The sufficiency of deposit protection fund's investment options to generate insurance funds for depositers in financial institutions in Kenya

Abstract

The principal objective of Deposit Protection Fund Board (DPFB) is to provide deposit insurance scheme for customers of member institutions, liquidate and wind up the operations of any institution in respect of which DPFB is appointed as a liquidator. DPFB as a department of the Central bank of Kenya undertakes to insure banks and other member institutions to compensate depositors of these institutions incase of liquidation. Thus the research intended to find out how sufficient the fund is to insure the institutions depositors in the event of liquidation. The sufficiency of the DPFB to insure all the depositors from the foregoing literature is that all the accumulated reserves are not enough to provide the necessary compensation to some of the member institutions whose deposits as a bank is much more than the total deposits at the DPFB. As at 30th June 2006, DPFB had fund reserves accumulated from premiums levied to the member institutions of Ksh.13.82 billion against a liability exposure of Ksh. 88.36 billion during the same period (DPFB, 2006). The study used conceptual framework to relate the dependent and independent variables. Both primary and secondary data were collected using the questionnaires administered to the respondents at the DPFB, the Ministries of Finance and Planning and National Development as well as the Nairobi Stock Exchange. The study used stratified random sampling techniques to select a sample from the target population and the data analyzed using both descriptive and inferential statistics. Presentation of the information was done using the pie charts, curves and bar graphs. From the analysis, it is has become evident that the DPFB's fund may prove insufficient to insure all the depositors at the same time while the performance of the economy has an influence on the investment options that the DPFB has. The roles of the member institutions have no significant effect in the investment options available to the Board. The mandate that the Board has (through the Banking Act) is the key significant factor that determine the investment options and effectively the sufficiency of the fund to insure depositors. The study recommends that DPFB be de-linked from CBK, review rules and regulations about DPFB, review the banking act to enhance capacity of the board and urgently diversity the investment options for DPFB.