kenya deposit insurance corporation 2016 deposit insurance ... supp- final.pdf · kenya deposit...

Kenya Deposit Insurance Corporation2016 Deposit Insurance of the Year

INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS

It is with profound humility that KDIC received the coveted global award as the Deposit Insurance organization

of the year 2016. This was no mean feat and has placed the corporation on a higher pedestal of achievement that will certainly be leveraged on by other jurisdictions.

KDIC with the expanded mandate of Risk Minimizer and with full resolution power has positioned itself

in the financial sector as a key driver of fostering financial stability. It will play its effective role in collaboration with other safety net participants in ensuring we maintain a sound and stable financial sector that will attract investments for the growth of our country.

The award was based on the corporation’s alignment with the International best practices, enhanced debt recovery and distribution to depositors, expanded mandate, enhanced governance structure and prompt access of depositors’ funds during receivership; amongst other fields.

KDIC was feted against the back drop of receivership of Imperial Bank and Chase Bank where the corporation applied the new resolution powers to enable depositors gain access to their accounts to a maximum limit. This indeed, enabled over 90% of the depositors have full access to their deposits, a first under receivership.

The corporation engaged in

stakeholders’ workshop where the Legislators, Media and other stakeholders were sensitized on the new mandate and what it entails in the financial system.

KDIC is now set to play a proactive role through examination and surveillance of member institutions and to ensure enhanced risk Management frameworks are in place to mitigate bank failures. The corporation will constantly engage member banks to ensure depositors and creditors funds and interests are protected at all times.

However, in the unlikely event of a bank failure, KDIC will promptly apply its resolution powers to preserve and provide appropriate solutions to lessen any disruption on lives and businesses.

We Know, there has been a lot of concern on the protected sum of Kshs.100,000/= that has remained so since 1989. Despite the amount covering 95% of the deposit accounts, KDIC has engaged Consultants to review the coverages to be aligned to

the International best practice. The study is almost being concluded and will inform the way forward. However, KDIC will work closely with all safety net participants to mitigate and reduce bank failures as we continue to strengthen our financial system.

Mine is to commend the KDIC Management & Staff for a job well done and request them not to be complacent but sustain the spirit and tempo of teamwork and dedication. The corporation shall continue to enhance skills and competencies to effectively drive the new mandate.

Finally, I wish to commend member institutions and our Galant depositors for their resilience and invaluable support without which we could not achieve much. To this end, we dedicate the award to our Galant Depositors and say Asante Sana.

Thank you all.

Mohamud AhmedAg. Chief Executive Officer

I would like to congratulate the entire team of Management and Staff of KDIC for being voted “The

Best Deposit Insurance of the Year 2016” at The Annual General Meeting of The International Association of Deposit Insurers (IADI), held in Seoul, South Korea. We the Board take cognizant of the fact that this coveted award has been presented for the first time to an African Deposit Insurer which is no mean fete for KDIC as it positions itself as a hub of the best practice Deposit Insurance scheme.

Since the enactment of the Kenya Deposit Insurance Act (KDI Act) in May 2012 with an expanded mandate, KDIC has managed to pursue its objectives critically and the results

have been recognized internationally. This award is an affirmation of the role that KDIC has played as a financial safety net player.

With its expanded mandate as a risk minimizer, KDIC is now able to engage in financial stability proactively as the resolution authority by actively participating in problem bank resolution and apply a range of resolution options, as was witnessed in the recent past when the Corporation applied some of its resolution tools on problem banks.

Going forward KDIC will continue to uphold enhanced governance and sound and effective principles as well as best practices in key areas of deposit insurance, in compliance with the global standards as set up and enforced by the International Association of Deposit Insurance IADI Executive Council. The corporation is gearing towards a risk based premium assessment mechanism that will encourage prudent management of member institutions.

The Board remains committed to managing the KDIC transition process by addressing the challenges in Bank resolution and to ensure that the Corporation responds to the needs of depositors promptly in order to foster confidence in the financial system.

Dr. Julius Kipng’etichChairman, Board of Directors

I am glad to join the Board, Management and the entire Staff of the Kenya Deposit Insurance Corporation

(KDIC) in celebrating the award for being voted “The Best Deposit Insurance of the Year 2016”, being the first by an African deposit insurer. This has indeed placed our country on a higher scale in the international business arena and has enhanced our country’s competitive edge.

Kenya’s financial sector remains robust and sound as indicated by the various indicators. Maintaining financial sector stability is a critical component in enabling the financial sector play its facilitative role to bolster economic growth. It is for this reason, and in accordance with the principles of Vision 2030 of transforming Kenya into a financial centre, that the Government through the National Treasury continues

to implement necessary reforms to strengthen the financial sector.

During the past year the banking sector was faced with challenges following the placement of three institutions under receivership. However, I am pleased to note that KDIC in liaison with Central Bank of Kenya has been working towards resolution of these banks. I also note that a large number of depositors in these institutions were able to access their funds within a very short time. This indeed goes a long way in deepening confidence in our financial sector.

In order to improve the resolution process further, and in line with the international best practices of enhanced governance of deposit insurance schemes, the KDI Act was recently amended in order to improve governance at the Board levels. The National Treasury shall soon be implementing additional reforms to strengthen the independence and resolution capacity of the KDIC.

Similarly, the National Treasury is considering reviewing upwards the insured amount from the current KShs 100,000 payable when an institution is in liquidation. This is expected to enhance depositor confidence and mitigate shocks that may occur when a bank is in distress by ensuring a larger proportion of deposits are covered.

The National Treasury will continue to support and work closely with KDIC in furtherance of its mandate of being a risk minimizer with full resolution powers as we foster sound and safe financial system.

Congratulation again and Thank you

THE KENYA DEPOSIT INSURANCE CORPORATION (KDIC)Celebrating The IADI Global Award of The Deposit Insurance Organization

of The Year 2016

Dr. Julius Kipng’etichAg. Chairman, Board of Directors,

Mr. Henry Rotich, EGH Cabinet Secretary, National Treasury

Mohamud AhmedAg. Chief Executive Officer

MESSAGE FROM THE CHAIRMANMESSAGE FROM THE CABINET SECRETARY, NATIONAL TREASURY

MESSAGE FROM THE CEO



KDIC beats 100 competitors to emerge the best deposit insurance company of 2016

KDIC: PROTECTING YOUR DEPOSITS

By Rading Biko

The Kenya Deposit Insurance Corporation (KDIC) has been named the best deposit insruance company in

the world beating 100 other firms that were gunning for the prestigious award.

The award presents a major milestone for KDIC, the coveted accolade is presented for the first time to an African deposit insurance company. It is also a major feat for KDIC as it positions itself as a hub of the best practice deposit insurance.

The best deposit insurance award is organized by the International Association of Deposit Insurance (IADI), the standard setting body and the event took place in Soeul, South Korea attracting 100 entries from across the world.

“It is indeed with great honour and humility that we receive this prestigious award at a time that KDIC is effectively discharging its new mandate of being a risk minimizer with full resolution powers. Risk minimization remains the cornerstone of any successful business,” says KDIC Ag,CEO, Mohamud Ahmed.

This award comes at the backdrop of a major transformation taking place within the financial service sector in the country which seek to improve service delivery to the people.

At the event, Mr. Ahmed was also elected as a member of the executive council, the

highest decision making organ of IADI.“I am humbled to be elected as a member

of the IADI and I will fully work towards a common goal of IADI and its also a clear sign that Kenya’s KDIC has the best manpower,” explains Mr. Ahmed.

According to the international Association of Deposit Insurance (IADI), an organisation of 71 insurance organisations based in Basel, Switzerland, in 2014, there were 113 countries with deposit insurance, up from 12 in 1974.

Out of this, Africa has only four which is a clear sign that the continent needs to pull up its socks in matters of financial stability.

“The most active deposit insurance bodies in the continent are only four in Tanzania, Kenya, Nigeria and Zimbabwe but other African countries need to swing with the wind as a way of assuring investors that they can put their money in the continent,” adds Mr. Ahmed.

Mr. Ahmed is thus calling upon African states to commit themselves by enacting laws that will create deposit insurance bodies in their respective countries.

Globally, nations have established deposit insurance to ensure financial stability. Deposit insurance is simply protection provided by a government agency to depositors of a bank or deposit-taking institution. It assures the depositors of compensation in case a bank closes.

According to him, banking business

involves mobilising customers’ deposits and doing business with these funds.

“When customers suspect that their bank’s going-concern status is at risk, they vote with their feet. This may culminate in a run on the bank. This is so serious that at times it leads to the collapse of an entire banking system,” he cautions.

And even though central banks are usually careful to avoid such failure, the protection of customers is critical. Between 2007 and 2015, more than 10 banks have closed in Kenya due to poor financial management and corporate governance issues.

Deposit insurance started in the US after the great depression, the longest lasting economic downturn in the US. The on-switch went on after the infamous stockmarket crash of 1929.

To further expand its scope, KDIC has been working closely with the Sacco movement to ensure that their customers’ deposits are also insured.

“We have engaged the Saccos and very

soon will launch the Depoist Guarantee Fund which seek to target those customers who bank with Saccos. As you all know, the current law does not include the Saccos but with this new initiative it will create a better financial framework within the Sacco industry as a financial service provider,” he adds.

HISTORICAL BACKGROUND:

Deposit Protection Fund Board (DPFB) was established in 1985, pursuant to section 36 of the Banking Act, Chapter 488 Laws of Kenya, as an autonomous

corporate body. DPFB commenced operations in 1989, as a Deposit Insurance Scheme with the joint mandate of maintaining public confidence in the banking sector, and thereby contributing to the stability of the financial system in Kenya. The protection of depositors against the loss of their savings, in the unlikely event of closure of a member institution of the Fund, remains one of the key objectives of Deposit Insurance in Kenya.

TRANSITION TO KENYA DEPOSIT INSURANCE CORPORATION:

In view of the development in the financial system of Kenya and in line with international best practice, it was considered that the DPFB mandate of a ‘pay-box plus’ scheme was too narrow and could not provide the strategic decision to expand its mandate from a pay-box to a risk minimizer with powers to undertake bank resolution of distressed member institutions licensed by the Central Bank of Kenya. This culminated in DPFB transforming to Kenya Deposit Insurance Corporation (KDIC) under a new legal framework, the Kenya Deposit Insurance Act, 2012 which is aligned with international best practice. KDIC is a statutory institution established to the promulgation of Kenya Deposit Insurance Act, 2012, and commenced operations on 1st July 2014.

The overall objective of the new Act is to ensure that KDIC engages in financial stability proactively as the resolution authority by actively participating in problem bank resolution with receivership powers and enhanced corporate governance. KDIC’s prime responsibility and mandate is therefore to foster financial stability and promote public confidence in the Kenyan banking system by providing an effective and efficient deposit insurance scheme for customers of member institutions and to provide incentives for sound risk management, receive, liquidate and wind up any institution in respect of which the Corporation is appointed receiver or liquidator.

Corporation’s mandate entails,• Formulateandprovideincentivesfortheimplementation

of sound risk management policies in the financial system and if necessary, undertake effective intervention measures in a pro-active manner and work closely with Central Bank of Kenya. This means that the performance of member institutions shall be monitored closely to detect and mitigate any signs of distress.

• Providedepositinsurancescheme• Conduct examination and surveillance of member

institutions• Tohavefullresolutionpowers• Receive,liquidateandwindupanyinstitutioninrespectof

which the Corporation is appointed receiver or liquidator• Providepublicawarenessandfinancialliteracy• Prudentlyinvestthefundsingovernmentsecurities• Act to minimize costs to the Corporation and financial

system at large by exercising the ‘least cost option’ in the resolution of problem banks.

KDIC continuous to uphold sound and effective principles as well as best practices in key areas of deposit insurance, according to the core principles of IADI (International Association of Deposit Insurers). These include, but are not limited to, public policy objectives, mandates and powers, governance, membership and coverage, funding, prompt corrective action, problem resolution as well as public awareness.

The Corporation continuous to build strategic alliances with the National Treasury, Central Bank of Kenya, and other safety net players and stakeholders in the financial system. This is in accordance with the objective of achieving the aspirations envisaged in the country’s ‘Vision 2030’ of transforming Kenya into a financial hub. As a key player in the financial sector, KDIC will pursue its complementary role of guaranteeing safety of deposits locally and cross-border through information sharing, consumer protection and building public confidence in the overall stability of the financial system.

VISION The Corporation’s vision is to be a best-practice deposit insurance scheme.

MISSION Our mission is to promote and contribute to public confidence in the stability of the nation’s financial system by providing a sound safety net for depositors of member institutions.

MEMBERSHIPMembership to the Fund is Mandatory for all deposit taking institutions licensed under the Banking Act, Building Societies Act and the Microfinance Act (Banking Act 38(1), KDIC Act 24(1).

The Membership to the Fund, as at 30th June, 2016, comprised the following: i.) Forty three (43) Commercial Banksii.) One (1) Mortgage Finance Institutioniii.) Thirteen (13) Deposit-Taking Microfinance Institutions.

INTERNATIONAL CO OPERATIONKDIC is a founding and active member of the International Association of Deposit Insurers (IADI), a standard setting body that draws its membership from all the deposit insurances in the world. IADI had set up best practices standard under the thematic rule of Core principles that has been adopted by the World Bank and IMF in their Financial Assessment Programs in member countries. The principles run through the Mandate, Governance, Design and prompt reimbursement of depositors’ funds. Recently, the CEO was elected to be a member of the Executive Council, the highest decision making body of IADI which reinforces the effective role we have been playing. Additionally, the CEO is one of the international Assessors on compliance with the core principles.

Achievements•ExpandedMandateasaRiskMinimizerwithfullResolution

powers•AlignmentoftheKDIActtotheInternationalBestpractices•PromptAccessofdepositors funds during Receivership as

witnessed in Imperial Bank and Chase Bank Limited (IR)•Enhanced Debt Recovery and Distribution to depositors

and creditors of Institutions in Liquidation•Stakeholders Engagement and sensitization programs on

the New Mandate by KDIC•AwardoftheGlobalDepositInsuranceOrganizationofthe

year 2016

From left to right KDIC Ag. CEO, Mohamud Ahmed, Dr. Julius K. Kipng’etich (Ag. KDIC, Chairman), Thomas M. Hoenig (President & Chairman - IADI ) and Martin S.O. Gumo (member of KDIC BOARD)

Kenya Deposit Insurance Corporation

2016 Deposit Insurance of the YearINTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS

TOP: KDIC staff during a tree planting session as part of the organisation’s CSR activities.

LEFT: Best Deposit Insurance of the Year 2016 award trophy.

KDIC Ag. CEO, Mohamud Ahmed (left) and Thomas M. Hoenig (President & Chairman - IADI)



SOURCES OF INCOME:The Fund has four major sources of income, namely:a) Premium levied on member institutionsb) Investment incomec) Funds from the Central Bank of Kenya and Consolidated

fundd) Grants

All funds are invested in government securities and contribute to the development of the country.

DEPOSIT INSURANCE COVERAGE In its endeavor to provide a Deposit Insurance Scheme to

depositors of member institutions, KDIC has ensured that the level and scope of coverage meets public policy objective by covering majority of retail depositors in full.

Membership to the fund is mandatory for all deposit taking institutions licensed by the Central Bank of Kenya, while the coverage and limit of insured deposits has remained at a maximum of Ksh100,000 (US $ 1,010) per depositor. In view of this a study was commissioned by the Office of the Technical assistance of the US Treasury, to establish Adequate Cover, Optimal Target Fund and Risk- Based Contribution. The coverage level is set for review, though to be limited to a level, adequate and credible enough, to instill confidence in the financial system. The planned review, hence, will balance the current economic conditions and moral hazard in order to meet public policy objectives with a goal to maintain financial stability. However, KDIC will continue to pursue preventative measures to mitigate potential failures.

At the current level and scope of coverage, total depositors’ accounts covered have been maintained at over 90% which is in line with IADI’s minimum benchmark. This is attributed to national initiatives that have promoted financial inclusion which has seen previously unbanked retail depositors enter the formal financial system. As shown in the Table below, the total amount insured increased by KShs. 5.73 billion from KShs. 246.77 billion in June, 2015, to KShs 252.50 billion in June, 2016. The total number of deposit accounts increased by 6.84 million during the year under review, from 33.936 million in June, 2015, to 4033.936 million in June, 2015.

Table 1: Trend in Deposits and Coverage

June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016

Total Deposits (Kshs ‘M’) 1,222,160 1,420,457 1,678,590 1,884,784 2,188,065 2,630,908 2,762,386Total Insured(Ksh ‘M’) 136,291 168,120 170,931 192,887 213,708 246,772 252,502Total No of A/cs (000)

10,676 14,213 16,471 20,908 27,423 33,936 40,776

A/cs Fully Covered (000)10,057 13,365 15,588 19,911 26,327 32,689 39,443

RESOLUTION ACTIVITIESPayment of Protected DepositsThe total protected deposits paid by all the institutions so far placed in liquidation by the Kenya Deposit Insurance Corporation (KDIC) amounted to Kshs.1,162 million as at June 30, 2016. This figure increased by Kshs. 48 million following payment of protected depositors of Dubai Bank Limited placed in liquidation on 24th August 2015. The cummulative payment for insured deposits since the Board commenced liquidation of banks and financial institutions averaged 71.46% of total insured deposits. The Corporation is currently liquidating 17 institutions and 8 were successfully wound up.

Debt RecoveryAs part of the enhanced debt recovery strategies, KSh1 billion was recovered recently from one debtor and will be distributed to depositors and creditors by December, 2016. Kenya has been ranked amongst the country with highest debt recovery from failed institutions. The cummulative recovery of debts and realisation of other assets by all the institutions so far placed in liquidation by the Kenya Deposit Insurance Corporation totalled Ksh 9,839.57 million, which has been distributed to the depositors and creditors of the institutions.

Payment of DividendsCurrently the cummulative liquidation dividends paid by all the institutions in liquidation amounted to Ksh 9,027.38 million compared to Ksh7,407.92 million paid the previous year resulting in an increase of Kshs.1,619.46 million in dividend payment. So far, Trust Bank Limited (I.L.) has made the highest dividend payout amounting to Kshs. 2 billion, that has been distributed to depositors and creditors of the institution.

Institution in ReceivershipTwo institutions are in receivership namely:a) Imperial Bank Limited(IR)b) Chase Bank Limited(IR)Imperial Bank (IL) was placed in receivership as a result of unsafe and unsound banking practices perpetuated in the bank. So far the bank has managed to pay 18,677 depositors up to Ksh2.5 billion constituting 93% of the depositors. The bank is faced with legal challenges that have derailed receivership process. On the other hand Chase Bank was placed in receivership due to adverse publicity and high non-performing loans. The bank re-opened immediately and business stabilized through the management of KCB. Over 10,000 new accounts were opened with all payment channels reactivated. Depositors have continued to transact with the bank and fresh deposits made while still in receivership.

KDIC STAKEHOLDER WORKSHOPKDIC has held several workshops with the media, the Judiciary, the Legislature and other stakeholders to sensitize and update them on the general happenings at the corporation such as transition from Deposit Protection Fund Board to Kenya Deposit Insurance Corporation, key operations, funding, membership of the fund, Institutions in Liquidation, status of banks in receivership, lessons learned such as loyalty & resilience displayed by depositors through the process and the way forward for the Corporation.

Corporate Social ResponsibilityThe mission of Kenya Deposit Insurance Corporation (KDIC) is to promote stability in the Financial Sector by providing a deposit insurance scheme for depositors of member institutions. In fulfilling this important mandate, KDIC also



to

for winning

The Global Deposit

Insurance of the Year 2016

recognises the need to make a positive contribution to the welfare of the society.To this end, KDIC Philanthropic Fund extended financial support to needy projects all over the country to educational, orphanages and health institutions. Some of the beneficiaries include The Nairobi Hospice, FARAJA 2014- Nairobi, Hope and Faith Center for the Disabled- Juja, Jaipur Foot Trust, Turkana Child Education Support Programme, Agency for Sustainable Poverty Eradication and Community Transformation – Garissa, Friends Kaimosi Special School-Vihiga, Ndoleeli CBO-Meru,Child Concern-Isiolo, Rays of Hope-Kericho,Limuru Children Centre and KI-GI Quakers CBO-Vihiga.

KDIC aslo participated in a tree planting exercise at Kariko Secondary School, Nyeri in support of environmental sustainability as part of its strategic initiatives.

The Corporation shall continue to support needy projects with the vision of making a difference to society.

Frequently Asked Questions (FAQs)1. What is KDIC?KDIC is a corporation established under the Kenya Deposit Insurance Act, 2012, which provides for the establishment of a deposit insurance scheme and a corporation to manage the scheme and to wind up failed deposit taking institutions, among other things. This Act establishes a Deposit Insurance Fund (the Fund) to replace the Deposit Protection Fund governed by the Banking Act of Kenya (as amended 2009).

2. What is the role of KDIC in the financial system?To promote public confidence and contribute to the stability of the Kenyan financial system.

3. What is a Deposit Insurance Scheme?A deposit insurance Scheme is a financial guarantee that instills confidence and protects depositors in the event of a bank/deposit taking financial institution failure and to offer a measure of safety for the banking system.

4. Who manages KDIC?KDIC is a state corporation managed by the Board of Directors which consists of: a) Non-executive chairperson appointed by the President

on the recommendation of the Minister from amongst the members appointed under paragraph (d);

b) The Permanent Secretary in the Ministry for the time being responsible for matters relating to finance or his representative;

(bb)Attorney General or his representativec) The Governor of the Central Bank of Kenya or his

representative;

d) Five independent members, not being public officers, appointed by the Minister at the National Treasury

e) Chief Executive officer of Kenya Bankers Association, and

f) the CEO, who is ex-officio member

5. Who are considered member institution?All banks, financial institutions, mortgage finance companies (defined under the Banking Act), and deposit-taking microfinance institutions (defined under the Microfinance Act) licensed by the Central Bank of Kenya will automatically become members of the Fund.

6. How does KDIC protect a depositor of a member institution?It is a cover that safeguards depositors against loses they would otherwise incur if a bank or deposit taking institution closes its operations. Depositors are entitled to claim an amount of Ksh100, 000 or less which is currently set for review.

7. How does a depositor recover deposits in excess of the insured amount of KSh100, 000?This is paid as liquidation dividend after the liquidator has recovered sufficient funds from the sale of the institution’s assets and recovery of debts.

8. Who pays the insurance premium?Any institution licensed by the Central Bank shall become a member of the Fund from the date it is granted the licence. The member institution pays the premium to the KDIC at no cost to the depositor.

9. Which deposits are insured by KDIC?All deposits in current accounts, savings accounts and time/fixed deposit accounts are insured.

10. What if I am a non-resident of Kenya, are my deposits held with member institutions in Kenya insured?Yes, all depositors are paid regardless of their place of residence or nationality.

11. What if I have several accounts in the same institution?All accounts of each depositor in an institution are

consolidated and paid up to the maximum insured sum of KSh100,000.

12. In the event that a joint account exists in addition to individually owned account in the same insured institution, is each account separately insured?A joint account is considered as being distinct from individually owned accounts and is therefore insured separately.

13. Are accounts held in trust, executor, guardian or custodian insured separately from an individual’s account?Yes, these are treated as distinct from individually owned accounts and therefore insured separately.

14. Are creditors of institutions insured?No, however, they are entitled to participate in the payment of liquidation dividends.

15. Is an account held by a limited liability company or a partnership insured separately from the individual accounts of shareholders or partners of those entities?Yes, these are different entities and they are treated separately for purposes of insurance.

16. What happens if my bank is ‘bought out’ or merged with another member bank?The deposit insurance coverage is retained in the name of the new institution.

17. What happens when a member institution fails?CBK appoints KDIC as the receiver and the corporation publishes a notice of the institution’s failure and advises depositors on the claim procedures.

18. How many institutions are currently under liquidation?Seventeen (17) institutions are currently under liquidation.

Our contactsCBK Pension House, Harambee AvenueP.O. Box 45983-00100, Nairobi, Kenya.Tel: +254 20 667000/ 0709043000/2863814Email: [email protected]: www.depositinsurance.go.ke

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