Risky banks are set to be hit by higher insurance payments as the Depositors insurer changes its premiums model.
Kenya Deposit Insurance Corporation (KDIC) will review the current flat rate premium model to risk-based premium model in the next two years which it expects will instill market discipline and safeguard bank depositors.
It will now use a formula that will charge a flat rate and add a percentage on the insurance cover depending on the risk carried by a lender.
“We believe this is fairer and will encourage banks to streamline their operations in order to minimize their risk exposure. We will charge a flat rate of x plus 1 where if the risk is high it can be 3 or 4 and if it is low it can be 0,” KDIC Chief Executive Mohamud Mohamud said.
Larger banks have been complaining that the previous model where KDIC charges a flat rate of 0.15 percent on average annual deposits saying they have invested in controlling risks yet they were forced to pay huge amounts on their large deposits despite the safeguards.
Smaller lenders who serve the small and medium enterprises considered very risky will be hard hit by the development.
The Tier II and TierII lenders are still recovering from the contagion of the 3 failed banks, Imperial, Dubai and Chase Banks, new international accounting regulations called IFRS 9 and the rate cap that has made their business a difficult affair.
Mr. Mohamud said he has given the lenders two years to ‘review and reinforce their risk management framework to bring down their risk.
He said the formula will look at reckless lending, insider loans, and Non-performing loans to determine the level of risk.
They will initially use CBK’s Capital adequacy, Asset quality, Management, Earnings, and Liquidity known as Camels test to rate baking risks.
KDIC is also currently in the process of developing an ICT based Central data surveillance monitoring system-to enable profiling of member institutions.
Since its inception in 2012, KDIC has been instrumental in changing the deposit insurance landscape in Kenya.
The Kenya Deposit Insurance Act mandated KDIC to provide Bank resolution mechanisms for failing and failed institution among other powers.