Mention Kenya Deposit Insurance Corporation (KDIC) and what it usually elicits is fear that depositors’ money is at stake, and the future of the bank involved is uncertain.
But the KDIC Chief Executive Mohamud Mohamud wants to do something different. In an interview with the Financial Standard, the international assessor says he is shifting the agency’s role from reactive to proactive.
“We are not going to wait for a bank to enter critical condition before we come in. We used to wait until the body is brought to us but we now want to become doctors,” he told Financial Standard. “We will review banks even when on surface they look healthy.”
When asked how it feels handling distressed customers when their hard-earned savings are locked in a bank, he takes a backward pose on the chair, followed by deep breath.
“Without emotional intelligent, this is not a place to work. There was a day a patient was wheeled up to me here (KDIC office) from Aga Khan Hospital.
All her money was locked up in a bank,” he recalled. He opines that the only happy moment is when his team has recovered some assets and is calling depositors to come for their money.
Called Deposit Protection Fund Board, a department within Central Bank of Kenya (CBK) up to 2012, the agency used to have a narrow mandate of liquidating banks since its existence in 1989.
So far, it has liquidated 25 banks out of which eight have been concluded and depositors fully paid. Some 17 are at different stages of being concluded.
According to Mr Mohamed, the “dark past” of poorly documented loans, weak regulations and unclear securities has only meant that the process of tracing preserving and realising loans is hard. In 2012, KDIC was born, becoming an independent insurance body in line with international best practices.
Its mandate was broadened to risk minimisers as opposed to just being liquidators. Mr Mohamud, a deposit insurance assessor of international best practice, a title he only shares on the continent with his counterpart in Zimbabwe, says the agency no longer wants to only be receiving “dead banks.”
“We shall be doing surveillance in banks together with CBK in order to fix any problem before it becomes terminal. Previously, we used to come in only when the bank has collapsed,” he told Financial Standard.
This will see the agency work with banks’ management to reinforce their risk management frameworks as CBK looks at corporate governance.
Banks will also start paying premiums on credit based on their risk profile.
Under liquidation, once a bank is put under receivership, the agency pays a guaranteed sum of up to Sh100,000 to the depositors then the rest is through dividends as it liquidates the assets.
According to KDIC latest annual report, out of Sh2.76 trillion in accounts of commercial banks, deposit taking microfinances and non-bank financial institutions, Sh252.5 billion is fully secured.
This is 39.44 million of 40.78 million accounts meaning that about 97 per cent of accounts have less than Sh100,000. Despite this decent figure, huge amounts, beyond Sh100,000, remain exposed. However, thanks to the study by KDIC together with US Treasury, Mr Mohamud told Financial Standard, that the figure is set to be reviewed upwards.
“Although international best practice talks of twice the per capita of a country, we are going to give more than that,” said Mr Mohamud. Kenya’s Gross Domestic Product (GDP) per capita, a measure of average wealth of each citizen is estimated at $1250 (Sh129,398). Therefore, KDIC is likely to more than double the deposit cover.
This review may come at additional cost to banks but the CEO says it will help inject more confidence in the industry. “On the premiums, banks should expect a marginal increase which they may not even feel,” he said.
Currently, banks are charged a premium of 0.15 per cent as premium on the average total deposits for the last 12 months preceding the start of a financial year or Sh300,000 whichever is higher.
However, the CEO says that in the next three years, the agency wants to shift from charging a flat rate to charging risk- based premiums. By the act, it can charge up to 0.4 per cent.
This will see riskier banks incur higher premiums compared to more stable ones. Mohamud expects that this move will put banks on the toes to increase risk profile ratings. “We will work with CBK bank supervision department to give us data and during supervision, we will be accompanied them to know deposit structure,” he said.
In 2015-16 financial year, the agency collected premiums worth Sh3.6 billion and sees that rising to Sh4.04 billion in 2016-17. The CEO says that the agency will be out to “detect early warning signs” by looking at among other things how loans are given out and if they are well documented.
Where weaknesses are spotted, the agency wants to work with CBK on prompt corrective action such as compelling banks to restructure loan book.
CBK usually conducts capital adequacy, asset quality, management, liquidity and sensitivity to market risk, popularity known as Camels ratings on banks.
“KDIC will be looking at composition of bank’s deposits and their usage as well as quality of loan book. We will also check the mitigation frameworks that they have put in place,” said KDIC.
Such information on Camels, was a preserve of CBK and KDIC would only step in in the last minute when the bank is being put under receivership.
Matching the expanded task, KDIC boss will soon be increasing the staff size from the current 74 to about 150. The agency is set to partner with Korea Deposit Insurance Corporation so that Kenyan staff can be trained at Korea’s deposit insurance academy.
He is upbeat that becoming proactive will help to eliminate bank failure. Closing a bank he says, only serves to kill the brands and interferes with the customers’ affairs.
“We want to fix the problems of banks while they are operational and in the likely situation of a resolution, we conduct the resolution while the bank is a going concern,” said the chief executive. However, in the unlikely event of a receivership, KDIC wants to guarantee settlement of the protected deposits within seven days.
The agency may not be so much in the face of Kenyans yet on the continent, only Nigeria has a vocal insurance corporation that matches that of Kenya.
Last year, KDIC was awarded as the best insurance corporation in the world. The CEO, who also sits on the board of International Association of Deposit Insurers, told Financial Standard that countries such as Uganda, Ghana, Tanzania and Namibia are coming to Kenya to benchmark on how to run their deposit insurance agencies.
Debt recovery continues to be an anthill task due to poor documentation by institutions under receivership. Between May 1993 to June 2016, out of Sh45.5 billion total loans at time of liquidation, only Sh8.83 billion or 19.4 per cent has been recovered.
KDIC boss is looking a t a possibility of selling off these debts. “Some countries have succeeded in selling off old debts and we are working with them to see if we can offload these debts at certain price, share the proceeds with depositors and close these institutions.