The Kenya Deposit Insurance Corporation (KDIC) is revising the Sh500,000 compensation limit for a customer of a collapsed bank, a move that will benefit depositors with larger balances.
KDIC has this week closed bids for a consultant who is set to review the funds' coverage limit to enhance public confidence and banking sector financial stability. The move will take into account changes in inflation and industry dynamics including the size of deposits held by commercial banks.
“The coverage limit was set at Sh100,000 in 1989 and reviewed to Sh500,000 in recognition of decline in real value over time to Kenyan depositors,” KDIC said in the document inviting consultants for the review.
“The coverage limits as set in the KDI Act apply to all banks in the deposit insurance system. However, there is a need to review the coverage limits on a regular basis in order to take into account inflation, changes in real income, the composition and size of deposits and additional funding requirements.”
KDIC’s move is an about-turn from last year when the corporation warned of a moral hazard from a switch in the compensation model per customer to per account and an increase in the maximum payout arguing the move would encourage recklessness among lenders and trigger more bank failures.
The corporation argued that the Sh500,000 coverage limit per customer was sufficient for the sector.
A consultant is expected to carry out research in the banking sector with a view to determining the adequacy and optimality of coverage limit and scope of deposit products within two months.
At present, depositors are reimbursed up to Sh500,000 of deposits in the event a bank collapses, meaning that depositors with balances up to the threshold are fully paid.
Depositors with amounts exceeding Sh500,000 meanwhile are first compensated up to the coverage limit with balances being paid as and when assets of the closed bank are disposed of in liquidation.
