Kenya Deposit Insurance Corporation (KDIC) CEO Mohamud Ahmed Mohamud during a past press conference. PHOTO | FILE | NMG
Kenya has rolled out the risk-based insurance premium model for commercial banks after a one-year suspension due to the Covid-19 crisis.
The Kenya Deposit Insurance Corporation (KDIC) in collaboration with the industry stakeholders have agreed that the model, which requires ‘high risk’ lenders to pay more premiums to the Corporation, goes live from July 1 2021.
Under the new model, banks rated low risk will pay the normal flat rate of 0.15 percent of their annual deposits to the Corporation while those rated high risk will pay 0.206 percent, an additional 0.056 percent.
The banks’ risk status will be assessed based on their liquidity positions, capital adequacy, and asset quality and governance structures.
KDIC Chief Executive Mohamud Ahmed Mohamud said Wednesday that the highly anticipated model ensures equity in premium assessment process, with the primary objective of providing incentives for banks to avoid excessive risk taking.
“Cognizant of the country’s state of the economy, this new dispensation in Kenya’s banking sector is a culmination of three straight years of intense discussions and reviews with the KDIC membership on both the design of the model and its efficacy as well as public participation,” Mr Mohamud told reporters in Nairobi on Wednesday.
“All commercial and Microfinance Banks who are members of the deposit insurance have, at individual levels, been sensitised on the assessment process of determining risk categories, the premium rates for each category and how a bank could improve its risk profile.”
The new risk-based premium model was scheduled to go live on July 1 last year but was suspended to give small and weaker banks a breathing space due to the impact of Covid-19.
The deposit insurance fund, which is run by KDIC, was created to compensate depositors of collapsed institutions and to boost confidence in the banking industry that had been rocked by a series of bank failures in the 1980s and early 1990s.
Prior to the new mode, the fund was being funded by member banks at a flat rate of 0.15 percent of the total deposits per annum.
In Uganda, the Deposit Protection Fund (DPF) has implemented the risk-based premium payment model where all institutions licensed and regulated by the Bank of Uganda (BoU) pay a normal premium of 0.2 percent of their average weighted deposit liabilities in the previous financial year.
However, institutions rated high ‘risk’ pay an additional charge of 0.2 percent of the average weighted deposit liabilities in addition to the annual premium, while institutions which are comparatively less risky pay 0.1 percent of the average weighted deposit liabilities in addition to the normal premium.
Risk adjusted premiums are based on quarterly ratings from BoU.
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