| Introduction
The Deposit Protection Fund Board ("DPFB" or the "Board") is a significant player in the financial sector as it provides a safety-net for the savings, banking and payments systems in the Republic of Kenya. It plays the role of protecting depositors against loss of all their deposits in case of a bank failure, by providing payments of insured deposits thereby ensuring depositors remain confident enough to continue keeping their savings within the banking and payments system. The Board was established in response to challenges presented by banking crises and bank failures in the country and it has proved its worth during the twenty years of its existence.
Banking crises, failures and closures in post-independence
Kenya
 Kenya gained independence from Britain in 1963. The post-independence
period was one of tremendous economic growth characterized by conscious
Government Policy to transfer economic activity into the hands of indigenous
Kenyans. The banking sector was no exception and given the large number
of new entrants and low levels of expertise and experience, disaster was
bound to strike sooner or later.
Twenty years after independence in 1983, the stage was set for Kenya's
first post-independence banking crisis when several indigenous banks developed
acute liquidity problems. In spite of efforts by Treasury and Central
Bank to bail out the ailing institutions, one institution was closed in
December 1984. This crisis and failure exposed the inadequacy of the safety-net
and failure resolution mechanisms existing at the time, which precipitated
amendments to the Banking Act in 1985 to expand the safety net and improve
the bank failure resolution mechanism. The DPFB was established as a deposit
insurance scheme to provide cover for depositors and act as liquidator
of banks which could not be salvaged. The same amendments gave Central
Bank of Kenya the responsibility of risk minimization through enhanced
prudential regulation, supervision and surveillance. The function of curator
and revival of ailing institutions was also entrusted to the Central Bank.
Although operations of the Board commenced on activities
at the initial period up to 1989 involved establishment of the necessary
administrative and operational procedures as well as laying the foundation
and building up seed capital to ably meet any future payments of protected
deposits and its other objectives. While the nascent Board was struggling
with teething problems, two more institutions collapsed in August 1986
followed by a third one in January 1987. The Board was not equipped to
deal with these failures and hence the institutions were placed under
liquidation by the Official Receiver, a Government office under the Attorney
General's Chambers.
Hardly two years passed before the next crisis came and in 1989 seven
institutions were found to be financially distressed and drastic corrective
action needed to be taken. A consolidation scheme was crafted whereby
a new entity, known as the Consolidated Bank of Kenya Limited was formed
to take over the assets and liabilities of the seven institutions. The
scheme was supervised by the Treasury which also funded the seed capital
for the new bank through the DPFB. The Board learned crucial lessons from
the consolidation exercise and was now prepared to play its full role
by the time the next crisis struck.
The early 1990s were characterized by intensive political activity with
the resurgence of multi-party politics. An unfortunate by-product of this
activity was a mushrooming of licensed for
political exigencies. The crunch was bound to come sooner or later and
this time round the DPFB was equipped to play its role of protecting small
depositors. In 1993 alone, eleven institutions were placed under liquidation.
Ten of these were under the DPFB while one went into voluntary liquidation.
After this, the DPFB has grown from strength to strength and it has managed
to deal with subsequent bank failures as follows: two in 1994, three in
1996, one in 1997, five in 1998, one in 1999, one in 2001, two in 2003,
and two in 2005. There were a total of twenty four (24) institutions under
liquidation out of which four (4) have been wound up. In the middle of
all these challenges the Fund has grown in financial terms and now reports
assets in excess of |