How the Kenyan banks went under

Abdulmalek Janmohamed, the group managing director of Imperial Bank, died of a heart attack in September 2015.

An obituary released by the bank noted that he was a founder shareholder who had been with the institution since its inception in 1993. It said that he embodied integrity and service and that he was a trusted friend who was compassionate, loyal and committed to employees of the bank.

It added that he left behind a legacy of philanthropy and service and would be missed by family, friends, and colleagues. A few days later, customers were shocked to learn that the bank had been placed under receivership by the regulator, the Central Bank of Kenya (CBK).

Imperial had been the 18th largest bank in the country and the quarterly results it published in the newspapers, a legal requirement in Kenya, showed that on 30th June 2015 it had KSh58bn ($548m) of customer deposits and KSh41bn in loans, of which its non-performing loans were just KSh2.4bn. To the outside world, Imperial Bank was a growing institution with no issues.

It had even won financial reporting awards for several successive years. But inside, it was a different story – it was the bank that exploded after Janmohamed died. The institution had gone under with billions of shillings that belonged to thousands of depositors who then became very vocal about their suffering, forming groups, writing blogs, sending tweets and appearing in television interviews.

Dubai Bank is closed

Exactly a month before Janmohamed’s death, the CBK appointed the nation’s deposit protection fund, Kenya Deposit Insurance Corporation (KDIC), as receiver-manager of Dubai Bank due to liquidity and capital deficiencies that exposed depositors, creditors and the banking sector to financial risk. Despite its ambitious name, it was a tiny bank – the smallest of Kenya’s 43 banks – with just over 7,000 customers.

It had KSh3.5bn in assets and its share of capital was marginally above the regulatory minimum of KSh1bn. Before this, Dubai Bank had also been in the news for the wrong reasons. Its chairman, Hassan Zubeidi, had been sued for wrongful dismissal by its former managing director, who then claimed in court that the chairman had used depositors’ money for personal business.

One prominent customer, Jacob Juma, made claims that the bank was about to sink. Then the new managing director fled to India the day he was to meet investigators. The receivership period did not last long, as the CBK did a quick audit and concluded that the bank should be liquidated and depositors paid their money.

Period of panic

While Dubai Bank was an outlier, the closure of Imperial Bank had a startling effect on the banking sector. Other banks that had similar profiles to Imperial Bank – and indeed all small and medium-sized banks – faced a period of panic when anxious depositors withdrew their funds and transferred them to larger, safer institutions.

But this only contributed to the next bank crisis. Chase was a fast-growing bank. The 11th largest bank in the country, with KSh142bn in assets, the darling of large investors, fund managers and entrepreneurs, and known for paying high interest on its deposits and extending creative finance solutions to borrowers, it was in the midst of celebrating its 20th anniversary.

But on 6th April 2016, the bank republished its 2015 accounts with some changes. The first set had curiously omitted to name the firm that audited their accounts or their opinion, but this second set noted that Deloitte had qualified the accounts of the bank – an ominous sign.

There were also differences in the figures for insider lending and non-performing assets, which keen analysts now compared, shared and discussed online. Later that day, the governor of the CBK said he could not comment on individual banks. Shortly after, the bank’s Twitter account posted a statement saying that the chairman and group managing director had stepped down from the board.

There was a run on the bank that day, not with physical customers in branches, but more with steady withdrawals using the bank’s efficient online network. The bank did not open the next day, and customers instead found a notice from the CBK placing Chase Bank in receivership for a year.

Both Chase and Imperial had about 50,000 customers, but unlike Imperial, which was mostly a bank for the Asian community, Chase had broad reach across the economy, with cooperatives, schools, fund managers, entrepreneurs, law firms, state corporations and wealthy individuals as customers.

There was an outcry and great pressure to reopen the bank. Joel Macharia, a financial markets entrepreneur, tweeted: “Chase is not just our banker; they are our custodian, dealer, broker, pay-bill processor, lender, and client. Such a shame.” Chase was also big in Islamic banking, and sharia-compliant banking solutions amounted to 12% of their customer deposits.

Chase reopened three weeks later, with facilitation from the Central Bank through KCB, the country’s largest bank. KCB was also tasked to do a due diligence audit on the bank for other investors and KCB was expected to be one of the banks to bid for Chase.

Later, when Chase Bank directors appeared before a parliamentary committee looking at the closure of the bank, they traced the events at their bank back to the sudden close of Imperial Bank, which was followed by a slowdown in liquidity in the banking sector, and finally late disagreements with Deloitte on some items in their financial statements, including reconciliation of Islamic bank products.

Limo Taboi