KDIC has a statutory mandate to provide incentives to Banks for sound risk management. Since its inception as DPFB, the Corporation has been assessing premiums for the deposit insurance scheme on a flat rate basis of 0.15% of the annual average deposits. This model has since fallen short of the risk minimization mandate. To remedy this; the KDIC developed a Risk Based Model dubbed Differential Premium System (DPS). The model is designed to achieve the following objectives:

  1. To provide incentives for banks to avoid excess risk taking
  2. To introduce fairness into the premium assessment process
  3. To mitigate the risk taking incentives created by the deposit insurance scheme
  4. To reduce the cross-subsidy that stronger banks implicitly provided weaker banks under the flat rate premium system

The Risk Based Premium model operates on a simple principle of the “higher the perceived risk the bank has, the higher the Premium to be paid”. Unlike the Flat rate model, the Risk Based Premium model has two components:

  • The Flat Rate component
  • The Risk Based Rate component

The risk based rate is based on the Capital Adequacy (C) Asset Quality (A) management (M) Earnings (E) and Liquidity (L) rating, commonly known us CAMEL Rating, of the Bank by CBK. Under this model banks rated low by CBK will pay a risk premium while those rated “strong” will only pay a flat rate. The model aims at rewarding banks with sound risk management without punishing banks that are yet to implement sound risk management.