When a bank or microfinance institution in Kenya fails, it triggers a structured resolution process designed to protect depositors, maintain financial stability, and minimize systemic risks.
The Kenya Deposit Insurance Corporation (KDIC), established under the Kenya Deposit Insurance Act (Cap. 487C), is the sole resolution authority for banking institutions that collapse, in consultation with the National Treasury.
In the event of a collapse, the Deposit Insurance Scheme, a mandatory scheme for commercial and microfinance banks licensed by the Central Bank of Kenya (CBK), ensures that insured deposits are promptly reimbursed.
The primary objective of the Deposit Insurance scheme is to promote public confidence and contribute to financial stability. The Deposit Insurance Scheme provides a guarantee that depositors will be reimbursed their money even if the bank were to collapse.” KDIC” directs.
Currently, Kenya has 37 commercial banks, one mortgage finance institution, and 14 microfinance banks as members of the Deposit Insurance Scheme, with 19 institutions placed in liquidation, according to KDIC reports.
Legal Framework and KDIC’s Responsibilities
Under the Kenya Deposit Insurance Act, KDCI ensures immediate intervention and financial action in the event of a bank collapse.
In collaboration with the CBK and the National Treasury, banking institutions are obligated to notify customers about covered and uninsured products.
The current protected deposit limit stands at KSh 500,000 per depositor per institution, covering over 99% of deposit accounts nationwide.
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Bank Collapse: Resolving Process.
Banks experiencing collapse due to failure to meet financial obligations, such as paying depositors, undergo receivership from the KDIC to avoid full closure and protect the financial system.
KDIC evaluates options to resume the institution’s operations, including open bank assistance, mergers and acquisitions, or government intervention during the process.
However, during the process, certain withdrawals are subject to a moratorium, while loan repayments continue under the contract terms.
If the receivership resolution fails, the bank moves to liquidation, in which the institution is insolvent, unable to pay its debts, or has assets valued below its liabilities, in accordance with CBK regulations.
KDIC takes over the banking institutions during liquidation and facilitates payment of protected deposits.
Additionally, KDIC traces and preserves the assets, recovers debts, and pays dividends to depositors and creditors.
Payment by the KDIC for the protected deposits of up to KSh 500,000 per depositor is made from the Deposit Insurance Fund.
Further, balances above KSh 500,000 are treated as uninsured claims, with additional dividends paid as assets are recovered.
If a bank fails to make any progress, the KDIC publishes a final statement of account in the Kenya Gazette.
Alternatively, KDIC may apply to the High Court to terminate liquidation and dissolve the institution.
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Protected Deposits
Coverage of the protected deposits during the collapse of the institution applies to current accounts, savings accounts, fixed deposits, call accounts, bank drafts, certified cheques, and certain trust or joint accounts.
Trust deposits are treated separately for each beneficiary if properly documented, according to KDIC.
However, the coverage has exclusions, including balances above the limit, mutual funds, cryptocurrencies, government securities, interbank placements, annuities, and deposits in non-member institutions.
Depositors with multiple accounts at a single institution receive a single consolidated payout.
Depositers Claims Submission
Affected customers submit claims and submit relevant documents, including National Identification card (ID) and statements of transaction.
KDIC, however, clarifies that claims cannot be filed on behalf of others without a power of attorney.
Overseas depositors may lodge claims online with notarized documents.
Cases of Liquidated Banks
- Imperial Bank Ltd-2021.
- Charterhouse Bank-2021.
- Dubai Bank Ltd-2015.
- Euro Bank Ltd-2003.
