The Role Of Deposit Insurance In The Economy

Banks are essential to the growth of economies since they act as intermediaries between savers (depositors) and borrowers. This role gives rise to fiduciary duty where banks are expected to act in the best interest of depositors. In this regard, banks have been subjected to strict regulations by the Regulator and are therefore expected to fully comply with set standards. As a result, the Kenya Deposit Insurance Corporation uses its Early Warning System to identify instances of non-compliance, monitor and record compliance with these standards. As part of its early interventions, the Corporation provides incentives for sound risk management through annual risk-based premium as Corporate Watch Magazine’s KJ Odongo narrates.

Kenya Deposit Insurance Corporation (KDIC) is a body corporate established by an Act of Parliament, under the Kenya Deposit Insurance Act Cap. 487C. KDIC’s mandate is to provide deposit insurance to customers of member institutions (banks) and to receive, liquidate, and windup troubled banks.

With a vision ‘To be a reliable, and effective Deposit Insurer and resolution authority, and a mission, ‘To protect depositors and enhance public confidence in the financial system, by promoting sound risk management and timely resolution’, KDIC espouses the core values of Professionalism, Integrity, Teamwork, Innovativeness, Customer Focus, and Accountability in the workplace.

In an exclusive interview with Corporate Watch, KDIC’s Chief Executive Officer, Mrs. Hellen Chepkwony, highlighted the Corporation’s Core Pillars: – Deposit Insurance, Risk Minimization, Resolution of Problem Banks, and Institutional Capacity Development. She elaborated on the role of deposit insurance; which is to stabilize the financial system in the unlikely event of bank failure, by ensuring depositors access their insured funds.

“Banks are sensitive to reputational issues which can cause panic among depositors. This could lead to mass withdrawal of deposits and possibly failure of the bank. Given the level of interconnectedness of banks, a run on one troubled bank could result in the failure of other healthy banks.

This phenomenon is called ‘the contagion effect’. To contain the said effect and disincentivize depositors from withdrawing their money from a bank on account of rumors, a deposit insurance scheme is therefore a safety net for bank depositors.

The deposit insurance provides a guarantee to depositors that their deposits will be reimbursed up to the guaranteed amount,” she noted, adding that this guarantee is critical in promoting public confidence in the banking system.

The CEO who holds M.A. and B.A degrees in Economics, both from the University of Nairobi, explained that it is through this confidence that banks can mobilize deposits for intermediation services that they provide for the development of the economy.

Milestones in Risk Management…

According to the Chief Executive Officer, when the Corporation was established in 1989, the guaranteed amount per depositor was capped at Ksh100,000. To reflect changes in the economy and give value to depositors, the amount was reviewed up to KES.500,000 per depositor, in 2020.

The decision was informed by the outcome of a survey, demonstrating the need for an upward review of the coverage limit. Subsequently, the coverage of the scheme increased to 99% of total accounts in Kenya’s banking sector. The protected amount is paid from the Deposit Insurance Fund established and administered by the Corporation.

“As part of the Corporation’s proactive Depositor Protection Strategy, KDIC has established an Early Warning System for early detection of troubled banks and timely interventions. Further, the Corporation developed and implemented the Risk-Based Premium Assessment Model in 2021. This system enables the Corporation to closely monitor the risk-taking of banks, flagging out those that are likely to fail as a result of their risk appetite. As such, the system allows the Corporation to reward banks who have implemented sound risk management practices as an intervention. This approach has seen most of our member institutions implementing risk management practices to the benefit of depositors,” explained Mrs. Chepkwony.

Under Her Leadership

Mrs. Chepkwony has had an illustrious career in Kenya’s financial sector, making a significant contribution in sector engagements. She has thus been instrumental in the formulation of requisite financial policies backed by extensive research. Under her leadership, KDIC immensely contributed to the entrenchment of Kenya’s economic blue-print and engagement in financial stability.

Having begun her career at the then Ministry of Finance, now the National Treasury and Economic Planning, Mrs. Chepkwony has previously served in various capacities including her posting at the Central Bank of Kenya, prior to her appointment as KDIC Chief Executive Officer.

The CEO revealed that the Corporation continued to manage the orderly resolution of failed banks, in receivership, liquidation, and winding up processes through tracing, preserving and realizing assets and subsequently, payment of depositors and creditors.

She explained that KDIC had between 2018 and June 2024, declared over KES 500 million as additional payment of dividends, to depositors of 9 institutions in liquidation. “The additional payments allowed depositors to access the funds locked in these institutions, where majority of the beneficiaries are micro-small, and medium-sized enterprises. The declared payments targeted to fully compensate 40,000 depositors of those institutions out of the remaining 42,500 depositors, which translates to a full compensation rate of 93%”, she concluded.

Case of Chase Bank LTD (IL)

KDIC successfully transferred assets of a Bank in distress (Chase Bank Ltd (IL) to a new acquirer- bank: SBM Bank (K) Ltd. This immediately guaranteed depositors access to 75% of their deposits held by the failed Bank. Thereafter, the Corporation made an additional payment (dividend) which improved the recovery rate by an additional 5%. Successful transfer of the assets and liabilities of Chase Bank Ltd was critical in showcasing KDIC’s success story, thereby fostering public confidence.

“On innovation, the Corporation has fully rolled out a mobile banking application that allows debtors of collapsed institutions to repay their loans using their mobile phones. This has greatly improved the debt recovery rate as well as reduced the transaction costs associated with loan repayments. It is out of these collections that we have managed to make additional payments to depositors,” she affirmed.

“The collection process is a time-consuming and an expensive endeavor due to protracted litigation where debtors have challenged the debt recovery efforts with the sole purpose of avoiding repaying debts owed to institutions in liquidation.

We have addressed these challenges through the adoption of alternative dispute resolution methods, mainly focusing on negotiations and mediation. This, she upheld, is a win-win situation for both depositors and creditors.

Partnerships and Collaborations…

In the effective execution of its mandate, the Corporation has established various partnerships with different institutions both locally and internationally. Notable global partnerships that have largely been on capacity building of staff and knowledge-sharing include those with: Korea Deposit Insurance, Nigeria Deposit Insurance, and Taiwan Deposit Insurance among others.

The Corporation is a member of the International Association of Deposit Insurers (IADI), a global standard-setting body that guides on the principles and best practices in matters of deposit insurance. The CEO informed Corporate Watch that, KDIC is a founder member of IADI. In 2023, Kenya secured a seat at the IADI, following her election as a member of the IADI Council.

Regionally, the Corporation is a member of the African Regional Committee of IADI where its active contributions play a pivotal role in enhancing the capacity and effectiveness of deposit insurance systems in Africa, thereby promoting financial stability and resilience in the region. This close collaboration with other regional deposit insurance schemes, supports KDIC’s crisis management framework in Kenya’s financial system.

“We believe that our local partnerships with institutions such as Kenya Bankers Association (KBA) and the Kenya Institute of Bankers (KIB) will effectively contribute to strengthening the country’s financial system by enforcing our brand promise, aptly described in our slogan ‘Safer, Stronger, Together’,” she observed.

During the interview, the Corporate Watch Magazine established that KDIC has continuously collaborated with other government agencies like National Transport and Safety Authority (NTSAA) and National Land Commission (NLC) in an attempt to trace and preserve securities and thereafter realize them for the benefit of depositors,

KDIC brand tagline ‘Safer, Stronger Together’ is further exemplified through close collaboration with the safety net players. KDIC works closely with its parent Ministry, the National Treasury and Economic Planning, Central Bank of Kenya, Capital Markets Authority, Insurance Regulatory Authority, and other key stakeholders in the execution of its mandate.

KDIC Interventions In Times Of Crisis

In fulfillment of its mandate, the Corporation supported the banking sector as well as depositors during the COVID-19 pandemic, by extending the premium payment period by three months. This allowed banks to re-organize their cash flows to accommodate the changes caused by the pandemic.

Further, the Corporation postponed by one year, the implementation of Risk-Based Premium which had been slated for implementation in 2020. This gave banks ample time to assess and improve their risk profiles ahead of the proposed implementation.

Corporate Social Responsibility…

Through its Corporate Social Responsibility (CSR) initiatives, KDIC has significantly contributed to improving healthcare infrastructure and environmental conservation in Kenya aligning its efforts with the government’s strategic agendas. Recognizing the critical need for adequate medical infrastructure, KDIC has supported Mbagathi Hospital, Spinal Injury Hospital, and Wenje Dispensary in Tana River with essential life-saving medical equipment.

These initiatives are not just philanthropic gestures but strategic interventions aimed at supporting community’s healthcare system. Among the medical equipment donated to the three facilities are incubators, wheelchairs, stretchers, neonatal equipment, beddings, patient monitors, orthopedic and ordinary beds as well as the construction of two large patient shades at Mbagathi Hospital.

KDIC’s CSR efforts extend beyond healthcare to encompass environmental conservation, reflecting a holistic approach to CSR.

Additionally, in line with the Kenyan government’s agenda to plant 15 billion trees by 2030, KDIC has undertaken an ambitious tree-planting initiative. As such, over the last four years, the Corporation has planted over 15 million trees across various sites in the country, a significant contribution to environmental sustainability and climate change mitigation.

Public Awareness

Despite its critical position in the economy, one of the challenges impeding the progressive achievement of KDIC’s mandate is the low public awareness of the role played by the state agency.

This is compounded by the very nature of Deposit Insurance, which is largely seen as a new concept not just in Kenya but regionally. That being the case, KDIC has put in place strategic measures to address the challenge of low public awareness aimed at ensuring that the public gets to know KDIC and understand the role it plays in Kenya’s financial system.
These measures include sustained publicity awareness campaigns on both legacy and new media, strategic partnerships, and collaborations as well as stakeholder engagements. “We also undertake financial literacy programs geared towards enlightening the public about the importance of savings and investment in close collaboration with other stakeholders,” she notes.

Further, the Corporation will continue to invest heavily in critical areas through its Corporate Social Responsibility and Investment initiatives, aimed at transforming lives. KDIC sponsorship focus include health, sports and matters of climate change.

Safer, Stronger, Together…

With an evident progressive track record in strategic leadership and management spanning over twenty-five years, Mrs. Hellen Chepkwony, a distinguished economist, and astute risk management professional with extensive exposure in both the public and private sectors, stands tall as an instrumental pillar in ensuring depositors are cushioned.

As a passionate, and service-oriented thought leader, she has proven ability to direct and enhance operations across dynamic environments, combining exceptional skills with a proactive work ethic and commitment to achieve organizational success.

Parting Shot

“When we collaborate and work together as stakeholders in the financial sector (depositors, member institutions, borrowers et al) we will create a stronger financial system that not only guarantees the safety of our deposits but also boosts the level of economic growth of our country for shared prosperity,” she concludes.