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February 22, 2018

KDIC to make risky banks pay big premiums amid collapses

Kenya Deposit Insurance Corporation chief executive Mohamud Mohamud with CBK governor Patrick Njoroge during an update on Chase Bank in Nairobi on January 12 /ENOS TECHE
Kenya Deposit Insurance Corporation chief executive Mohamud Mohamud with CBK governor Patrick Njoroge during an update on Chase Bank in Nairobi on January 12 /ENOS TECHE

Banks considered high risk will be required to pay higher premiums to the Kenya Deposit Insurance Corporation to avert bank failures

Currently banks are charged a flat premium of 0.15 per cent of total deposits for 12 months preceding the start of the financial year, or Sh300,000 — whichever is higher.

In an exclusive interview with the Star yesterday, KDIC chief officer Mohamud Mohamud said the corporation plans to introduce risk-based premiums in two years to avoid and  mitigate the impact of bank collapse on depositors. The starting date has not been determined.

''We will no longer be mere liquidators. In our role as risk minimisers, we work with CBK to survey bank portfolios, examine their strength and ensure depositors and creditors get quick compensation in case of failure,'' Mohamud said.

He blamed bank failures on poor corporate governance, saying risk-based premiums will reward best practices and shield depositors by setting higher compensation.

Mohamud urged banks to be proactive in advising borrowers to invest productive ventures, rather than just extending loans to earn interest.

''When a customer sinks, a bank sinks. This is not the picture we want in our financial sector. It therefore demands every stakeholder to be very careful. Nothing makes me happier than issuing a dividend cheque to disgruntled depositors. But I will be happier when no bank is forwarded for liquidation,'' the KDIC chief officer said.

This is good news, especially for large depositors and creditors who suffer during bank failures. Under liquidation, once a bank is put under receivership, KDIC pays a guaranteed sum of up to Sh100,000 to depositors. The rest is paid through dividends as it liquidates bank assets.

Mohamud said about 97 per cent of Kenyan accounts contain less than Sh100,000, hence, most depositors are fully secured.

In 2012, the agency was upgraded from the Deposit Protection Fund Board to KDIC under the Kenya Deposit Insurance Act.

Since 1993, it has liquidated 25 banks, concluding compensation for eight banks. Another 17 are at different stages of the compensation process, including Chase, Imperial and Trust banks.

Although Kenya's debt recovery is better than that of other countries in continent, the process has been hampered by poor documentation by banks.

The agency has recovered 19.4 per cent of more than Sh40 billion since establishment of the Deposit Protection Fund Board in 1987, Mohamud said. It plans to recruit more employees to expedite the process.

 

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