Protection of depositors’ interests within the banking sector in Kenya – an analysis of directors’ duty to promote the success of the company and the suitability of the compensation fund when the bank fails

Kenya witnessed systemic bank failures between the years 2015 and 2016. As a result, most depositors suffered financial losses given the fact that they could not have immediate access to their funds held in the bank accounts of the collapsed institutions. The failures have been partly attributed to failure by directors to efficiently carry out their duties. The primary legislation regulating companies in Kenya, the Companies Act, Act No 17 of 2015 (CA), stipulates that the general duties are owed by directors to the company. Directors’ therefore owe their duties to the owners of the company that is, the shareholders. There appears to be no primary duty owed to other stakeholders and for purposes of this study no direct duty of care is owed to the depositors. This has led to questions arising on the adequacy of protection of depositors’ interests as provided in our legislation in the event of systemic bank. In an attempt to answer this question, this study examined the existing banking and corporate legal and regulatory framework to determine whether and to what extent depositors’ interests are protected in the banking institutions in Kenya. Further, the study examined the applicable banking and corporate laws in the United Kingdom and the Republic of South Africa and has made recommendations on the best practices that can be borrowed and adopted within the Kenyan context. The study focused on the directors’ duty to promote the success of the company whilst fostering the company business relationships with its customers, with the aim of recommending the broadening of section 143 (1) (c) of the CA when applied to banks; to include depositors as customers of banks as one of the ways of ensuring depositor protection; additionally, the study focused on the adequacy of the compensation mechanisms to depositors, as provided by the Kenya Deposit Insurance Corporation. From the research findings, there is need for subsidiary legislation/guidelines to be introduced so as to help directors know how best they can balance the interest of shareholders (while promoting the success of the company) and the interests of depositors (as directors try to foster the company relationships with the customers). Further as depositors’ interests are protected (given the special relationship they have with banks) there is need to have sufficient and timely compensation mechanisms to cater for their interests should a systemic bank failure occur.
A Thesis submitted in partial fulfillment of the requirements of the Degree of Master of Laws, at Strathmore University
Depositors’ interests, Banking sector_Kenya, Compensation fund