Kenya has moved to instill more confidence in her savers in the wake of a simmering banking standstill in troubled European state of Cyprus.
Banks in Cyprus are reportedly yet to re-open following a controversial 6.75 percent levy on deposits proposed as a condition for the impending €10 billion ($13 billion) bailout plan by EU and IMF.
The proposal that threw the political class into a limbo with a series of crisis meetings reported on Wednesday a day after an overwhelming parliamentary rejection was expected to raise €5.8 billion ($7.5 billion) through the one-off tax on banking savings.
Although those with less than 20,000 were let off the hook on Tuesday, the 6.75 percent levy on deposits of between €20,000 ($26,000) and €100,000 ($129,000) and 9.9 percent charge on over € 100,000 remained.
Here in Kenya fiscal policy authorities insisted that efforts to tighten security of savings was pre-planned and accidentally coincided with development in Cyprus.
This despite the supporting piece of legislation, the Kenya Deposit Insurance Act, having been passed and gazetted in May, last year.
Public consultations on draft regulations to establish an autonomous implementing state agency, the Kenya Deposit Insurance Corporation, kicked off on Tuesday in the capital,Nairobi, and is expected to go on for the next two months.
“The consultations are timely given what’s going on in Cyprus,” said professor Kinandu Muragu, the director of Kenya School of Monetary Studies, the host of the debate. “We have the best banks in the continent but that does not remove the need for deepening trust in deposits.”
The completion of the public consultation, a legal requirement in the Constitution, will set the stage for a revised deposit insurance scheme beginning July to replace the 23-year old present Deposit Protection Fund under Banking Act.
The new scheme seeks to, among other reforms, review upwards the deposit insurance coverage from the present maximum of Sh100,000(about $1,166) paid to savers upon collapse of their financial institution.
The reforms, the Central Bank said, will align the new deposit scheme to international best practices.
The first review in 23 years since the present scheme was established will also pave way for periodic reviews in funding mechanism to be in tandem with public policy objective and responsive to emerging risks.
Central Bank Governor professor Njuguna Ndung’u said the hallmark of the restructuring that started in earnest in late 2008 was to usher in a new mechanism that detects and addresses risks and threats to financial system stability.
The shift to a “problem bank resolution mechanism” will replace the prevailing “pay-box scheme” where individual depositors of a closing institution get a maximum compensation of Sh100,000 ($1,167).
The operation regulations and guidelines for the new Corporation are projected to be in place in three months. Thereafter, they are to be gazetted by Finance secretary.
The KDIC will however continue with the core business of deposit insurance but this time round will light red lights for a looming crisis that could collapse a financial institution.
“We want to arrest (threats) and help an institution before it fails,” said director of Deposit Protection Fund at the Central Bank Ms Rose Detho. “We will be participating more in problem-bank resolutions to promote financial stability so that closing will only come as a last resort.”
With the compensation cap set to rise, it’s likely contributions from deposit-taking institutions will equally be raised.
But the chief lender said this decision lies squarely in the hands of stakeholders within the financial sector.
During the one-day financial stakeholders’ consultative forum on Monday Prof Ndung’u urged participants to consider recommendations made by International Association of Deposit Insurers during their assessment last November and the bank’s consultant on the matter, Fit & Proper Consultants.
“On our part, we will put in place a public awareness strategy and work closely with our member institutions to disseminate pertinent information to depositors,” he pledged. “We will also seek to strengthen our cross-border relations while at the same time analytically providing indicators of changing risk profiles in the region.”
More than 10 Kenyan-rooted banks have spread their operational tentacles into the five-nation, East African Community trading bloc.
The new Fund will draw its cash from existing Fund, contributions from institutions and accruing penalties or interests as well as loans from the Central Bank.
“This model will work like an insurance concept where you pay premium for cover,” Detho said of the new scheme. “The Corporation will only come in to compensate depositors if the institution cannot be resuscitated.”
According to data from Central Bank website, 20 institutions are under liquidation process.
The bank of last resort however made it clear that the winding up process will go on as planned not withstanding the new mechanism.
“Those under liquidation will continue until we wind them up,” Detho maintained. “In fact, we have paid quite an amount in protected deposits and declared dividends.”
Image credit: UKReuters
