Reinventing the Wheel: “Pass Through” Deposit Insurance coverage for Mobile Money in Kenya

Kenya’s regulatory environment permits non-banks such as Mobile Network Operators (MNOs) to provide basic money transfer and payments services, much to the revulsion of banking purists. The question of whether mobile money schemes qualify for deposit insurance is often met with a straight answer: no. The argument goes that since such funds are not in the strict legal sense ‘deposits’ as defined under the Banking Act, and the beneficial owners of the funds do not have customer/banker relationships with the institutions in which the trust fund has been placed in respect of their entitlement under the mobile money scheme, it follows therefore that each mobile money customer’s entitlement cannot be considered a protected deposit.

Indeed, the Kenya Bankers Association recently repeated its posturing on the subject, saying that there was no regulation currently in place to extend deposit insurance to customers of e-money accounts held by MNOs, casting doubt on the security of mobile money transfer services.

Which begs the question: is each mobile money account holder entitled to deposit insurance coverage in the event of bank failure?

In 2012, Kenya enacted the Kenya Deposit Insurance Act (KDI Act). The Act establishes a Deposit Insurance Fund to replace the Deposit Protection Fund, and the Kenya Deposit Insurance Corporation (KDIC) to replace the Deposit Protection Fund Board (DPFB). While the Act has officially commenced, it is yet to be operationalized as regulations to bring it into force are still in draft form. In essence, the DPFB continues to provide deposit protection until the KDI Act is operationalized.

The current deposit protection provided under the DPFB has inherent weaknesses. For instance, protected payment is restricted to one cover per depositor per institution [i] and no provision is made for the protection of accounts held in a fiduciary capacity.

“Pass Through” Deposit Insurance

Recognizing these weaknesses, the new KDI Act provides [ii] that where a depositor acts as a trustee for another and the trusteeship is disclosed on the records of the institution:-

a) the deposit of the depositor as trustee shall be deemed to be a deposit separate from any deposit of that depositor acting on his own behalf or acting in another trust with the institution;

b) the deposit held in trust by the trustee for each beneficiary, shall be deemed to be a separate deposit where the trustee is acting for two or more beneficiaries; and

c) the deposit held in trust by a trustee for a beneficiary in an institution shall be deemed to be a deposit separate from a deposit of that beneficiary with the institution on his own behalf and shall also be deemed to be separate from any deposit held in trust by another trustee for the beneficiary in the institution.

Kenya has borrowed from the US Federal Deposit Insurance Corporation (FDIC) “Pass Through” model for omnibus custodial accounts holding pooled funds underlying stored value cards.

The US Federal Deposit Insurance Act [iii] read with the Federal Deposit Insurance Corporation (FDIC) Regulations [iv] recognizes deposit ownership in fiduciary relationships and custodial accounts.

The FDIC has taken the view that the funds underlying stored value cards or other non-traditional access mechanisms are “deposits” to the extent that the funds have been placed at an FDIC-insured depository institution [v].

The requirements for “Pass Through” are [vi]:

  1. The custodial relationship must be disclosed in the account records of the insured depository institution.
  2. The identities and interests of the actual owners must be disclosed in the records of the depository institution or records maintained by the custodian or other party.
  3. The deposits actually must be owned (under the contract between the parties or any applicable law) by the named owners and not by the custodian.

When the FDIC’s requirements are satisfied, the insurance coverage ‘‘passes through’’ the custodian, i.e., from the nominal account holder, to each of the actual owners of the deposit [vii].

While it transitions from the DPFB to the KDIC, the DPFB should be encouraged to develop similar requirements for operationalization of the KDI Act in respect of funds held in a fiduciary capacity, claiming its place as a champion of financial inclusion. The guiding principles that may be considered before extending deposit insurance to trust funds include:

  1. The account name must disclose the holder’s fiduciary capacity in relation to the account (which must be in a DPFB (or KDIC) insured depository institution [viii]); and
  2. Records sufficient to identify the beneficial owners of the funds and their respective entitlements held by the trustee in the banking institution on deposit must be available for inspection either with the bank, the trustee or some other party (e.g. the MNO providing the mobile money service).

With this in hindsight, is each mobile money account holder entitled to deposit insurance coverage in the event of bank failure? My answer is yes, subject to the three conditions above being met as the law is clear and unambiguous.

Low income groups gaining access to financial services through mobile money and other financial inclusion and innovation strategies remain the most vulnerable to financial shocks and are probably the highest at risk of losing their savings (in stored value) in the event of bank failure, reversing any financial inclusion gains made so far.

Regulators, as agents of change, need not shy away from reinventing the wheel when seeking regulatory solutions whose effect would be to bolster the confidence of low income groups in the financial system and promote financial inclusion. Deposit insurance passed through from the trustee to the mobile money consumer reinforces existing safeguarding measures and the overall safety of the mobile money scheme.

[i] The DPFB provides deposit protection coverage of up to KES 100,000.00 (US$ 1,180) to each depositor of a member institution. Where a depositor has more than one account in an institution, all accounts are consolidated for settlement as a single claim. Any deposit in excess of the insured amount is paid as a liquidation dividend upon liquidation.

[ii] Section 29

[iii] 12 U.S. Code § 1817 (i) provides that “Trust funds held on deposit by an insured depository institution in a fiduciary capacity as trustee pursuant to any irrevocable trust established pursuant to any statute or written trust agreement shall be insured in an amount not to exceed the standard maximum deposit insurance amount for each trust estate.”

[iv] § 330.5 Recognition of deposit ownership and fiduciary relationships.

[v] FDIC Notice of New General Counsel’s Opinion No. 8 available at

[vi] Ibid.

[vii] Ibid.

[viii] Currently 43 commercial banks, 9 deposit taking micro-finance institutions and one mortgage finance company are member institutions.

Join the Conversation (one comment)

  • Owureku Asare says:

    Kudos!!!! to Kenya. It is better late than never.

    I hope the Central Bank of…… is learning from this. A good electronic money issuing guidelines should take of with a specific cover to protect beneficiary funds.

    This cover is spelt out in the FCA EMI handbook.

    US also has a cover for stored value cards as highlighted in this article.

    They all can’t be wrong?

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