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KDIC mulls new approach to end future bank failures

Depositors of defunct Chase Bank, became the first group to receive an enhanced insured deposit limit of Sh500, 000 after KDIC revised the coverage limit from Sh100, 000, offering a huge relief to savers who have struggled to retrieve their cash from failed banks. -In June 2021 KDIC started payments to depositors who had up to Sh500, 000 in collapsed Charterhouse Bank, ending a 14-year freeze that had inconvenienced thousands of savers. Over 85 percent have been paid.

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By Steve Umidha

The Kenya Deposit Insurance Corporation (KDIC) is considering sweeping changes that could see failed banks’ customers get their insured deposits within the shortest time possible.

Some of those changes will require licensed commercial and microfinance banks as well as mortgage finance institutions to frequently share data and information with the agency in collaboration with Kenya’s Central Bank to help monitor and track financial activities in such institutions.

Through its ‘zero bank failure’ mantra, KDIC’s Chief executive Mohamud Ahmed Mohamud in an interview Monday said the new approach will seek to bring to an end failed banks depositors’ woes previously seen with some banks.

“We want to use Chase bank as a model of our last mile of resolution. We want to use international best practices where a decision is made eight months before a bank fails. Once we discover a bank has a slight problem, we can move into that bank without anyone knowing and fix it beforehand,” said Mohamud.

It is a practice he says has effectively been employed in other markets like Nigeria, where a distressed bank is reopened within days of its closure.

“In those markets they do it before banks fail. My dream is to see KDIC close a bank on a Friday and reopen it on a Monday,” he adds – in a strenuous approach that will require the participation of the CBK, Treasury and other relevant agencies.

Depositors of failed banks have been known to wait for years on end for the payment of their insured deposits by the KDIC and sometimes to no avail.

Previously, the corporation has faced roadblocks in the full payment of trapped depositors’ funds as a result of difficulty in realizing assets of banks in-liquidation due to poor documentation by the banks, revocation of title by authorities and litigations over the assets.

But with an expanded mandate, KDIC will seek to come to the rescue of thousands of bank customers still in tears.

Indeed some of the depositors including those from Chase, Imperial and Charterhouse banks for instance, are yet to be paid, even though a chunk of depositors affected by closed banks with deposits below Sh500, 000 have been paid through the agency.

According to Dr. Sam Nyandemo, an economist and a University of Nairobi (UoN) don, believes that while the idea by KDIC is a dream in the right direction and which may not live to its billing.

“It is a dream. A wishful thinking and a marketing strategy. I do not think they have the capacity owing to the fact that our economy is so fragile unlike other markets with deepened financial systems,” said Nyandemo in a telephone interview yesterday.

The agency could also contend with the idea to make it easier for private equity firms willing to buy insolvent lenders, in a move that could reduce the number of failed banks that the fund would have to support.

Peter Macharia, a banker and economist, reckons that KDIC could, in its quest to meet its ambitions, seek to entice buyers by agreeing to share some of the potential losses from failed banks.

“I see a scenario where KDIC will be inclined into retooling its financing programs to make it cheaper for bidders to buy the toxic assets of closed lenders,” said Macharia.

Further, the agency will aim to use its recently unveiled risk-based insurance premium model whose aim will be to safeguard Kenyans putting their money in banks with speedy resolution procedures. Its future target is to ensure no bank failures are realised in the future.

Under the new model unveiled in July1, banks rated low risk will pay the normal flat rate of 0.15 percent of their annual deposits to the Corporation while those rated high risk will pay 0.206 percent, an additional 0.056 percent.

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