Kenya Plans to Rescue Lenders Using 'Interim Banks'

Nov 16, 2018

Kenya has announced plans to establish "interim" banking institutions to manage the assets and liabilities of troubled banks for two years in order to boost banking stability and attract more investment into the lending business.

The move is expected to protect banks under receivership against a run on deposits and give regulators enough time to search for potential buyers. The EastAfrican has learnt that the Kenya Deposit Insurance Corporation (KDIC) will also form an asset management company to take care of the non-performing loans of banks under receivership.

KDIC Chief Executive Mohamud Ahmed said that the temporary banks, to be called "bridge banks" will be owned by the corporation and will each have a life span of two years within which it would be sold to strategic investors. A bridge bank will be created for each operating bank that runs into financial trouble and fails to respond to intervention measures by KDIC and the Central Bank, leading to its being put under receivership.

On the other hand, the asset management company, which will also be owned by the deposit insurance agency, will be a permanent institution whose purpose is to handle bad assets in the event of bank failures. "KDIC is coming up with these initiatives and more in future to prevent bank failures and protect depositors in the event that a bank fails," said Mr Ahmed, who is also the vice-chairman of the African regional committee of International Deposit Insurers.

Under the proposed arrangement. which will be anchored in law, the asset management company will be required to recapitalise the interim bank, if the need arises, through the sale of its assets. This will ensure that the interim bank operates normally and has the ability to attract strategic investors. For instance, if Bank X collapses, KDIC will move quickly to shut it and create a new Bank X to ensure the bank continues to operate normally to avoid a run on deposits pending its sale to strategic investors. The new Bank X, however holds only the good assets and liabilities of the defunct Bank X, while the bad assets are transferred to the asset management company.

The proposed measures constitute the last options for KDIC would be forced to take to salvage the assets of depositors in the event that a bank is pushed into receivership. These measures are also meant to ensure speedy and efficient resolution of problematic banks.

 

Source: All Africa