Deposits payout in collapsed banks raised to Sh500,000

Collapsed Imperial Bank depositors protest outside the lender’s headquarters on Westlands Road in Nairobi on October 13, 2016. FILE PHOTO | NMG 

By ELIZABETH KIVUVA
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Summary

• The Kenya Deposit Insurance Corporation says the increase from Sh100,000 will cover about 99 percent of the depositors from the current 90 percent.
• 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.
• KDIC is funded by charging commercial banks a small percentage of their deposits in the form of insurance.

Depositors in collapsed banks will from Wednesday 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 cover about 99 percent of the depositors from the current 90 percent.

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.

“The new limit will give more protection to depositors in the most unlikely event of a bank failure,” said KDIC chief executive Mohamud Ahmed Mohamud on Tuesday.

He added that the insurance scheme will now cover about 20 percent of all bank deposit from the previous eight percent

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 while the assessments are conducted in July and premium payments expected by August of each year.

But the KDIC has pushed the payment date to December to ease pressure on banks amid the Covid-19 economic hardships that have hit deposits and increased loan defaults.

Banks were also this year expected to pay premiums based on the risks and not a uniform rate.

This has also been delayed to July next year.

“In support of our member institutions during these unprecedented times, which may have affected their cash flows, the corporation has postponed the implementation of the model which was due in July by one more year,” said Mr Mohamud.

“This will allow member institutions to recover post the global pandemic.”

Kenyans had saved Sh3.68 trillion in banks at the end of March 2020, says the Central Bank of Kenya, adding that the lenders had issued loans of Sh2.9 trillion, and had recorded defaults worth Sh377 billion at the end of May.

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.

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. However, Chase Bank and Imperial Bank had their good loans and deposits transferred to State Bank of Mauritius (SBM) and KCB

respectively.

Mr Mohamud said a rise in deposit refunds would encourage Kenyans who had become risk-averse to return money into the banking system.