In Summary
  • The Capital Markets Authority (CMA) and the Kenya Deposit Insurance Corporation (KDIC) have failed to strike a common deal on a compensation mechanism for bondholders in the event of a bank failure ahead of next month’s budgetary proposals.
  • The CMA has for several months been seeking support from the KDIC and the Central Bank of Kenya (CBK) on a clear reimbursement policy for debt held under custodial arrangements such as pension schemes by collapsed banks.
  • The move is part of efforts to restore confidence in the limping corporate bond market, which is on the verge of collapse, routed by defaults by collapsed Chase and Imperial Bank.
  • The two lenders went under with a cumulative Sh6.8 billion in bonds, whose sale to the public had been cleared by CMA in 2015, leaving investors — especially fund managers who are contracted by pension schemes to manage workers’ savings — bruised.

The Capital Markets Authority (CMA) and the Kenya Deposit Insurance Corporation (KDIC) have failed to strike a common deal on a compensation mechanism for bondholders in the event of a bank failure ahead of next month’s budgetary proposals.

The CMA has for several months been seeking support from the KDIC and the Central Bank of Kenya (CBK) on a clear reimbursement policy for debt held under custodial arrangements such as pension schemes by collapsed banks.

The move is part of efforts to restore confidence in the limping corporate bond market, which is on the verge of collapse, routed by defaults by collapsed Chase and Imperial Bank.

The two lenders went under with a cumulative Sh6.8 billion in bonds, whose sale to the public had been cleared by CMA in 2015, leaving investors — especially fund managers who are contracted by pension schemes to manage workers’ savings — bruised.

The capital markets regulator hopes to win back and restore the confidence of fund managers with the proposed amendment to section 30 of the KDIC Act.

The proposal seeks to have funds invested by pension schemes through fund managers “ring-fenced” from other assets of a collapsed bank and paid as a priority, an arrangement KDIC and CBK are reluctant to support.

Luke Ombara, the director for regulatory policy and strategy at CMA, said discussions with KDIC and CBK were still ongoing, but hinted at a deadlock.

“Discussions are about identifying assets under custodial arrangements. For example, if you have a bond issued, there’s a bond trustee and they are held in custody on behalf of pension funds through fund managers,” Mr Ombara said in an interview with Smart Company on Wednesday last week.

“In some other jurisdictions, funds held under custodial arrangements are supposed to be segregated from deposits. They are not supposed to be dipped into.”

Under current law, depositors are given priority when it comes to compensation from funds recovered from a collapsed bank to a limit of Sh100,000 per account.

Bondholders, like other creditors, are paid what remains after insured depositors are compensated, KDIC chief executive Mohamud Mohamud has maintained.

“According to our law, those (bondholders) are creditors and so they will be catered for under the residual (cash). If you look at our law, we first pay the depositors then the creditors,” said Mr Mohamud in a past interview.

The collapse and subsequent default on bonds by Chase Bank (Sh4.8 billion) and Imperial Bank (Sh2 billion) has exposed the gaps in Kenya’s investor compensation laws and policies, leaving bondholders with no clear recourse in the event a company is liquidated.

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