The Kenya Deposit Insurance (Amendment) Bill 2020 by Imenti North MP Abdul Rahim Dawood has been signed by President Uhuru Kenyatta into law.
The Bill now gives depositors in fallen banks up to Sh500,000 in compensation for every account.
The Bill also sought to make the compensation made for each account instead of per depositor, amid opposition from the Treasury and the KDIC.
Although Hon. Rahim had earlier proposed a compensation limit of Ksh 1 Million, this was reviewed downward to Sh500,000 by the National Treasury and the KDIC.
South Africa and Ireland
The Imenti North legislator cited two major cases – South Africa and Ireland, where revolutionary measures have successfully been implemented to safeguard depositors amidst rising cases of bank failures.
“With the objective to alleviate the high social and economic costs caused by failure of banking institutions, South Africa established a comprehensive regulatory framework in the banking sector. This is something we can largely borrow from to protect Kenyans from the same risks.” he argued.
The South Africa Deposit Insurance Scheme is a subsidiary of South Africa Reserve Bank. It’s a separate legal entity with its own legislative framework and governance requirements but physically located at SARB.
Hon. Rahim also cited the Deposit Guarantee Scheme (DGS) in Ireland that has over time successfully protected the interests of both consumers and providers of financial services in the country.
The DGS protects depositors in the event of a bank, building society or credit union authorized by the Central Bank of Ireland being unable to repay deposits.
100,000 to 500,000
The increase in compensation from an earlier Sh100,000 is a boost to depositors because the low reparation had exposed savers to higher losses in the event of bank closures.
The revised cap of Sh500,000 covers about 20 percent of all bank deposits from the previous eight percent.
The Kenya Deposit Insurance Corporation (KDIC) is funded by charging commercial banks a small percentage of their deposits in the form of insurance.
In 2015 and 2016, Dubai Bank, Chase Bank, and Imperial Bank were placed in receivership, fueling jitters among investors.
Dubai Bank is facing liquidation, while Chase and Imperial had their good loans and deposits transferred to State Bank of Mauritius and KCB Group respectively.
The initial Ksh 1 Million compensation limit was opposed by KDIC, saying that if passed as proposed, it would increase its exposure to Sh950 billion against the current fund of Sh130 billion.
The President, in a memorandum to the National Assembly in February, rejected the proposal to cap six months as the waiting period for payment of compensation to a customer in respect of a protected deposit.
He urged MPs to delete the proposal to amend section 28 of the KIDC Act that introduced the new provision prescribing the caps.
The Act requires that where the KDIC is obliged to commence payment in respect of any insured deposits, the corporation shall within 30 days after the appointed liquidator makes payment based on the records of the institution and the opinion of the corporation as regards entitlements of the amount claimed.
The Head of State also rejected the caps, saying it conflicts with the International Association of Deposit Insurance’s core principles for an effective deposit insurance system.
He said paragraph 15 of the International Association of Deposit Insurance provides that the deposit insurance system should reimburse a depositor’s insured funds promptly, to contribute to financial stability.
The paragraph also dictates that there should be a clear and unequivocal trigger for insured depositor reimbursement.