The primary objective of the Deposit Insurance scheme is to promote public confidence and contribute to financial stability.
When banks take demandable deposits and lend long-term on illiquid assets (loans), they create a cash-flow mismatch which exposes them to Liquidity Risk. This risk crystallizes when a bank is unable to provide adequate liquidity (cash) to meet depositors’ withdrawals. This can trigger a market panic among depositors who may rush to withdraw ALL their deposits at once for fear of losing them. The fear arises from the fact that once a bank is closed, depositors will lose their money. This fear normally spreads to banks that would ordinarily not be experiencing the liquidity risk.
In order to address this fear and restore confidence in the banks, the Deposit Insurance Scheme provides a guarantee that depositors will be reimbursed their money even if the bank were to collapse. This unequivocal deposit protection guarantee is critical for the banking system, by promoting public confidence and financial stability.
Depositors’ fear arising from a single bank failure can quickly spread to other banks leading to a contagion effect. Consequently, those depositors who lose access to their funds in bank failures may not be able to meet obligations coming due, resulting in financial stress to businesses and households. Deposit insurance is designed to reduce these risks.
As such, In 1989, the government of Kenya established the Deposit Insurance System (DIS), dubbed “Deposit Protection Fund Board,” which has since transited to the Kenya Deposit Insurance Corporation (KDIC). The Corporation is thus mandated to protect depositors against the loss of their insured deposits in the unlikely event of failure of a member bank.
Our members include: Commercial banks, Mortgage finance institutions and Microfinance banks licensed by the Central Bank of Kenya and as such, membership to KDIC is mandatory. Currently, we have 37 Commercial banks, one Mortgage Finance Institution, and 14 Microfinance banks.
What KDIC Deposit insurance Scheme covers
KDIC is mandated to provide insurance cover for deposit accounts of up to a maximum limit provided for from time to time per depositor of a member bank. Where a depositor has more than one account in a bank, all the accounts are consolidated and paid up to the threshold of provided limit.
Accounts covered include:
- Current accounts
- Savings accounts
- Fixed deposit accounts
- Call accounts
Other facilities covered includes:
- A bank draft, certified cheque or other similar instrument or payment instruction, drawn or made against a deposit account for which the member institution shall be primarily liable;
- A cheque entered into a payment system notwithstanding any delay or failure by the member institution in crediting the payee's account; or any other liability or financial instrument as may be specified by the Corporation
- The deposit held in trust by the trustee for each beneficiary, shall be deemed to be a separate deposit where the trustee is acting for two or more beneficiaries; and
- The deposit held in trust by a trustee for a beneficiary in an institution shall be deemed to be a deposit separate from a deposit of that beneficiary with the institution on his/her own behalf and shall also be deemed to be separate from any deposit held in trust by another trustee for the beneficiary in the institution.
What KDIC Deposit Insurance Scheme does NOT cover. Uninsured financial products include:
- Balances above the protected limit
- Deposits not payable in Kenya
- Mutual funds (including money market funds);
- Digital and cryptocurrencies;
- Securities of the Government of Kenya;
- Debentures issued by banks, governments or corporations;
- Deposits held at financial institutions that are not KDIC members.
- Sacco deposits
- Interbank money market placements
- Annuities
- Unit trusts, stocks and shares
- Any sum of money payable under a repurchase agreements;
- Interbank transactions; and
- Repurchase agreements
- Any other liability or financial instrument as may be specified by the Corporation;
The member institutions will notify depositors when a deposit (or deposit-like) product is not eligible for insurance.
Deposit Insurance Payout
Conditions for payout
KDIC is mandated to provide deposit insurance coverage of up to Ksh.500,000 to each depositor of a member institution. The insurance covers all types of deposit accounts. However, protected payment is restricted to one depositor per institution.
Where a depositor has more than one account in an institution, the accounts are consolidated for settlement as one claim subject to the maximum protected limit of Ksh.500,000. This limit was set after analysis of returns submitted by the institutions. The limit provides full deposit insurance coverage for over 99% of deposit accounts in Kenya.
KDIC may decide that a deposit insurance payout should be made if:
- A court order has been made to wind up a DI Scheme member; or
- An institution has been placed in liquidation by the Central bank of Kenya and KDIC appointed liquidator.
Joint Accounts
For deposits in joint accounts, the joint account will be considered separate from each individual account.
The aggregate amount of insured deposits is insured up to Ksh.500,000 because each joint account holder is assumed to have an equal share in the joint account.
Risk minimization is a key mandate of the Corporation, implemented under the Risk and Examination Directorate. This involves early detection and timely intervention in regard to risk exposures of member institutions to the Deposit Insurance Fund. Risk minimization helps to minimize the failure of institutions that may have adverse effects to the entire financial system. Through the risk management function, KDIC continues to proactively assess the risk exposure of member institutions through offsite surveillance and on the exceptional cases through a special onsite examination for detection of early warning signs for troubled institutions.
Resolution is the disposition plan and process for resolving a non-viable bank. One important statutory mandate of KDIC is to ensure that failing/failed institutions are resolved in a timely and efficient manner. This is supported by the existence of legal powers through the KDI Act Cap.487C that supports early intervention and prompt corrective action, the ability to close troubled banks promptly, and orderly liquidation of assets and resolution of creditors’ claims. As the sole and exclusive “Receiver” of the Bank, KDIC advises the Central Bank of Kenya on the most viable resolution mechanism to reopen the bank within the shortest time possible.
Intervention mechanisms may include:
Open Bank Assistance (OBA)
This is a resolution mechanism where a troubled Bank receives assistance in form of a loan or contribution by the Deposit Insurer, Government, or the Central Bank. This may include changes in the Board and Management. The Deposit Insurer must determine that the assistance is the least costly option to the insurance fund of all possible methods for resolving the institution. The overall goal in using OBA is to minimize the cost of a failing bank to the deposit insurance fund.
Merger: A merger is where shareholders identify with suitable partners who may come in and conduct due diligence in order to merge the balance sheets and come up with a strong bank.
Acquisition: Acquisition is a form of taking over where the shareholders may identify a strategic investor who may have a significant controlling interest and or acquire the whole bank as it is. This will entail due diligence and negotiations to inform the decision made.
For example, the Consolidated Bank is made up of mergers of 9 financial institutions. Over the years the country has experienced a number of mergers and acquisitions in order to restructure and strengthen the banking sector
This is where the DIS forms an institution to assume the troubled bank as it continues to find a solution or an acquirer for the troubled Bank. The bridge bank is usually established by the DIS or financial regulator and may be instituted to avoid systemic risk and provide an orderly transition avoiding negative effects such as bank runs.
Liquidation, also known as pay-out is the process where a bank is closed and depositors are paid their insured deposits in a prompt manner.
The Liquidator engages in the process of realizing the assets of resolution with a view to distributing dividends to depositors and creditors as and when sufficient funds are available.
A financial institution is placed in liquidation when it becomes insolvent if:
- It violates any law or regulation or engages in unsafe and unsound practices likely to cause insolvency
- It is unable to pay its debts
- A winding-up order is made against it or a resolution for creditor’s voluntary winding-up is passed
- It is unable to pay sums due and payable to its depositors
- The Central Bank determines that the value of its assets is less than the amount of its liabilities.
The Liquidation process entails:
- Takeover of failed institutions
- Facilitation of Payment of Insured Deposits
- Tracing and Preservation of Assets
- Debt Recovery
- Asset Realization
- Payment of Liquidation Dividends
- Winding up (dissolution of institutions)
We currently have 19 (Nineteen) institutions have been placed in liquidation as shown in the list below
LIST OF INSTITUTIONS PLACED IN LIQUIDATION
|
INSTITUTION |
LIQUIDATION DATE |
1 |
Postbank Credit Ltd. |
20-May-93 |
2 |
Trade Bank Ltd. |
18-Aug-93 |
3 |
Middle Africa Finance Ltd. |
20-Aug-93 |
4 |
Pan-African Bank Ltd. |
18-Aug-94 |
5 |
Pan-African Credit & Finance Ltd. |
18-Aug-94 |
6 |
Thabiti Finance Co. Ltd. |
19-Dec-94 |
7 |
Meridien BIAO Bank Ltd. |
15-Apr-96 |
8 |
Kenya Finance Bank Ltd. |
29-Oct-96 |
9 |
Ari Bank Corporation Ltd. |
05-Dec-97 |
10 |
Prudential Bank Ltd. |
05-May-00 |
11 |
Reliance Bank Ltd. |
12-Sep-00 |
12 |
Fortune Finance Co. Ltd. |
14-Sep-00 |
13 |
Trust Bank Ltd. |
15-Aug-01 |
14 |
Euro Bank Ltd. |
21-Feb-03 |
15 |
Prudential Building Society |
18-Jan-05 |
16 |
Daima Bank Ltd. |
13-Jun-05 |
17 |
Dubai Bank Ltd. |
24-Aug-15 |
18 |
Charter House Bank |
7-May-2021 |
19 |
Imperial Bank Ltd |
8-Dec-2021 |
This is a form of resolution method where the Government comes into play and bails out the troubled Bank. This may be in form of a take-over or nationalization. For example the in the past the Government has bailed out institutions like the National Bank of Kenya.
A trust account is a legal arrangement a trustee (third party) holds funds in a bank account for the benefit of another party (the beneficiary), which may be an individual or a group.
Deposits in trust accounts held by banks are protected separately at beneficiary levels and are treated as separate deposits from deposits in other types of accounts for the same beneficiary
A trustee acting for two or more beneficiaries in one trust account is required to submit information on the trust account directly to the bank where the account is maintained. The information must be submitted, as a monthly deposit liability report.
A trustee acting for two or more beneficiaries is responsible for submitting the following information directly to the bank where the trust account is maintained:
- The trust account number
- The name, address and identity card number or passport number or any other identification of the trustee acceptable to the bank
- The name and address of each beneficiary on monthly basis
- The amount or percentage of each beneficiary’s interest in the trust account on monthly basis
c. The deposit held in trust by the trustee for each beneficiary shall be deemed to be a separate deposit where the trustee is acting for two or more beneficiaries; and
d. The deposit held in trust by a trustee for a beneficiary in an institution shall be deemed to be a deposit separate from a deposit of that beneficiary with the institution on his/her own behalf and shall also be deemed to be separate from any deposit held in trust by another trustee for the beneficiary in the institution.
Example of trust account transaction protection information:
a. One beneficiary in a single trust account:
A mother (the account holder as trustee) deposits money in trust for her minor son.
b. Two or more beneficiaries in a single trust account:
A law firm (the account holder as trustee) holding funds in trust for multiple clients pending completion of a number of real estate transactions.
Account |
Account Holder |
Beneficiary Name Or Code |
Amount (Kes) |
Protected (Kes) |
|
1 |
Omondi & Co. (Office account of a law firm) |
N/A |
300,000 |
Applicable set Limit |
|
2 |
Omondi & Co. (Client account in trust of a law firm) |
x 001 |
300,000 |
Applicable set Limit |
|
x 002 |
300,000 |
Applicable set Limit |
|||
Total deposits |
900,000 |
Total Applicable set Limit |
c. What if there are several trustees who hold accounts for the same beneficiary in the same member bank?
The beneficiary will receive separate protection up to KES 100,000 for each trust account.
Account |
Trustee |
Beneficiary |
Amount (Kes) |
Protected (Kes) |
1 |
Simiyu & Co. |
Hassan |
300,000 |
Applicable set Limit |
2 |
Kamau & Co. |
Hassan |
300,000 |
Applicable set Limit |
Total deposits |
600,000 |
Total Applicable set Limit |
d. What if a trustee holds several accounts for the same beneficiary in the same member bank?
All deposits will be combined and protected up to KES 100,000.
Account |
Trustee |
Beneficiary |
Amount (Kes) |
1 |
Korir |
Jemutai (Daughter) |
150,000 |
2 |
Korir |
Jemutai (Daughter) |
150,000 |
Total deposits |
300,000 |
||
Total deposits eligible for protection |
Applicable set Limit |
e. What if a trustee holds several accounts for different beneficiaries in the same member bank?
Each account is protected separately up to KES. 500,000.
Account |
Trustee |
Beneficiary |
Amount (KES) |
Protected (KES) |
1 |
Ali |
Ahmad (son) |
275,000 |
Applicable set Limit |
2 |
Ali |
Sera (daughter) |
275,000 |
Applicable set Limit |
Total deposits |
550,000 |
Total Applicable set Limit |