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Relief for depositors as Kenya set to review closing of distressed banks

Saturday November 18 2017
Imperial

Imperial Bank depositors protest outside the bank’s headquarters in Nairobi, in October 2016. PHOTO FILE | NATION

By JAMES ANYANZWA

Customers of commercial banks could soon be spared the distress of having their money locked up in failed institutions following measures by the deposit insurance agency to have weak institutions sold instead of being placed under management.

The move is expected to curb runs on deposits and safeguard depositors. Consumers and bankers have backed the shift, which appears to have been informed by the new Insolvency Act that obligates regulators to ensure revival of institutions, with liquidation being a last resort.

Under the new arrangement, the Kenya Deposit Insurance Corporation (KDIC) and the Central Bank of Kenya will carry out joint surveillance and examination of the corporate governance practices and financial statuses of every lender with a view to engaging with the directors and owners of troubled institutions for a change of ownership as a going concern.

Early warning signs

“This surveillance and examination will enable us come up with early warning signs; then, in collaboration with the Central Bank, we can engage with the directors and shareholders of the bank to give us some resolution plans. The main idea is for all of us to work together to revive the bank without closing it,” KDIC chief executive Mohamud Mohamud told The EastAfrican.

“We will sell the bank as a going concern. We want to avoid receiverships. Closing the bank or putting it under receivership causes disruptions to lives and businesses and impacts negatively on the general financial stability of the country,” Mr Mohamud added.

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He however noted that there are exceptional circumstances, such as fraud, that may lead to the regulators closing the bank for a short while to tame a run on deposits.

“Any event that  is likely to trigger a run on the bank may call for a brief closure to stem any further run, which may adversely affect the assets of the bank and industry in general,” he said.

“However KDIC, CBK and the National Treasury will be working jointly towards ensuring bank failures are minimised.”

The new measures come after the collapse of Dubai Bank (August 2015), Imperial Bank (October 2015) and Chase Bank (February 2016) shook depositors’ confidence in the banking sector, leading to massive transfers of deposits from small banks to large banks.

The three banks collapsed with a combined Ksh100 billion ($1 billion) in customer deposits.

The State Bank of Mauritius is considering taking over the assets of Chase Bank, and six bidders have expressed interest in acquiring Imperial Bank. 

READ: Mauritian lender seeks more buyouts

Crane Bank

The policy would be similar to what Uganda has in place. When Crane Bank collapsed in September last year, it was sold to DFCU by January 2017; Imperial Bank operations in Uganda were not affected by the problems at its parent bank in Kenya.

In Uganda, depositors are covered up to Ush5 million ($1,356) of their total deposits, and the law provides that all depositors be paid within 90 days of a bank failure. The troubled institution should have its assets auctioned within six months of its takeover by the central bank.

“This is a key pillar towards ensuring stability in the industry because the move involves preventing or reducing the probability of a bank entering into a situation of receivership, by identifying and resolving a bank problem before it deteriorates,” said Habil Olaka, the chief executive of the Kenya Bankers Association.

READ: Large Imperial Bank depositors to get their money

Stabilise the banking industry

Mr Olaka, however, noted that if the bank is in bad shape, the Central Bank could put it under receivership, sending a warning to directors who may take advantage of the new measures to sell out.

The chief executive of Equity Group, James Mwangi, said the new measures would stabilise the banking industry.

“It is appropriate for the regulators to keep evaluating what works for the industry. The move will create certainty,” said Mr Mwangi.

According to the Consumer Federation of  Kenya (Cofek), although the closure of banks has led to losses of funds and businesses that have hurt depositors, the new measures must be anchored in the law.

“Such a major policy shift requires to be supported by regulations of the Banking Act, which must undergo stakeholder consultations and be approved by the National Assembly,” said Stephen Mutoro, secretary general of Cofek.

While customers held millions of dollars in the failed Chase and Imperial Banks, they were only allowed to access up to Ksh1 million ($10,000)  and Ksh1.5 million ($15,000) respectively under special arrangements with select banks, since the legally allowed compensation to depositors is up to Ksh100,000 ($1,000) only.

KDIC is also working towards raising the compensation to depositors of failed institutions from the current Ksh100,000 ($1000). Recommendations for the review of Kenya’s deposit coverage amount are currently under consideration by the Treasury.

In Tanzania, the Deposit Insurance Board increased the amount of protected deposits from Tsh500,000 ($220) to Tsh1,500,000 ($660), while the Deposit Guarantee Fund of Rwanda protects eligible deposits up to Rwf500,000($579) per depositor per member bank and microfinance institution.

Francis Mwangi, the head of research at Standard Investment Bank, said abolishing or reducing the incidence of putting banks under receivership boosts confidence in the industry.

“The biggest gray area is how CBK and KDIC will compel directors of distressed banks to implement the measures,” said Mr Mwangi.

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