Good times for depositors as CBK unveils new refund plan

Central Bank of Kenya (CBK) has announced a radical compensation plan for collapsed institutions that will ensure depositors get decent refunds up from the maximum Sh100,000 guaranteed under the current scheme. The latest initiative is meant to boost confidence in the banking industry and control the resurgence of bank failures that had plagued the industry in the 80s.

Governor Njuguna Ndung’u says CBK’s focus would now be directed to strengthening the deposit insurance design that will add value to the depositors and the financial system in general. He says the proposed measures, which are mainly designed to minimise the depositors’ exposure, include a total review of the depositor insurance coverage, which has remained constant at Sh100,000 for more than two decades.

Prof Ndung’u said effective mechanisms will also be formulated to address risks inherent in the banking sector to avert the possibility of further bank failures.

Also to be reviewed, he says, is the funding mechanism of Central bank’s Deposit Protection Fund Board (DPFB), which currently relies on annual premium contribution by all member institutions and income from investments in Government securities.

“Going forward, as we undertake initiatives to usher in the new deposit insurance regime, our focus will be directed to strengthening the deposit insurance design that will add value to the depositors and the financial system in general,” says Ndung’u, who is also the Chairman of the Deposit Protection Fund Board (DPFB).

Through the DPFB’s annual report (2013), Ndung’u notes that the deposit insurance coverage would now be reviewed periodically while a target fund would be created to strengthen DPFB’s financial muscle to meet claims when they arise.

Emergency liquidity

This, he says, will also include a means of obtaining supplementary back-up funding to support emergency liquidity needs to ensure prompt reimbursement of depositors’ claims.

“Having fund buffers will create the required confidence in the markets,” says Ndung’u.

Membership to the Deposit Protection Fund (DPF) is mandatory for all deposit taking institutions licensed by the Central Bank while the coverage and limit of insured deposits has remained at a maximum of Sh100,000 since 1989 when the fund was established. “This coverage will be subjected to periodic reviews to ensure it is credible enough to meet public policy objective,” Ndung’u says.

According to the report, deposit accounts increased to 20.9 million in the 2012/2013 financial year from 16.5million in the previous period with the bulk being micro accounts.