East African governments are working on increasing compensation for victims of collapsed banks as part of efforts to boost depositor confidence in the banking industry, which has had incidences of bank failures in the past five years.
Regional member states are working towards harmonising rules and regulations for dealing with troubled banks as part of measures to enhance the stability of the region’s banking sector.
In 2016, the EAC member states through the Monetary Affairs Committee resolved to jointly put in place measures to deal with troubled banks.
Recently, Kenya’s Deposit Insurance Corporation (KDIC) increased the insurance coverage for depositors to Ksh500,000 ($5,000) from Ksh100,000 ($1000), which had been in force for three decades.
The increase came after the KDIC jointly with the US-Treasury carried out a study in 2016 on the possibility of reviewing the insured deposits to boost confidence in the banking sector.
Last month, Ugandan Finance Minister Matia Kasaija announced plans to increase the deposit insurance limit to Ush10 million ($2,700) from Ush3 million ($809) before the end of this year.
“The government is committed to ensuring that the banking sector remains safe and sound. The public is encouraged to deposit their savings in the formal banking sector,” said Mr Kasaija.
In Tanzania, the Deposit Insurance Board has increased the amount of protected deposits from Tsh500,000 ($215) to Tsh1,500,000 ($646), while the Deposit Guarantee Fund of Rwanda protects eligible deposits up to Rwf500,000 ($535) per depositor per member bank and microfinance institution.
In Kenya, 90 per cent of total deposits in the banking sector have balances of less than Ksh100,000 ($1,000) while only one per cent of the deposit accounts have more than Ksh1 million ($10,000).
The latest development increases coverage from 90 per cent of the deposits to 98 per cent and in terms of value from eight per cent of deposits to 20 per cent.
“Our main aim is to enhance confidence in the industry and reward depositors who have been resilient during hard times and thereafter mobilise more savings,” KDIC chief executive Mohamud Ahmed Mohamud told The EastAfrican.
According to Mr Mohamud, in the unlikely event that a bank is put under liquidation depositors will be compensated within a period of 30 days.
Deposit insurance is the protection provided by governments to depositors of bank or deposit-taking institutions. It assures depositors of compensation in case a bank collapses.
Since 1989, Kenya has been compensating depositors of failed institutions up to a maximum of Ksh100,000 ($1,000).
While this amount fully covers small depositors, it leaves medium to high net worth savers who control over 90 per cent of an estimated Ksh3.5 trillion ($35 billion) worth of deposits highly exposed.
The new policy shift takes effect on July 1, 2020.
Compensation to depositors is made from the levies that banks pay to KDIC every year. Although banks currently pay premiums to KDIC at a flat rate of 0.15 per cent of their total deposits in a year, Mr Mohamud said the model is switching to a risk-based one on July 1, 2020 where high risk and unstable lenders pay more compared with more stable institutions.
In Uganda, there are about 11 million accounts including micro-deposit taking institutions with an estimated Ush20 trillion ($5.4 billion) worth of deposits. However, 98 per cent of deposit accounts have less than Ush3 million ($809).
In terms of total deposits in the sector, only 9.4 per cent are insured.
“The Deposit Insurance Fund, together with the Ministry of Finance, Planning and Economic Development, is working on revising this limit in order to cover a larger percentage of deposits in the sector,” said Ben Patrick Kagoro, chairman of Uganda’s Deposit Protection Fund in the 2018 annual report.