Resolution is the disposition plan and process for resolving a non-viable bank. One important statutory mandate of KDIC is to ensure that failing/failed institutions are resolved in a timely and efficient manner. This is supported by the existence of legal powers through the KDI Act 2012 that supports early intervention and prompt corrective action, the ability to close troubled banks promptly, and orderly liquidation of assets and resolution of creditors’ claims. As the sole and exclusive “Receiver” of the Bank, KDIC advises the Central Bank of Kenya on the most viable resolution mechanism to reopen the bank within the shortest time possible.

Intervention mechanisms may include:

Open Bank Assistance (OBA)

This is a resolution mechanism where a troubled Bank receives assistance in form of a loan or contribution by the Deposit Insurer, Government or the Central Bank. This may include changes in the Board and Management. The Deposit Insurer must determine that the assistance is the least costly option to the insurance fund of all possible methods for resolving the institution. The overall goal in using OBA is to minimize the cost of a failing bank to the deposit insurance fund.

Government Intervention

This is a form of resolution method where the Government comes into play and bails out the troubled Bank. This may be in form of a take-over or nationalization. For example the in the past the Government has bailed out institutions like National Bank of Kenya.

Mergers and Acquisitions

Merger: A merger is where shareholders identify with suitable partners who may come in and conduct a due diligence in order merge the balance sheets and come up with a strong bank.

Acquisition: Acquisition is a form of take over where the shareholders may identify a strategic investor who may have significant controlling interest and or acquire the whole bank as it is. This will entail due diligence and negotiations to inform the decision made.

For example, the Consolidated Bank is made up of mergers of 9 financial institutions. Over the years the country has experienced a number of mergers and acquisitions in order to restructure and strengthen the banking sector.

Bridge Bank

This is where the DIS forms an institution to assume the troubled bank as it continues to find a solution or an acquirer for the troubled Bank. The bridge bank is usually established by the DIS or financial regulator and may be instituted to avoid systemic risk and provide an orderly transition avoiding negative effects such as bank runs.

Transfer and Exclusion/ Purchase and Assumption

This is a resolution transaction between the DIS and a healthy financial institution, generally referred to as the Assuming Institution (AI). The P&A agreement is a closed bank transaction in which a healthy institution (generally referred to as either the acquirer or the “assuming” bank) purchases  some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits.

The acquirer usually pays for the shortfall between the assets purchased and the liabilities assumed where the value of the assets exceed that of the liabilities or vice versa.  This option is underlined by the lesser cost rule where the net assets/ liabilities visa vis the Deposit Insurance exposure determines whether the bank can adopt this method, or go into liquidation. If the gap between the net assets/ liabilities is greater than the DIS exposure, then the DIS exposure then the process of Exclusion and Transfer can be effected.

Currently two institutions have been placed in receivership.

INSTITUTIONS IN RECEIVERSHIP

 

INSTITUTION

DATE PLACED IN RECEIVERSHIP

1

Imperial Bank Limited

13th October 2015

2

Chase Bank Limited

7th April 2016

Liquidation

Liquidation, also known as pay-out is the process where a bank is closed and depositors are paid their insured deposits in a prompt manner.

The Liquidator engages in the process of realising the assets of resolution with a view to distributing dividends to depositors and creditors as and when sufficient funds are available.

A financial institution is placed in liquidation when it becomes insolvent if:

  • It violates any law or regulation or engages in unsafe and unsound practices likely to cause insolvency
  • It is unable to pay its debts
  • A winding-up order is made against it or a resolution for creditor’s voluntary winding-up is passed
  • It is unable to pay sums due and payable to its depositors
  • The Central Bank determines that the value of its assets is less than the amount of its liabilities.

The Liquidation process entails:

  • Takeover of failed institutions
  • Facilitation of Payment of Insured Deposits
  • Tracing and Preservation of Assets
  • Debt Recovery
  • Asset Realization
  • Payment of Liquidation Dividends
  • Winding up (dissolution of institutions)

So far 17(seventeen) institutions have been placed in liquidation as shown in the list below

LIST OF INSTITUTIONS PLACED IN LIQUIDATION

 

Winding Up

Winding up is the last process of liquidation. At this point there is no more recovery and liquidation is deemed complete. KDIC then applies to the High Court for an order to terminate the liquidation and wind up the institution. KDIC has successfully wound up 8 (eight) institutions as shown in the table below:

LIST OF WOUND UP INSTITUTIONS

 

INSTITUTION

   DATE OF LIQUIDATION

DATE WOUND

  UP

1

Allied Credit Ltd.

20-Aug-93

06-Nov-07

2

International Finance Ltd.

16-Apr-93

06-Nov-07

3

Trade Finance Ltd.

18-Aug-93

23-Sep-08

4

Diners Finance Co. Ltd.

20-Aug-93

07-Nov-08

5

Nairobi Finance Ltd.

20-Aug-93

16-Aug-10

6

Inter-Africa Credit Finance   Ltd.

31-Jan-93

07-Sep-12

7

Central Finance Ltd.

19-May-93

07-Sep-12

8

Heritage Bank Ltd.

13-Sept-96

22-Nov-14