Sh500,00 is too little; deposit insurance should be Sh2 million
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
13 October 2019
Early this month, the
Kenya Deposit Insurance Corporation (KDIC) announce that it would
increase the amount of money covered from the current Sh100,000 to
Sh500,000 with effect from July 1, 2020. Bank customers should keep
their fingers crossed for the next nine months in the hope that their
financial institution does not collapse before then!
Meanwhile, it is
important to note that the current coverage of Sh100,000 has been in
force since 1989 – 30 years ago. So, the natural question to ask is: is
the new limit a fair increment?
At first sight, it
appears fair given that it is five times the old limit. But that alone
is not enough to draw any conclusions. We need to know whether the KDIC
has kept up with inflation.
In 1989, the Consumer
price Index was 9.84 and today, according to the latest figures from the
National Bureau of Statistics place it at 201.6 for the month of
September 2019. What this means is that, the average prices of goods and
services have increased by a factor of about 20.5 over the last 30
years.
Therefore, the fair
maximum limit for the bank deposit insurance should be about 20 times
the value that was fixed in 1989. In other words, Sh2 million.
The next natural
question is whether the KDIC can afford such an amount. To answer that,
we look at its financial position. The latest audited report available
at the Office of the Auditor General is for the year ended 30th
June 2017.
At that time, the
KDIC had total assets valued at Sh77.3 billion and liabilities of just
Sh158 million. Thus, its net worth was about Sh77.15 billion.
Now unlike most other
organisations and businesses, nearly all of KDIC assets (Sh76B out of
Sh77B) are in the form of cash investments. This money is invested in
government of Kenya securities – Sh45B in Treasury Bills and Sh31B in
Treasury Bonds.
Furthermore, in that
year, KDIC made a net income (surplus) of Sh11.8 billion after all
expenses were paid off. The bottom line is that KDIC has managed its
financial affairs very well and it is cash-rich.
For these reasons, I
think it can afford to cover up to Sh2 million of depositors’ funds
without feeling any financial strain.
Nevertheless, it is
not enough for KDIC to simply announce an increment of the coverage
limit and go back to sleep for another 30 years! It needs to put in
place a regular predictable review mechanism so that the coverage keeps
up with inflation.
I would propose a
review every five years. Thus, starting from Sh100,000 in 1989 (when the
CPI was 9.84), the coverage limit should have been increased to
Sh300,000 in 1994 (CPI =32.6), then Sh450,000 in 1999 (CPI = 45.4); and
so on up to Sh2 million in 2019 when the CPI is standing at 201.6.
My big worry right
now is that, by writing this, I might have invited the crocked
crocodiles who like dipping their fingers in public money, especially
cash-rich institutions!
 |
 |