Banking Law

BANKING LAW

QUESTION

The financial services consumer protection in the commercial banks, capital markets and insurance business has been secured through the deposit protection, investor protection and policy holder compensation funds.

Having regard to the structure and objectives of these funds, critically analyze how they have dealt with the twin problems of adverse selection and the moral hazard.

Structure and objectives of the funds

Deposit protection fund was established under section 36 of the banking act of 1985 and managed by the deposit protection fund board. The board was established as a deposit scheme to provide cover for depositors and act as a liquidator of failed member institutions. Its role being that of safeguarding depositors against losses they would otherwise incur if a bank or deposit taking institution closes its operation.

  However today, the deposit protection fund has been taken from the purview of the banking act to the deposit insurance act. The deposit protection fund has been replaced by the deposit insurance fund while the Kenya deposit insurance corporation has replaced the deposit protection fund board. The responsibilities of the commission are almost similar to that of the board and its they include providing a deposit insurance scheme for customers of the member institutions, administering the scheme, collecting contributions for the fund from the member institutions and holding and applying the fund. It also receives, liquidates and winds up institutions whein they fail.

  The deposit fund board was a functional department of the central bank of Kenya but the corporation operates independently from the central bank with its own management and staff who are answerable to the corporation This greatly enhances its independence in carrying out its functions.

The fund is established under section 20 of the Kenya deposit insurance act and vests it in the corporation to be administered by the board. Section 23 of the same goes ahead to state its application which among others include: to meet payments in respect of insured deposits. The membership of the fund is found under section 24 of the act, which states that any institution licensed by the central bank shall be deemed to be a member of the fund from the date its granted the license and also all the institutions which at the commencement of the act I licensed by the central bank.

Section 27, deals with the contributions by institutions and an institution license by the central bank is expected to contribute to the fund such annual amount and at such times as the corporation may determine. The amount to be contributed is also set out and also under section 27(4) it states that where the affairs of an institution are detrimental to its interests or that of the interests of the depositors the corporation may increase the contributions of that institution beyond the prevailing rate and also there is a penalty for failure to pay contributions.