Bank depositors who lose money in failed banks will be paid up to Sh1 million in compensation if the Treasury approves the doubling of the reimbursement, offering comfort to high-net-worth savers.

The Kenya Deposit Insurance Corporation (KDIC)—an independent State agency that manages deposit refunds for collapsed banks— has issued a draft legal notice to increase the compensation from the current Sh500,000.

Under the enhanced compensation coverage, a bank customer with one or multiple accounts in a collapsed lender will see their deposits reimbursed up to Sh1 million.

Parliament earlier rejected a proposed law that would have seen depositors in fallen banks paid up to Sh1 million for every account, fretful of the burden.

Zamara Actuarial Services, the consultant that reviewed the deposit cover, recommended raising the compensation to boost depositor confidence and ensure stability of the financial system.

“The Kenya Deposit Insurance Corporation determines that the maximum amount payable to a customer in respect of the aggregate credit balance of any deposit accounts maintained by the customer with banks and microfinance banks shall not exceed Sh1 million,” KDIC said in a legal notice published on Tuesday.

KDIC will be revising the deposit compensation limit for the second time in five years. In July 2020, it raised compensation ceiling for depositors in collapsed banks to Sh500,000 from the previous Sh100,000.

The rise came at a time when low compensation had exposed savers to higher losses in the event of bank closures because the refund was not adjusted to take into account changing economic realities over three decades.

In 2015 and 2016, Dubai Bank, Chase Bank and Imperial Bank were placed under receivership, fuelling jitters among investors.

The revised cap of Sh500,000 covers about 14.3 percent of bank deposits as of December 2024 or Sh822.7 billion of the industry’s Sh5.74 trillion savings.

An estimated 739,803 deposit accounts holding more than Sh500,000, and beneficiaries of the set increase to Sh1 million. Kenya had 116.1 million accounts in December 2024, exposing less than one percent of the accounts in the event of collapse.

Read: Depositors in failed lenders may draw up to Sh1m enhanced compensation

“In terms of the value of deposits protected, there has been a steady decline from 15 percent to 14 percent. This value is below the International Association of Deposit Insurance (IADI) recommended minimum value of 20 percent,” the Central Bank of Kenya (CBK) said in its latest financial sector stability report.

“However, at the current coverage limit of Sh500,000, 99 percent of the 116.1 million bank accounts in December 2024 (115.3 million accounts), were fully protected as they fell under the coverage limit.”

Depositors in the collapsed Chase Bank, Imperial Bank and Charterhouse were the first beneficiaries to receive the enhanced protected payment of Sh500,000 per depositor.

KDIC had partially paid Sh635.7 million to the claimants in the three banks at the end of June, 2023.

“The payment of protected deposits instils confidence in the financial system, safeguards the savings of depositors and promotes economic stability by preventing bank runs and ensures that individuals and businesses can trust their banks,” KDIC noted.

The deposit insurance fund, which is run by KDIC, was created to compensate depositors of collapsed institutions and to boost confidence in the banking industry that had been rocked by a series of bank failures in the 1980s and early 90s.

The insurance fund depends heavily on premiums collected from member institutions that are based on a percentage of the total deposits, depending on the risk profile of these institutions.

KDIC introduced a risk-based insurance premium model for commercial banks on July 1, 2021, and imposes higher premiums on banks deemed as ‘high risk’. Claimants in collapsed banks are expected to follow up with the KDIC and CBK bank branches for compensation, including submission of key documents.

Depositors with multiple accounts at a failed institution usually see all their accounts consolidated for settlement purposes up to the maximum protected limit.

Kenya has a higher compensation threshold compared to peer jurisdictions, including Uganda, Tanzania and Rwanda.

Uganda’s depositors are compensated up to UGX 10 million (about Sh346,740) while compensation in Tanzania is between Tsh500,000 and Tsh1.5 million (Sh24,900 to Sh74,701).

Rwanda protects eligible deposits up to Rwf500,000 (Sh44,365) per depositor.

→kmuiruri@ke.nationmedia.com

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