Why State agency wants banks to write own wills

Kenya Deposit Insurance Corporation CEO Mohamud Ahmed Mohamud during an interview with the Standard. [Beverlyne Musili/Standard]

Banks will soon be required to write their own wills, explaining how their assets will be disposed of in case of failure in their business.

This is part of the measures being taken by financial regulators, including Central Bank of Kenya (CBK) and the Kenya Deposit Insurance Corporation (KDIC), to ensure insolvent banks do not stay for long with depositors’ cash.

KDIC CEO Mohamud Ahmed Mohamud said this when he announced that depositors of Imperial Bank, which is under receivership, will get access to 7.5 per cent of their outstanding deposits, estimated at Sh53 billion.

However, depositors might have to wait for at least four years before receiving their money in full.

This is after a new offer by the KCB Group, which is set to acquire the ailing lender’s assets, to clear deposits held in Imperial Bank.

As part of stemming bank failures in the country, Mr Mohamud said, they will soon ask banks will do a resolution plan, explaining what they will do in case of failure to streamline the process of paying depositors.

“The next initiative is to ask our membership, the banks, to do what we call a resolution plan. Other jurisdictions call it a living will. We can ask the banks to give us wills,” said Mr Mohamud.

Higher premiums

He also announced that starting July next year, they will roll out a risk-based premium under which banks with higher risks will be expected to pay higher premiums against deposits.

With risk-based premiums, banks and Microlenders will be assessed in accordance with their risk profile as a measure to instil market discipline and avoid problems in the sector.

“The premium we are going to charge banks will be based on their risk profile,” said Mahmud, noting that banks have already been sensitized.

“We want to assure Kenyans that bank closures will be a thing of the past as we move forward,” said Mr Mohamud.

Surveillance

“We have already put in mechanisms in place to ensure that problem banking is resolved beforehand.”

He said they currently have surveillance powers and are working closely with CBK’s supervisory reports.

KDIC will also create a strong surveillance unit, which will be automated so that it can create a real-time information sharing platform with the banks and CBK.

For the surveillance powers, Mr Mahmud said, the agency will rely on inspection reports from CBK. These reports will inform their risk-based premium, where they want to go and even detecting signs of any problem in a bank so that they can start early.

“I know most of you must be wondering, the FDIC (Federal Deposit Insurance Corporation) of America closes a bank on Friday and opens it on a Monday. There is no magic there. These people are in that bank six months before that is done.”

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