Introduction
Of utmost concern in the recent collapse of several financial institutions is the impact that the said collapse has had on customers, depositors, creditors among others. These events in the banking industry have indeed been a reason enough to pause and re-think the current financial regulatory approach.
The legal framework governing deposit insurance is one such regulatory approach. Deposit insurance is intended to play the central role of encouraging savings and promoting the stability of the financial system of the country.
The Legal Framework governing deposit insurance in Kenya
Deposit insurance in Kenya is generally governed by the Kenya Deposit Insurance Act, No. 10 of 2012 (the KDI Act) as read together with the Banking Act, Cap 488 (the BA Act). The KDI Act establishes the Kenya Deposit Insurance Corporation (the Corporation). The object of the Corporation is to provide a deposit insurance scheme for customers of member institutions and to receive, liquidate and wind-up any institution in respect of which the Corporation is appointed receiver or liquidator in accordance with the Act.[1] The Banking Act empowers CBK to intervene in the management of a bank or other financial institution by among other things, appointing KDIC to assume the management, control and conduct of the affairs and business of an institution and to exercise all the powers of the institution to the exclusion of its board of directors including the use of its corporate seal.[2]
The KDI Act further establishes the Deposit Insurance Fund (the Fund) which consists of the monies contributed by institutions licensed by the Central Bank of Kenya (the CBK).[3] The contribution of each institution is determined by the Corporation depending on the risk profile of the institution.[4]
- The application of the Deposit Insurance Fund
The Fund is applied in payments in respect of insured deposits.[5] Accordingly, the Kenya Deposit Insurance Regulations, 2015 (the KDI Regulations) require that the Corporation shall insure current account deposits; savings account deposits; call deposits; fixed term deposits; and foreign currency deposits [6] placed with an institution.
The maximum amount payable to a customer in respect of the aggregate credit balance of any deposit accounts maintained by the customer with the institution shall not exceed one hundred thousand shillings (KES 100,000) or such higher amount as the Corporation may from time to time determine.[7]
If a depositor owns two or more deposit accounts with an institution, the aggregate of those deposits shall be insured in respect of the consolidated amount to the prevailing maximum amount fixed (KES 100,000).[8]
The KDI Act requires an institution that is under a lawful obligation to repay monies to a depositor who is acting as a trustee for another or as joint owner with another to disclose the trusteeship or joint ownership on its records.
Consequently, the deposit of the depositor as trustee or as a joint owner shall either be deemed:
- to be a deposit separate from any deposit of that depositor acting on his own behalf or acting in another trust or joint capacity with the institution:
- to be a separate deposit where the trustee is acting for two or more beneficiaries;
- to be a deposit separate from a deposit of that beneficiary with the institution on his own behalf; and
- to be separate from any deposit held in trust by another trustee for the beneficiary in the institution.
- The sufficiency of the Coverage from the Fund
This is both a moral and a legal question. The Fund as currently is, has evidently achieved one most paramount objective; the protection of small depositors. This is understandable as small depositors (with deposits less than KES 100,000) are believed to be unable to determine the risks associated with the banking institutions into which they place their money due to information asymmetry.
However, the protection offered by the Fund is definitely insufficient for the large depositors who constitute not more than ten (10) percent of the depositors in the deposit taking institutions. This prompts the question as to whether the recoverable limit of KES 100, 000 should be increased to reflect current economic circumstances such as taking into consideration the current inflation rate.
The insufficiency of the coverage has been subject to discussions in the Kenyan courts. In Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust Bank Limited (In Liquidation) [2016]eKLR, the court though not pronouncing itself on whether the recoverable amount should be increased noted the plea of the plaintiff relating to the insufficiency of the amount. The court’s hands were definitely tied.
- Suggestions for Reforms
Understandably, full coverage may be undesirable for many reasons including the potential moral hazard that it would be associated with due to the decline in market discipline and encouragement of excessive risk taking.
However, there is definitely an urgent need to increase significantly the deposit insurance coverage so as to align with the current inflation rate. This will also serve as an incentive to encourage more customers to keep large deposits in banks.
In addition, there is need to re-evaluate the amount contributable to the fund. The Act provides that the amount contributed to the corporation shall not be less than three hundred thousand nor exceed 0.4 per cent of the average of the institution’s total deposit liabilities during the period of twelve months prior to the date of the notice served within twenty one days by the corporation.[9] However, for institutions that have been members for less than twelve months, the amount of deposits shall be prorated for the number of months that the institutions have been in operation.[10] This percentage needs to be adjusted upwards for the deposit insurance to be relevant.
Lastly, the Act ought to be amended to include deposit insurance for SACCOs. Due to their attractiveness, there is the need to protect proprietors who opt to invest in them.
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[1] Section 5(1) of the KDI Act, 2012.
[2] Section 34 (2)(b) of the Banking Act cap 488
[3] Section 20 of the KDI Act, 2012.
[4] Section 27 of the KDI Act, 2012.
[5] Section 23 of the KDI Act; Section 39 of the Banking Act.
[6] Regulation 9 of the KDI Regulations.
[7] Section 28 of the KDI Act, 2012.
[8] Section 28 of the KDI Act, 2012.
[9] Section 27 of the KDI Act, 2012
[10] ibid
