The Capital Markets Authority (CMA) has entered fresh talks with the Kenya Deposit Insurance Corporation (KIDC) and the Central Bank of Kenya (CBK) to end the stalemate on plans to compensate bondholders if a bank goes bust.
The capital markets regulator said on Monday talks on amending the Deposit Insurance Act to allow for such reimbursements are now “progressing well” after a two-year deadlock.
The proposed legal changes, the CMA reiterated, are aimed at ensuring “investments by retail and institutional investors through corporate bonds are separated from customer deposits and other bank liabilities in instances where a financially distressed bank has issued a corporate bond”.
“We had proposed revision of relevant provisions in KDIC Act to provide much more clarity on what should happen in regard to segregation of the same (bonds), but that involves discussions with the KDIC, CBK and Treasury,” said CMA director for regulatory policy and market development Luke Ombara on April 29.
A breakthrough in the talks, in which the Treasury is an umpire, will see the proposed legal amendments presented to MPs for debate and approval in the financial year starting July.
That will see funds invested in corporate bonds ring-fenced from customer deposits and paid out if a bank collapses without having to wait for depositors to be compensated first as is the case under the current law.
The collapse and subsequent default on bonds by Chase Bank (Sh4.8 billion) and Imperial Bank (Sh2 billion) exposed the gaps in Kenya’s investor compensation laws and policies, leaving bondholders with no clear recourse in the event a company is liquidated.
This has routed trade on the corporate bond market, pointing to apathy among investors.
Market data, for instance, shows the share of corporate bonds shrunk to 0.08 per cent of Sh199.4 billion total bond transactions last year, with the Treasury bonds taking the lion’s share of the bond market trade.
This was a drop from 0.17 per cent of Sh691.8 billion traded in 2019 and 0.56 per cent of Sh655.1 billion in the prior year.