Uhuru Kenyatta declines to sign Kenya Deposit Insurance Bill

President Uhuru Kenyatta assenting to the Division of Revenue Bill, 2021 at State House, Nairobi. He has declined to sign Kenya Deposit Insurance Bill.

A proposal to have customers who have invested in a bank that has gone under compensated within six months has been rejected by President Uhuru Kenyatta.

President Kenyatta declined to sign into law the Kenya Deposit Insurance (Amendment) Bill 2020 that seeks to amend the Kenya Deposit Insurance (KDI) Act.

 The Bill passed in the National Assembly towards the end of last session, was sponsored by North Imenti MP Abdul Rahim Dawood.

In a memorandum to the National Assembly expressing his reservations on the Bill, President Kenyatta did not have an issue with the Sh500, 000 as minimum deposit guarantee for every account held in a bank that has collapsed.

The President also expressed his reservations on the imposition of a fine not exceeding Sh1 million or imprisonment for a term not exceeding three years or both for those who violate the law.

Six months

“The President has rejected a proposal to introduce a new provision to prescribe six months as the waiting period for payment of compensation to a customer in respect of a protected deposit,” National Assembly Speaker Justin Muturi told the House of the President’s memorandum.

Mr Dawood noted that to protect the investments in banks, the issue of minimum deposit guarantee must be in law and not regulations as is the case now.

The Act establishes Kenya Deposit Insurance Corporation (KDIC), an independent agency that manages the deposit refund in collapsed banks.

Initially Mr Dawood had proposed a Sh1 million as minimum deposit guarantee for every account held in a collapsed bank.

However, KDIC opposed the Bill, saying that if passed it would increase its exposure to Sh950 billion against the current fund of Sh130 billion.

The President noted that the requirement of the six months as contained in the Bill is inconsistent with section 33 (6) of the KDI Act.

The section provides that where the corporation is obliged to commence payment in respect of any insured deposits, the corporation shall, unless there are extraneous circumstances hindering the corporation, within 30 days after being appointed liquidator make payment.

The payment shall, however, be based on the records of the institution and the opinion of the corporation in terms of the entitlement of the amount claimed.

The President also notes that the six months requirement goes against the International Association of Deposit Insurance’s (IADI) core principles for an effective deposit insurance system.

IADI core principles provide that the deposit insurance system should reimburse depositor’s insured funds promptly, in order to contribute to financial stability.

“There should be a clear and unequivocal trigger for insured depositor reimbursement,” IADI principles state.

KDIC further noted that changing the law to allow for compensation per account instead of per depositor would be against the internationally accepted best standards of deposit insurance.

The increment to Sh500,000 made in July last year came at a time low compensation had exposed savers to higher losses in the event of bank closures because the refund was not adjusted to take into account changing economic realities over the three decades.

The National Assembly Committee on Finance and National Planning shot down the Bill amid concerns that nearly Sh1 trillion would be needed to cover for the exposure.

Kenya has witnessed the collapse of many banks in the last three decades with the recent ones being Dubai bank and Imperial bank in 2015 and Chase bank in 2016.

The collapse has been largely attributed to instances of fraud and insider dealings.

Other banks that have also collapsed in the country include Euro Bank, Trust Bank, Charter House Bank, Prudential Bank and Trade Bank among others.

To curb the collapse of banks, the government has had to undertake continuous surveillance to help in early detection of questionable financial dealings that would otherwise hurt depositors.

Financial transactions

This surveillance to ward off suspicious financial transactions, according to National Treasury Cabinet Secretary Ukur Yatani in the 2021 Budget Policy Statement (BPS), has been through the Central Bank of Kenya (CBK), Financial Reporting Centre (FRC) and other government agencies like the Directorate of Criminal Investigations (CID).

“Early detection of such major corporate scandals has elicited early intervention that has avoided some financial institutions from collapse,” Mr Yatani states in the 2021 BPS.

The law and circulars issued by the CBK Governor Dr Patrick Njoroge require all financial institutions including banks, insurers and saccos to file daily reports to the FRC on crimes such as money laundering, terrorism financing, piracy proceeds, organized crime, bribery and other suspected illicit cash flows. 

Yesterday Mr Dawood said that his proposal seeks to protect Kenyans who have invested in banks that have collapsed.

The current situation is that if a customer has, for instance, three accounts in a bank each with less say, Sh300,000, they can only be compensated a maximum of Sh500,000, which takes ages.

“I have no problem with the President’s reservations. It goes on to show that he supports my Bill,” said Mr Dawood.

The Bill is an improvement to the maximum of Sh100,000 the affected customers are currently entitled to as compensation regardless of the number of accounts held by a single customer.