sh100,000 rose by 78,160 last year to a record 1.1 million, reflecting rising personal fortunes and expansion of businesses in tandem with Kenya’s economic growth.

The high-value accounts, which have nearly tripled over the past decade, held Sh2 trillion, placing the average deposit in each account at Sh1.8 million, according to the latest Central Bank of Kenya (CBK) report.

That means Kenya now has several hundred thousand millionaires given that the bulk of the accounts are held by individuals. The growing pile of savings is linked to a steady growth in the past decade that has created significant disposable incomes for individuals and surpluses among firms.

Kenya’s economy expanded by 5.3 per cent last year compared to 5.7 per cent in 2013 when deposit accounts with more than Sh100,000 rose by 95,206.

The biggest expansion in the high-net-worth accounts took place in 2007 when the number jumped by 155,590 to 602,323, representing a 34.8 per cent increase from 446,733 the previous year.

The slowest increase was registered in 2008 and 2009 at 30,452 and 23,130 respectively, reflecting the depressed growth rates of 1.6 per cent and 2.6 per cent in the wake of the post-election violence and the global economic meltdown.

RISING INEQUALITY

While individuals and corporations hold diverse assets, including land, the cash deposits paint a picture of rising inequality as a relatively smaller number of people reap the benefits of a thriving formal economy and financial system.

Most importantly, the fact that the 1.1 million high-net-worth accounts held Sh2 trillion or about 90 per cent of the total 2.2 trillion deposits means the industry’s remaining 29.5 million accounts had only Sh229 billion in tranches of less than Sh100,000.

The Sh2 trillion in the high-net-worth accounts represents 35.7 per cent of the gross national disposable income, underlining the concentration of wealth in firms and individuals representing less than three per cent of the national population of 43 million people.

The deposit statistics — viewed against national economic data — show that the bulk of working-class earnings are spent on consumption, leaving little for savings and investment.

Compensation of employees across the country stood at Sh1.6 trillion last year, trailing private consumption by firms and individuals which stood at Sh4.2 trillion. This led to negative net national savings of Sh162.6 billion, with the government’s spending of Sh750.4 billion also contributing to the low savings rate.

CBK SUPERVISION

The rise in deposits by organisations and high-net-worth individuals is therefore seen as critical to the provision of resources to finance investment and consumption.

The big depositors, who stand to lose the most in the event of a failure of a deposit-taking institution, are betting on strong supervision by the CBK and its affiliate, the Deposit Protection Fund Board (DPFB), to protect their cash

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No deposit-taking microfinance institution has collapsed while the banking sector has witnessed relative stability in recent years.

Kenya witnessed its worst banking crisis in 1993 when 11 institutions — mostly “politically correct” banks — collapsed or were wound up by the regulator for money laundering and pilfering depositors’ funds.

FIRST BANK FAILURE

The first bank failure occurred in 1984 while the most recent liquidation occurred in 2005 when two banks went under, bringing the cumulative number of insolvent institutions to more than 20.

The DPFB manages failed institutions and only guarantees bank depositors up to Sh100,000, paid in the form of dividends from the sale of the collapsed bank’s assets.

The effective cover of deposits currently stands at about Sh480 billion or 21 per cent of the total deposits. This includes 26.3 million accounts holding Sh100,000 or less that are fully guaranteed.

All types of accounts, including current, savings and fixed deposits, are covered up to the set limit. Holders of multiple accounts in different financial institutions suffer a disadvantage during compensation as all the accounts are consolidated and paid up to the maximum insured sum.

Corporate or joint accounts are, however, insured separately and protected as distinct deposits. Depositors are required to fill forms and lodge claims with the DPFB to be eligible for compensation.

RISK MANAGEMENT

The government is considering raising the maximum deposit from the current level that has remained unchanged since the DPFB started operations in 1989 when Sh100,000 was worth much more.

The reforms will be accompanied by changing the contributions of banks and microfinance institutions from the current flat rate to one based on an institution’s risk profile.

Banks currently pay premiums to the DPFB at the rate of 0.15 per cent of their average deposits in a year. Changing this to premiums based on risk means unstable institutions will pay more to take and hold deposits compared with their more prudent rivals.

“This will serve to provide incentives to adopt sound risk management practices among member institutions, hence, will promote financial stability,” the DPFB said in its latest annual report.