Kenya’s banking sector could soon face higher costs in protecting customer deposits after regulators moved to tighten how insurance contributions are calculated, introducing a wider assessment of financial risks facing lenders.
The Kenya Deposit Insurance Corporation (KDIC) has proposed changes that would expand the current pricing model to include exposure to interest rate shifts, foreign exchange movements, and changes in commodity and equity markets. The aim is to improve how banks prepare for economic shocks and market instability.
The proposal builds on rules introduced in July 2021, under which banks contribute to the deposit insurance fund based on their risk levels, with the full cost of premiums carried by the institutions themselves.
At present, the Differential Premium System (DPS) is used to determine contributions. Under this system, low-risk banks pay 0.15 percent of their annual deposits, while higher-risk lenders are charged up to 0.206 percent.
The current framework is based on the CAMEL model, which assesses capital adequacy, asset quality, management quality, earnings, and liquidity.
KDIC now plans to upgrade this to CAMELS, adding market risk considerations such as foreign exchange exposure to strengthen the evaluation of banks’ stability and resilience.
“The enhanced CAMELS model is also designed to have a broader view of the capital adequacy, asset quality, management ratio, earnings, and liquidity ratios of banks,” KDIC told the Business Daily.
“This will help KDIC to assess how well banks are prepared to handle and respond to market or economic volatility,” it added.
Under the proposed system, all commercial banks and microfinance institutions will be placed into risk bands based on their overall scores. Each band will determine how much each institution contributes to the deposit insurance fund.
“The rate of contribution shall vary across risk bands, in a manner that incentivises institutions to maintain prudent risk profiles and strengthen risk management practices,” KDIC notes in the new draft regulations.
The contribution formula will combine a base rate with a risk-adjusted component, meaning institutions with higher exposure to financial risks will pay more.
This marks a shift from the earlier flat-rate approach, replacing it with a differentiated structure that increases pressure on riskier lenders while rewarding stability and sound management.
The deposit insurance fund, managed by KDIC, is used to compensate depositors if a bank fails. By December 2024, the fund stood at Sh248.9 billion, covering insured deposits of Sh822.7 billion out of a total industry deposit base of Sh5.74 trillion.
Alongside the revised premium structure, KDIC is also proposing to raise deposit insurance coverage to Sh1 million per depositor. While separate from the pricing changes, the move is expected to strengthen public trust in the banking system.
“The DPS model is designed to gradually enhance risk management by banks, improve performance, corporate governance, and resilience. This will be a good thing for depositors, the banking system, and the economy,” KDIC added.
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