Abstract:
This thesis appraises the Kenya Deposit Insurance Act, 2012 and evaluates its
effectiveness to address moral hazard in banking. While explicit deposit insurance
scheme (EDIS) enhance financial system stability by preventing potential bank runs
through reimbursement of depositors of failed banks using ex ante premiums levied
from the banks, they also create moral hazard when banks take excessive risks in the
knowledge that their losses will be borne by the EDIS. Kenya’s first EDIS under the
Deposit Protection Fund Board (DPFB) did not effectively address bank moral hazard.
The thesis considers the features the Kenya Deposit Insurance Act has adopted to
limit bank risk-taking and mitigate the impact of bank failure by facilitating the orderly
exit of failed banks from the financial system. The appraisal of the Act is conducted in
the context of the post-GFC reforms that integrate financial regulation for the safety
and soundness of individual financial institutions (microprudential regulation) and the
systemwide regulation of the risk emanating from the conduct of business of financial
institutions for the stability of the financial system (macroprudential regulation). Using
the post-GFC reforms in financial regulation, as well as South African and USA bank
regulatory and supervisory and deposit insurance and resolution regime perspectives,
I recommend reforms to strengthen Kenya’s macroprudential financial regulatory
framework and to enhance the effectiveness of its EDIS and SRR. Specifically, I
recommend reforms inter alia to strengthen Kenya’s bank supervisory framework
through consolidated supervision of financial conglomerates and the incorporation of
macroprudential regulation. In addition, I recommend reforms to the Kenya Deposit
Insurance Act to inter alia prescribe the assessment criteria for risk-based premiums
and the criteria for the enforcement of prompt corrective actions and the requirement
for financial conglomerates to prepare recovery and resolution plans.
