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Dr. Madigu: Consolidating Bank Stability through Risk Based Insurance

The collapse of several banks in the country over the last few years sent shivers down the public’s spines and dampened public confidence in banking institutions. The pain of the depositors at the inability to access their hard-earned money prompted many to question how safe their deposits are and how much trust they should place in their banks.

Dr. Godfrey Madigu, a PhD holder in Economics and Business from the University of Navarre, and a lecturer at the Strathmore University Institute of Mathematical Sciences (SIMS), is currently involved in a research project that will increase bank stability and ensure depositors’ money remains intact in the event that a bank collapses. This project is with Kenya Deposit Insurance Corporation (KDIC). KDIC, formerly known as the Deposit Insurance Fund, is a corporation established under the Kenya Deposit Insurance Act, 2012. Since 1993, it has liquidated 25 banks, and concluded compensation for eight banks. Another 17 are at different stages of the compensation process, including Chase, Imperial and Trust banks.

“When a bank goes down, KDIC moves in to sell off the assets and pay the debtors. They have for a long time been known as the ‘bad guys’, the ones who move in to liquidate banks. They want to change that image and introduce stability in the banking sector,” he says.

The project involves introducing a risk-based deposit insurance model that will see risk dictating the premiums that banks pay. “We are trying to introduce a risk-based premium model. Currently, the banks pay a flat rate of 0.15 per cent of total deposits held. But now due to the financial crisis we realised that some banks have more risk than others. This new model will ensure that two banks with the same kind of deposits but different risk appetites pay differently; so the bank with more risk will pay more,” Dr. Madigu explains.

KDIC is mandated to provide insurance cover for deposit accounts up to a maximum of Kshs. 100,000 per depositor of a member institution. “Few people know about this institution and what it does. Anyone with money in the bank is their client, whether they know it or not, as coverage is automatic,” he says.

This new model will instil market discipline and safeguard depositors. It will also provide incentives for sound risk management in financial institutions. “It’s important to ensure there is bank stability so that consumers can be reassured about their money in the bank. We need both big and small banks. We don’t want a situation where everybody goes to the big banks out of fear that small banks may fail. This is a ‘too big to fail’ syndrome which isn’t good for the economy. If they fail, it affects everybody yet perhaps the small banks understand the depositor’s needs better.”

Educational background

Dr. Madigu has an undergraduate degree in Textile Engineering from Moi University. He says that even though he knew he was out of a job while pursuing his undergraduate degree as the textile industry in Kenya was dying out, he is grateful because the engineering aspect has come in handy throughout his life. For instance, it helped him get through his Master’s programme in Economics and Finance at the University of Navarre, which he says was very technical. “There was a lot of mathematics involved. In fact if anything, from the word ‘go’, I wondered whether I was doing Mathematics or Economics. It was a very tough course but my background in engineering helped there.”

Challenges in his research journey

A lecturer in research methods, he describes research as finding new knowledge or finding out how things work. One of the challenges he has encountered on his research journey has been finding it difficult to make people understand what he is trying to do. People confuse research with consultancy yet they are two different things. He explains, “In consultancy, we apply what is already known to a situation. Research is more than this. It is about searching for what we don’t know so that we can apply it to existing or new problems.”

Other challenges he has encountered are accessing funds, and finding like-minded people who are passionate about research. He proposes that undergraduate students be tapped to assist in research as they are able to invest in it.

This article was written by Wambui Gachari.

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