Home Business Bill ups deposit refund in failed banks to Sh1m

Bill ups deposit refund in failed banks to Sh1m


Economy

Bill ups deposit refund in failed banks to Sh1m


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Kenya Deposit Insurance Corporation CEO Mohamud Ahmed. FILE PHOTO | NMG

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Summary

  • The Treasury is fighting a bid to change the law to allow depositors in collapsed banks receive compensation of up to Sh1 million for each account.
  • A draft Bill set for debate in Parliament seeks to increase the payout for each account in a fallen bank from the current cap of Sh500,000 per depositor.
  • The compensation was in July last year increased to Sh500,000 from Sh1 million, marking the first rise in 30 years.

  • 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 Treasury is fighting a bid to change the law to allow depositors in collapsed banks receive compensation of up to Sh1 million for each account.

A draft Bill set for debate in Parliament seeks to increase the payout for each account in a fallen bank from the current cap of Sh500,000 per depositor.

The Treasury, the Attorney-General and the Kenya Deposit Insurance Corporation (KDIC)— an independent agency that manages the deposit refund in collapsed banks — have opposed the increase, arguing it would a create a Sh1 trillion liability for the State.

The compensation was in July last year increased to Sh500,000 from Sh1 million, marking the first rise in 30 years.

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 reckons that time is not right for another adjustment.

“I do not think it is workable and we have raised objections, the National Treasury and the AG have also written to Parliament warning that the government will have to allocate Sh1 trillion to cover the deposits,” Mohamud Mohamud, the KDIC chief executive officer, said in an interview Tuesday.

The Bill scraps a clause that states that depositors can only receive a maximum of Sh500,000 despite holding multiple accounts in a collapsed bank.

The proposed law also compels KDIC to pay the refund with six months after the collapse of a bank failing which its executives risk a fine of Sh1 million or three years jail or both.

“The principal object of this Bill is to amend section 28 of the Kenya Deposit Insurance Act 2012 in order to increase the maximum amount a person with an account in an institution under liquidation is to be paid by KDIC,” says the Bill.

“It further seeks to delete the provision limiting the maximum a person is to be paid by the corporation despite having different accounts.”

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 four 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 the deposit insurance fund currently has Sh120 billion against an exposure of Sh650 billion after KDIC revised the cover to Sh500,000.

The revised cap now covers about 20 percent of all bank deposits 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 percent 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.

Banks are from July expected to pay premiums based on the risks and not a uniform rate.

Mr Mohamud reckons that increasing coverage to Sh1 million will see 99.9 percent of all bank accounts liable for compensation.

“It will create market indiscipline and banks will be reckless. Why would they care if all depositors can be paid by the government,” he said, adding that it would be in breach of international practice.



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