The Kenya Deposit Insurance Corporation (KDIC), a safety net body mandated to guarantee to offer banking resolution for failing or failed banks, has announced its transition from the current flat rate premium model to the risk-based premium model with the aim of increasing market discipline and safeguarding bank depositors.

The risk-based model will see the transition from the current rate of 0.15 percent of the total deposits held and replace it with a model where the premium that is charged is based on an individual bank’s risk appetite.

During KDIC’s inaugural stakeholder engagement forum themed “engendering confidence in the new era of deposit insurance: preparing for a risk-based model” Mohamud Ahmed Mohamud, KDIC’s CEO said plans to review the premium rate are aligned with global best practices and will offer an “incentive for sound risk management by reducing the premiums charged to banks with better risk profiles while increasing premiums for those with a high-risk appetite.

“One of the challenges we have faced in the past is the situation where all banks have been treated the same in terms of the premiums they pay to KDIC. We are now looking at instituting a risk-based premium model which we believe is fairer and will encourage banks to streamline their operations in order to minimize their risk exposure,” Mohamud stated.

KDIC together with the National Treasury and the Central Bank of Kenya are the institutions that provide a financial safety net for Kenyans through early intervention and resolution, legislation, and supervision and regulation respectively.

A risk-based model offers fairness, financial stability, and the right incentives.

“We are cognisant of the fact that banking stability is largely founded on public confidence and that this stability is crucial in maintaining a vibrant economy. We continue to put more effort in driving awareness of KDIC‘s role in maintaining and fostering soundness and stability of the financial sector and with the review of the bank insurance premiums, we are confident that we are on the right track in achieving these goals,” KIDC’s board director James Teko asserted.

Also speaking at the event, Treasury Chief Administrative Secretary Hon Nelson Gaichuhie said the Ministry is dedicated to driving awareness about KDIC’s transition to the risk-based model.

“We believe that well-designed safety nets could do more than just stabilize the financial system. They could also reduce the burdens placed on regulators and Central Banking in addition to providing increased room for discretion in financial institution’s activity,” Hon Gaichuhie said adding that by improving the safety net through the new model will increase stability of the banking sector thereby contributing towards the government’s achievement of the Big Four agenda.

Currently, KDIC is also working on creating a data warehouse which will enable information sharing among the financial safety net institutions and reduce the time it takes for depositors to get their payouts when banks go into receiverships to a maximum of 90 days.

To achieve it transition into the new era, KDIC is receiving help from globally renowned risk consultants Javier Bolzico and Natalia Teplitz. Part of the efforts by the consultants includes developing bank resolution tools and training the KDIC staff.

Moreover, KDIC is also in the process of creating an ICT-based central data surveillance monitoring system to allow the corporation to profile member institutions.

The KBA CEO, Dr Habil Olaka was also at the event and he offered the association’s support for the new model.

“KDIC is committed to protecting depositors, particularly small, and vulnerable against losses they may face because of the failure of bank(s) and other deposit taking institutions, thus creating public confidence in the financial system,” the corporation says in its press release.