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DEPOSIT INSURANCE

In 1989, the government of Kenya established the Deposit Insurance System (DIS), dubbed “Deposit Protection Fund Board,” that has since transited to the Kenya Deposit Insurance Corporation (KDIC). KDIC is mandated to protect depositors against the loss of their insured deposits in the unlikely event of failure of a member bank.

Membership to KDIC is compulsory. As such, our members includes commercial banks, mortgage finance companies and Microfinance banks licensed by Central Bank of Kenya. The current membership comprise 42 Commercial banks, one Mortgage Finance Institution and 14 Deposit Taking Microfinance banks.

In Kenya, the DIS is an integral component of an effective financial safety net which protects small, vulnerable and unsophisticated depositors. This consequently enhances consumer protection. When a bank fails, the protected depositors are notified through mainstream media, social media or any other relevant channel, on the process of lodging a claim to their protected deposits.

 

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
  • Any other liability or financial instrument as may be specified by the Corporation;
  • Repurchase agreements

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 Kshs 500,000.00 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 100,000.00. This limit was set after analysis of returns submitted by the institutions and it provides full deposit insurance coverage for over 90% of deposit accounts.

 

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, each joint account holder's share of the joint account is combined with other insured deposits held in his own name.

The aggregate amount of insured deposits is insured up to KES 100,000 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, it involves early detection and timely intervention in regard to risk exposures of member institutions to the Deposit Insurance Fund. This helps to minimize 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 exceptional case 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 2012 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:

Government Intervention

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 National Bank of Kenya.

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 realising 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)

So far 17(seventeen) institutions have been placed in liquidation as shown in the list below

LIST OF INSTITUTIONS PLACED IN LIQUIDATION

Winding up is the last process of liquidation. At this point there is no more recovery and liquidation is deemed complete. KDIC then applies to the High Court for an order to terminate the liquidation and wind up the institution. KDIC has successfully wound up 8 (eight) institutions as shown in the table below:

LIST OF WOUND UP INSTITUTIONS

 

INSTITUTION

   DATE OF LIQUIDATION

DATE WOUND

  UP

1

Allied Credit Ltd.

20-Aug-93

06-Nov-07

2

International Finance Ltd.

16-Apr-93

06-Nov-07

3

Trade Finance Ltd.

18-Aug-93

23-Sep-08

4

Diners Finance Co. Ltd.

20-Aug-93

07-Nov-08

5

Nairobi Finance Ltd.

20-Aug-93

16-Aug-10

6

Inter-Africa Credit Finance   Ltd.

31-Jan-93

07-Sep-12

7

Central Finance Ltd.

19-May-93

07-Sep-12

8

Heritage Bank Ltd.

13-Sept-96

22-Nov-14

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 reports.

 

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

 

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. 100,000.

 

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