What Happens When a Bank Collapses? Do You Get Back Your Money?

Elijah Ntongai, a journalist at TUKO.co.ke, leverages more than three years of expertise in financial, business, and technology research, providing profound insights into both Kenyan and global economic trends.

As long as your bank is insured by the Kenya Deposit Insurance Corporation (KDIC) and your deposits fall within the specified limit, your funds are secure in case of a bank failure.

Who protects bank deposits in Kenyan?

Established under the Kenya Deposit Insurance Act of 2012 (KDI Act, 2012), the KDIC is a legally mandated institution entrusted with the primary duty to safeguard deposits made by Kenyans in banks.

In the event of a bank, the KDIC will either facilitate the sale of the failed bank’s assets to a financially sound institution or directly reimburse bank deposits to customers through deposits.

In remarks published for the KDIC inaugural depositors conference, the cabinet secretary for the National Treasury and Economic Planning, Njuguna Ndung’u, said that KDIC’s mandate is to provide the Deposit Insurance Scheme and Fund.

“In this respect, I am happy to note that the fund has been managed diligently recording a consistent growth over 30 years of its existence,” Ndung’u remarked.

“This essentially means that the corporation can work together with the Central Bank of Kenya to undertake early detection and intervention mechanisms to minimise the risk of bank failure,” Ndung’u added.

How does KDIC ensure depositors’ money is safe?

Hannah Muriithi, the chairperson of KDIC board of directors, remarked that the Board of Directors has implemented governance measures to ensure that the Corporation functions as a dependable Deposit Insurer and resolution authority, maintaining its commitment to safeguarding depositors, fostering public confidence in the financial system, and promoting sound risk management and timely bank resolution.

What is deposit insurance?

During a presentation in the KDIC conference, Paul Manga, the director for risk and examination at the KDIC described deposit insurance as a form of financial safety net designed to shield bank depositors, either fully or partially, from financial losses arising due to a bank’s inability to meet its debt obligations on time.

“Deposit insurance is an arrangement that is there in the most unfortunate event that your bank gets in trouble (and is) distressed and unfortunately is closed by the CBK and placed in liquidation; we are able to cushion you and say you will not go home empty-handed,” said Manga

What happens when the bank collapses?

Manga added that KDIC cushions depositors with an initial amount of KSh 500,000 and continues to pay dividends to the depositors, but only when efforts to resuscitate the bank have failed.

“At the beginning, we (KDIC) cushion you with a maximum of KSh 500,000, but that is not the only amount. We will do that as our last resort. We will try as much as possible to resuscitate that bank without killing it, but if push comes to shove and the bank cannot be resuscitated after everything has been done, we can now say (it is) fine; we will give you KSh 500,000 to start with,” Manga said.

“Then as we continue realising the securities of that bank, we will continue to make subsequent payments that are generally called dividends,” he added.

Increasing bank deposits and savings

As previously reported by TUKO.co.ke, the KDIC Inaugural Depositors Conference was geared towards creating awareness and increasing confidence in the safety of the banking system as one of the strategies to change the low savings culture in Kenya.

“Despite these numbers where we are talking about 84% financial inclusivity, our savings rates are still quite low. I think the highest we have gone is 15% a few years ago. The latest I have checked the numbers is that our savings rate in Kenya is 12% and the average for Africa is 17%,” Said the PS for Treasury during the KDIC Inaugural Depositors Conference