The truth about investor protection

July 16, 2009
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, NAIROBI, Kenya, Jul 16 – Over the last one year investors around the world have been wary about the safety of their investments especially after the collapse of several financial institutions.

No one would have imagined that high profile and financially sound organisations like AIG and Lehmann Brothers would run into problems. This has left many investors asking themselves the question “Are my investments and savings really safe?”

Although the banking sector in Kenya is today considered one of the best regulated and most profitable ones, it has had its share of problems most notably in the 1990s. Trust Bank, Reliance Bank and Bullion Bank are just but a few banks that fell by the wayside during this period. The collapse of these institutions had an adverse effect on consumer confidence on smaller banks which struggled to keep afloat.

According to the provisions set up in the Banking Act, the Deposit Protection Fund Board (DFPB) is mandated to provide deposit insurance coverage of up to Sh100,000 to each depositor of an institution licensed to conduct banking or finance business in Kenya. The insurance covers all types of deposit accounts including current, savings, banker’s cheques, money orders, drafts and many more for which a protected institution is liable.

However, payment is restricted to one depositor per institution. This means that all accounts of a depositor with more than one account in an institution are first consolidated before settlement as one claim to the maximum protected limit of Sh100,000.  This is worrying for many depositors who look up to banks for the security of their hard-earned money and other value added services.

Fast forward to the turn of the new century and little has changed in terms of depositor or investor protection. The Nairobi Stock Exchange (NSE) that had seen many people invest in stocks in their droves in the last few years has recently taken a big hit. The collapse of stock brokerage firms such as Nyaga and Francis Thuo and Partners amid accusations of improper trading have seen many investors lose confidence in what had been a promising investment vehicle for many investors looking to diversify their options.  The long queues outside the firms’ offices are testimony of the desperation of investors as they seek to get at least part of their investments back.

Although the banking sector has taken great strides in terms of regulation while the Treasury seeks to tame rogue stockbrokers by stipulating stiffer measures, a lot remains to be done in terms of investor protection. The country’s regulatory authorities need to borrow a leaf from compensation schemes set up in offshore investment jurisdictions like Isle of Man and Guernsey.

The Isle of Man is a tax haven voted as the best offshore investment destination over the last few years.  Life insurance and financial investment companies based in the Isle of Man are licensed and regulated by the Isle of Man Government Insurance and Pensions Authority. In the unlikely event that a financial institution in the Isle of Man is declared insolvent, the compensation scheme will offer investors up to 90 percent of the investment value irrespective of where the investor resides.

Guernsey, as well, is one of the most respected international finance centers in the world making it an investment destination option. The Guernsey Compensation scheme goes a step further than that of Isle of Man. The compensation scheme ensures that at least 90 percent of the company’s liabilities to investors will be met in the event that an institution located there is declared insolvent. Investors will be entitled to – although stiff regulation means that companies based there have an almost non-existent chance of collapsing – a compensation scheme.

This leaves us with a lot to do. Capital security should be the primary objective of any financial institution. A protection scheme should only come into play when things go wrong and should not be used as a basis for making investment decisions as is the case today. It is anybody’s case when we will get there but it certainly should be a priority.

(Renaldo D’Souza is the Marketing and PR Coordinator at Winton Investment Services Ltd, an Offshore Investment Advisory Company based in Nairobi)

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