Banking regulators seek new rules to protect depositors of failed lenders

Monday January 03 2022
 Kenya Deposit Insurance Corporation

The Kenya Deposit Insurance Corporation is seeking to implement new rules to protect bank depositors. PHOTO | FILE


Kenyan banking regulators are working to implement a new accountability framework that will reduce depositors’ exposure to failed lenders following the recent closure of three banks in quick succession.

The Kenya Deposit Insurance Corporation (KDIC) has invited expression of interest (EoI) for consultants to help craft a new bank resolution plan dubbed the ‘Living Will’ that will see banks held accountable for their own disclosures of assets and liabilities in the event of failure.

Under the plan, banks are expected to submit their ‘will’ to the regulator showing the value of assets and liabilities they hold when they are still in operation so that in the event of failure they would be held accountable by their ‘will’.

“KDIC has advertised for consultants to develop the resolution plan framework in accordance with the international best practices,” Chief Executive Mohamud Ahmed Mohamud told The EastAfrican in an interview last week.

“It is part of putting the banks in a cautious position to ensure that their risk framework is effective and robust,” he added.

The latest is part of a string of measures that the monetary authorities — Treasury, KDIC and Central Bank — are undertaking to protect depositors and shore up confidence in the banking sector following the placement of three lenders — Imperial, Chase and Dubai — under receivership and eventual liquidation.


Mohamud said assets and liabilities of each bank will be reviewed regularly to ensure the finances are healthy and that customer deposits are well covered by assets.

KDIC provides a deposit insurance scheme for member institutions, providing incentives for sound risk management and fostering the stability of the banking sector. Already, the corporation has rolled out the increased deposit coverage limit of $4,464.28 per depositor from $892.85. From July 1, 2021 it started implementing the highly anticipated Risk-Based Premium model that allows banks with higher risk exposures to pay increased premiums. It’s implementation was, however, suspended for one year due to the Covid-19 pandemic.

Asssessing risk

Under the new model banks rated low risk will pay the normal flat rate of 0.15 percent of their annual deposits to KDIC while those rated high risk will pay 0.206 percent.

The banks’ risk status is assessed based on their liquidity positions, capital adequacy, asset quality and governance structures, ensuring equity in premium assessment and providing incentives for banks to avoid excessive risk taking.

In Uganda, all institutions licensed by the Bank of Uganda pay a premium of 0.20 percent of their average weighted deposit liabilities in the previous financial year to the Deposit Protection Fund.

Institutions rated ‘risky’ pay an additional charge of 0.20 percent while those considered less risk pay 0.10 percent of the average weighted deposit liabilities in addition to the normal premium.

Risk adjusted premiums are based on quarterly ratings from Bank of Uganda.