KDIC seeks to increase depositor refunds limit
Kenyan currency notes.
What you need to know:
- The move will take into account changes in inflation and industry dynamics.
- There is a need to review the coverage limits regularly to take into account inflation.
The Kenya Deposit Insurance Corporation (KDIC) is revising the Sh500,000 compensation limit for a customer of a collapsed bank, a move that will benefit depositors with larger balances.
KDIC has this week closed bids for a consultant who will review the funds' coverage limit to enhance public confidence and banking financial stability.
The move will take into account changes in inflation and industry dynamics including the size of deposits held by commercial banks.
“The coverage limit was set at Sh100, 000 in 1989 and reviewed to Sh500, 000 in recognition of the decline in real value over time to Kenyan depositors," KDIC said in the document inviting consultants for the review.
"The coverage limits as set in the KDI Act apply to all banks in the deposit insurance system.
Coverage limit
However, there is a need to review the coverage limits regularly to take into account inflation, changes in real income, the composition and size of deposits and additional funding requirements."
KDIC’s move is an about-turn from last year when the corporation warned of a moral hazard from a switch in the compensation model per customer to per account, and an increase in the maximum payout arguing the move would encourage recklessness among lenders and trigger more bank failures.
The corporation argued then that Sh500,000 coverage limit per customer was sufficient for the sector.
A consultant is expected to carry out research in the banking sector to determine the adequacy and optimality of coverage limit and scope of deposit products within two months.
At present, depositors are reimbursed up to Sh500,000 of deposits in the event a bank collapses, meaning that depositors with balances up to the threshold are fully paid.
Closure of troubled banks
Depositors with amounts exceeding Sh500,000 meanwhile are first compensated up to the coverage limit with balances being paid as and when assets of the closed bank are disposed of in liquidation.
High-value depositors have nevertheless been left frustrated by the lengthy time taken between the closure of troubled banks and liquidation which has meant a longer wait for full reimbursement of deposits.
The recent revision in the deposit insurance coverage limit to Sh500, 000 which took effect on July 1, 2020 lifted the total banking industry deposits insured by KDIC to Sh705 billion equivalent to 16 percent of total deposits in the year to June 2021 from seven percent previously. The previous compensation limit was Sh100,000.
The coverage limit was against a total deposit liability of Sh4.3 trillion represented by 66 million bank accounts according to additional disclosures by KDIC.
