, NAIROBI, Kenya, Nov 5 – Central banks in the East African Community are planning to come up with an effective Deposit Insurance Scheme by 2015 that will ensure depositors in all financial institutions are covered in case of a collapse of the institution.
Central Bank of Kenya Governor Njuguna Ndung’u said the move was necessary due to the vibrant growth in the financial sector in the region with some institutions being exposed to uncertain financial risks in new countries.
He said the regulators in the region will ensure the scheme is in line with the required international standards.
“This expansion into the region has some potential risks. We want to strengthen our deposit protection mechanism or insurance system. We will try to make sure we replicate across the countries the best of deposit insurance,” Ndung’u said at a regional workshop in Nairobi on assessment of compliance with the core principles for an effective deposit insurance system.
As part of the preparation towards the envisaged East African Community Monetary Union, the EAC central banks have also commenced a process of harmonising legal and supervisory rules and practices to promote financial stability and soundness of the financial system in the region.
Ndung’u added that in Kenya, the Deposit Protection Fund Board has been able to insure 94 percent of the 16 million banked Kenyans.
He however called on banks to create awareness among the depositors that their deposits are insured with an aim of strengthening their faith in the financial sector.
“We have a big growth in the number of depositors in the country and we are happy about that. But I am not also happy with the banks. The other day I asked the banks… do you ever tell your customers that they are fully covered by the deposit protection fund in your own advertisement I see on TV?” posed Ndung’u.
Since the formation of Deposit Protection Fund Board in 1985 in the country, it has been able to liquidate seven financial institutions out of 24 which collapsed in the 90s.
“This is not very good and I hope when the fund will be separated from Central Bank, it will be able to compensate the other Kenyans who got loses with the collapse of these institutions,” he said.
The fund is expected to start operating on its own before the end of this year according to the new Kenya National Payment Systems law.
Apart from the Deposit Protection Fund, Ndung’u said the CBK is working on proper implementation and improvement of the new law that also seeks to safeguard the operations of the electronic banking and money transfers in the country.
“As we encourage and support innovations in the financial sector, we must ensure that the environment is safe and sound in order not to undermine the integrity and stability of the financial system,” Ndung’u said.