Enhancing risk surveillance on banks will provide better safety for customers

Money is an emotive issue. People will go to any lengths to ensure their hard earned money is safe and secure. Safeguarding their clients’ money remains the cardinal role of banks and being a custodian comes with certain obligations: that the money will be available on call and more importantly, that the safety of the deposits is guaranteed and invested prudently.

Kenyan banks have earned the trust of the banking public, at least in the recent past. There are today fewer incidences of banks being placed under receivership compared to the 80s when we had some systemic challenges in the banking sector.

This can be attributed to several factors, among them sound and prudent regulatory or supervisory regime.

But, what happens when a bank goes down with customers’ deposits, for whatever reason? The thing with banks is, when panic withdrawals or a run on the bank is triggered, word spreads fast like bush fire.

It is also an oft stated fact that no bank, however big, can withstand panic withdrawals. That is why confidence in these institutions is an essential ingredient for banks’ business continuity and regulation is key for sustainability.

Financial difficulties

When a bank is facing financial difficulties, unlike other companies, it can adversely impact the society and more often than not, may trigger contagion effects on other sectors of the economy. Bank closure is said to be detrimental to lives and businesses, the cardinal principle of a country.

One of the safety nets that has been established to forestall such a calamitous situation is the establishment of Kenya Depositors Insurance Corporation (KDIC). An independently constituted public body, KDIC is mandated with providing a safety net for depositors’ funds when a bank failure occurs and combine sound risk management incentives to banks.

As of now, the amount of deposit covered by KDIC is limited to a maximum of Ksh100,000, a threshold that covers up to 97 per cent of depositors. Additional funds are distributed as liquidation dividends after realisation of the assets of the failed institution. However, mechanisms are in place to review the same but all efforts must be geared towards mitigating bank failures.

With our expanded mandate, we are expected to conduct surveillance jointly with the Central Bank of Kenya, to proactively address problem banks. We need to avoid closure. Period.

Receivership, though at times unavoidable, remains a preservative strategy to forestall further erosion of the bank assets in times of panic withdrawal. It is a stop-gap measure that requires prompt resolution and not protracted to further weaken the bank.

Hence, the introduction of transfer and exclusion powers where part of the assets and liabilities are transferred to a more solvent bank as is the case of Chase Bank and Imperial Bank.

Mitigate closure

Going forward, what we are looking at is putting in place measures that will mitigate closure of a bank and in the unlikely event of a closure, we shall promptly resolve the bank for depositors to continue with their business.

We want to step in before a distressed bank has gone beyond redemption, and take pre-emptive and corrective action so that depositors’ funds are secured. Risk surveillance is critical because the warning signs are apparent before they metamorphose into something that might lead to the collapse of a bank with the attendant risk of triggering a contagion effect in the sector.

To enhance market discipline and encourage the banks to develop appropriate risk management frameworks by managing their risk appetite, KDIC is in the process of introducing Risk Based Premium assessment methodology.

Banks will be charged premiums based on their risk appetite. This is in line with the international best practice for effective deposit insurance. Member banks will be more prudent in the way they conduct business and eventually strengthen our financial sector.

KDIC assures depositors and creditors that all mechanisms will be put in place to make our country the best business destination of choice in the region.

- The writer is the CEO, Kenya Deposit Insurance Corporation