Premiums paid by banks toward the insurance of customer deposits will now factor risks linked to fluctuating interest rates, foreign exchange rates, and commodity or equity prices as part of a proposed strategy aimed at improving the lenders’ preparedness against threats.
New draft regulations by the Kenya Deposit Insurance Corporation (KDIC) seek to enhance the existing risk-based premium model, which has been in use since July 2021, and where banks pay for their contributions to the deposit insurance fund based on their different risk levels.
Kenyan banks pay premiums to KDIC, with costs wholly borne by the lenders as permitted business expenses.
The scheme is modelled around an arrangement known as the Differential Premium System(DPS), where banks rated low-risk pay 0.15 percent of annual deposits, while those with higher-risk pay up to 0.206 percent.
The DPS currently assesses the contributions based on each bank’s assessment on six components: capital adequacy, asset quality, management quality, earnings, and liquidity (CAMEL).
But in a shift aimed at sharpening the deposit insurance scheme, KDIC now plans to factor market risks and widen the assessment matrix from CAMEL to CAMELS, which includes additional areas such as forex rates.
‘The enhanced CAMELS model is also designed to have a broader view of the capital adequacy, asset quality, management ratio, earnings, and liquidity ratios of banks,’ KDIC told the Business Daily.
‘This will help KDIC to assess how well banks are prepared to handle and respond to market or economic volatility,’ it added.
KDIC is expected to categorise every commercial bank and microfinance institution into a risk band based on the scores derived from the CAMELS model.
The rate of contribution to the deposit insurance fund by each institution shall be calculated by adding the base rate of contribution to the multiplied risk rate and risk weight.
‘The rate of contribution shall vary across risk bands, in a manner that incentivises institutions to maintain prudent risk profiles and strengthen risk management practices,’ KDIC notes in the new draft regulations.
KDIC transitioned contributions to the deposit insurance fund from a flat rate of 0.15 percent of the average annual deposits of each financial institution to the differentiated premium system.
The new system differentiates contributions per bank, where riskier institutions pay more to insure their customer deposits.
The contributions create the deposit insurance fund, which is overseen by KDIC and compensates depositors in the event of a bank failure.
The fund’s balance stood at Sh248.9 billion as of December 2024, while total insured deposits were Sh822.7 billion out of Sh5.74 trillion in total industry deposits.
The enhancement of the contribution model comes as KDIC proposes an enhanced coverage limit of up to Sh1 million per depositor.
The proposed improved coverage is not directly related to the DPS model, but is seen as positive to banking sector customers by improving risk management in the institutions.
‘The DPS model is designed to gradually enhance risk management by banks, improve performance, corporate governance, and resilience. This will be a good thing for depositors, the banking system, and the economy,’ KDIC added.