Banks to pay insurance charges based on risk exposure

Banks face higher insurance bills after the State-owned deposit underwriter announced plans to charge lenders premiums based on their risk profile.

The Kenya Deposit Insurance Corporation (KDIC) on Friday said it is awaiting the results of a study to determine how to implement a risk-based formula in underwriting the deposits held by banks.

Banks and deposit-taking micro-financiers currently pay premium assessed at 0.15 per cent of total deposits held, regardless of lenders’ risk exposure and risk-management strategies.

“We want to adopt a risk-based framework. Risk will dictate the premium we charge banks,” said the agency’s acting chief executive officer Mohamud Ahmed Mohamud.

“This will be implemented within the next two years,” he said in an interview during a meeting with banking sector stakeholders.

The US Treasury’s office of technical assistance is carrying out a study meant to reform the Kenyan deposit protection fund.

The ongoing study is looking at increasing the coverage of insured deposits from the current Sh100,000 per account, introducing risk-based deposit insurance, and viability of a new fund to support distressed banks.

The deposit underwriter had a fund worth Sh62 billion as at March 2016, against total industry deposits which stand at Sh2.6 trillion, Mr Mohamud said.

The KDIC called on banks to adopt Basel III regulations which address credit risk and calls on lenders to make use of credit bureaus in pricing and issuing loans; and inclusion of off-balance sheet items in calculating key ratios.

The agency reckons that the current flat-rate premiums is seen as a moral hazard, hence the need to punish rogue lenders with higher rates and reward prudent bankers with cheaper insurance premiums.