Mohamud Ahmed Mohamud is a man on a mission.
The Kenya Deposit Insurance Corporation (KDIC) boss is part of financial sector players ensuring the safety of customer deposits - the lifeblood of the banking sector.
Following the collapse of banks in the 1990s and recently Imperial Bank and Chase Bank that shattered thousands of livelihoods, KDIC, which insures customer deposits, has come out strongly to promote risk management and financial stability in the lending sector.
Mohamud noted that previously, KDIC was largely viewed as a “killer” of banks.
He said liquidation is now the last resort as they’ve put in place strong resolution measures to prevent the collapse of lenders.
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The agency, said Mohamud, also plays a more vigilant role in early preparedness and crisis management.
KDIC’s mandate is threefold - deposit insurance, risk assessment and resolution.
“We’ve moved from a pay box where we wait for a bank to be liquidated and then pay. We are now a resolution authority with a greater role in resolving besides payouts,” Mohamud told Financial Standard in an interview.
“Kenyans now see KDIC as a saviour unlike before when we were called bank killers. When they see KDIC, they know their money is safe,” he said.
Mohamud at the same time urged banks not to “sit and wait for a disease to become terminal”, but instead own up early so that their mistakes can be swiftly corrected.
“Owners and management should be alive to the fact that a bank can die, but this depends on systems put in place to prevent such a scenario,” he said.
Mohamud said in future, banks will have to provide a will (resolution plan) in case of failure or collapse, which is the case in other jurisdictions.
“If in the likely event a bank dies, how do we share its assets? Disclosure is very important,” he said.
The KDIC boss noted that as much as a bank is a private entity, it holds public assets in the form of customer deposits.
“Banks hold these deposits on public trust and should guard them jealously and not recklessly lend or engage in some crazy expenditures. It’s not your money,” Mohamud warned lenders.
“We are working to ensure bank failures are a thing of the past, and even if they face problems stakeholders work promptly to resolve them as fast as possible.”
According to the Central Bank of Kenya (CBK) data, customer deposits rose by 8.26 per cent from Sh3.3 trillion in December 2018 to Sh3.5 trillion in December 2019.
The regulator attributed the growth to the mobilisation of deposits through agency banking and mobile platforms.
In July this year, KDIC will roll out a new risk-based premium model.
The agency in 2020 suspended its implementation by one year as part of market intervention measures owing to the economic impact of the Covid-19 pandemic.
Currently, member banks fund KDIC’s deposit insurance fund at a flat rate of 0.15 per cent of total deposits per year.
KDIC’s membership is made up of the over 40 licensed commercial banks, one mortgage financier and about 13 deposit-taking microfinance banks.
But key financial sector players, including the National Treasury and CBK, agreed on a new payment system that profiles the risks of individual banks.
The deposit insurance fund is structured to compensate depositors of failed banks.
Mohamud said the flat rate was found to encourage market indiscipline and inequity.
The bigger banks raised concerns that they were paying for the inefficiencies of their smaller counterparts.
But now, Mohamud said, the new policy will create equity, straighten market discipline and also protect depositors by ensuring their funds are safe.
“This will create equity, whether small or big banks, all will be treated the same. Banks will also go back to their systems and look at their risk management frameworks, corporate governance and abide by their business plans,” he said.
Mohamud said the latest move will ensure the protection of customer deposits, which he termed the “crown jewel” of the banking industry.
“By protecting deposits, we must make sure they are prudently invested and jealously guarded by the banks so they don’t go into some imprudent investment, which has a direct impact on the deposits. This is part of our strategy to reduce banking problems in this country,” he said.
Under the new dispensation, banks are set to have strong risk assessment frameworks while ensuring they are more careful about the investments they choose to undertake.
Lenders will do their own self-assessment before CBK does its own. By looking at their systems and enhancing them, they will receive a higher rating.
When the risk profile is low, it means they can enjoy a lower premium, observed Mohamud.
He noted that strong banks will also spur foreign direct investments into the country aside from ensuring the safety of customer deposits.
This will see greater collaboration among safety net participants – CBK, National Treasury, banks and KDIC - to ensure seamless flow of information to help identify early signs of distress in banks.
Also, currently, if KDIC sees any variations in customer deposits, it seeks an explanation from the particular bank.
The stakeholders are working on technological infrastructure where information can be sourced at the click of a button.
KDIC is also working on an electronic data warehouse, which can be used by members for analysis and decision-making.
Mohamud noted this will further enhance the confidence Kenyans have in their banking institutions.
“More Kenyans will take money to licensed and regulated banks and micro financiers instead of parallel alternative institutions,” he observed.
KDIC last year also revised the coverage limit to Sh500,000 from Sh100,000.
This means that in the event of a bank liquidation, depositors will be paid a maximum of Sh500,000, up from Sh100,000 previously.
As part of market interventions owing to the effects of the coronavirus pandemic, KDIC had also issued a moratorium on payment of premiums for six months. The statutory premiums are normally paid every August, but were pushed to December.
The corporation, which is limited to covering the banks, is enhancing its capacity to play a greater role, with Africa becoming the new frontier for deposit insurance.
This has seen KDIC partner with universities and schools in an outreach programme aimed at developing a curriculum on deposit insurance.