INSURANCE

High risk banks set to pay higher premiums starting today

This after the Kenya Deposit Insurance Corporation rolled out the risk-based premium assessment model, after one year suspension

In Summary
  • This follows the expiry of the one-year suspension of the risk based premium model last year due to the economic knocks of the Covid-19 pandemic.
  • The roll out of this model means that high-risk lenders will now pay a higher premium to the fund and vice versa.
KICD CEO Mohamud Ahmed Mohamud during a press conference at UAP building on marketing interventions in light of government directives on the Covid-19 global pandemic on June 30, 2020.
KICD CEO Mohamud Ahmed Mohamud during a press conference at UAP building on marketing interventions in light of government directives on the Covid-19 global pandemic on June 30, 2020.
Image: MERCY MUMO

High risk banks will start paying higher premiums starting today after the Kenya Deposit Insurance Corporation rolled out the risk-based premium assessment model.

This follows the expiry of the one-year suspension put in place in July last year due to the economic shocks of the Covid-19 pandemic.

The one-year delay in premium payment was aimed at giving banks impacted by Covid-19 space to put their books in order, according to a November paper titled Post Covid-19 Economic Recovery Strategy 2020-2022.

“KDIC extended the payment period of annual premiums (Sh5.5billion) due in August 2020 for 6 months to give a breather to banks experiencing cash-flow disruptions. The stimulus is intended to give banks a one-year breather as they re-organise their business in response to the market shocks,” the Treasury paper said.

The roll out of this model means that high-risk lenders in terms of their liquidity positions, capital adequacy, asset quality and governance structures will now pay a higher premium to the fund and vice versa.

This new dispensation in Kenya’s banking sector, is a culmination of three years of discussions and reviews with the KDIC membership on both the design of the model and its efficacy as well as public participation.

According to a statement by the corporation's Chief Executive Officer Mohamud Ahmed , the primary objective of introducing the risk-Based Premium System, is to provide incentives for banks to avoid excessive risk taking.

“This model ensures equity in the premium assessment process in line with the Corporation’s core mandate and compliance with Section 27 of KDIC Act, 2012,” says Ahmed.

The risk based premium model will enable the Corporation to differentiate risks among banks and effectively assign premiums for each risk cluster.

The model utilizes a variety of relevant information provided by the bank to determine its risk category.

All commercial and microfinance banks, who are members of the deposit insurance, have at individual levels been sensitized on the assessment process of determining risk categories, the premium rates for each category and how a bank could improve its risk profile.

“In order to address any emerging issues, the Risk-Based Premium model will be regularly re-assessed on its effectiveness and efficiency in meeting its objectives. Where it is found, necessary, the model will be up-dated and/or revised to meet changing market conditions or requirements,” said Ahmed.

The deposit insurance fund, run by KDIC, was created to compensate depositors of collapsed institutions and to boost confidence in the banking industry that had been rocked a by a series of bank failures in the 1980s and early 1990s.

Currently, the fund is financed by member banks at a flat rate of 0.15 percent of the total deposits per annum.

The risk-based model will see the transition from the current rate of 0.15 percent of the total deposits held and replace it with a model where the premium that is charged is based on an individual bank’s risk appetite.