Watchdog questions bank advances made to tobacco firm

Consolidated Bank advanced cigarette manufacturer, Mastermind Tobacco, more than a quarter of its core capital in breach of banking laws even as it emerges that the bank needs a Sh800 million cash injection to meet its capital adequacy ratio required by the Central Bank of Kenya (CBK).

A parliamentary report by the Public Investments Committee (PIC) found that the bank advanced Mastermind Tobacco Kenya Limited funds in excess of 25 per cent of its core capital contrary to the provisions of the Banking Act.

“The Banking Act requires that any advances, credit facilities, financial guarantees or any liabilities incurred on behalf of any person should not at any one time exceed 25 per cent of the bank’s core capital,” the report reads in part.

Mastermind Tobacco is the maker of Supermatch cigarettes, which has been variously named in an expose by the British Broadcasting Corporation (BBC), where it is claimed British American Tobacco (BAT) executives bribed Kenya Revenue Authority (KRA) officials to spy on Mastermind Tobacco and hand over tax files.

The PIC report has also revealed that the bank, which has been struggling with meeting the capital requirements as outlined by the CBK needs a Sh800 million capital injection.

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

In its defence, the bank, however, explained that the breach in Single Borrower Limit (SBL) was as a result of losses that reduced the level of core capital. “The position was corrected subsequently through profits (increase in core capital) and loan repayments,” the report adds.

The bank has been sliding deeper below the statutory capital levels over the past three years but has been given leeway to continue operating due to its ownership structure in which the Government in a big stakeholder. The capital inadequacy, however, has seen its request for operating license delayed by banking sector regulator.

“The bank is not meeting the required capital adequacy ratios necessary for the renewal of its 2015 banking license by the CBK,” the report adds. The Government owns 50.2 per cent of the total shares and the remaining is owned by 26 other shareholders.

Corporate bond

Despite the capital gap, the bank is yet to issue the remaining Sh2 billion tranche of its corporate bond for which it has regulatory approval.

The committee looked into the bank’s audited financial reports by the Auditor General from 2000 to 2014. PIC also looked at reports for 64 other parastatals including the Kenya Meat Commission (KMC), the Kenya Revenue Authority (KRA) and Uwezo Fund among others.

Consolidated bank came into being through consolidation of nine financial institutions that collapsed in the early 1990s mainly due to loan delinquency.

This was expected to boost its capital base and make it survive in the increasingly competitive sector.

“The bank’s high levels of non-performing loans needs to be addressed to support the bank’s future growth,” the report says.

The bank’s chief executive Thomas Kiyai told the committee that he has been addressing the non-performing loans headache at the bank that saw it report losses in 2005 through debt collection and loan growth.

The banks Non-Performing Loan (NPL) ratio declined gradually to eight per cent in 2011.
This is mainly because of the significant growth in the loan book (the compounded Annual Growth Rate (CAGR) of 27.1 per cent over the period 2005 to 2013). It rose to 23 per cent in 2014.

The bank was also found to have violated the provisions of the Public Audit Act 2003 by publishing its financial statements before the issuance of the Auditor General’s Report, a situation that could be explained by typical delay by auditor general office to release its results on time even as the industry demands timely release of statement.

In its recommendations, the parliamentary committee says the bank must desist from breaching the Single Borrower Limit provisions and should endeavor to adhere to the provisions of the Banking Act and any other relevant law.

Parliament also wants the National Treasury to fast track the approved privatization programme for the bank.

“This is to mobilise necessary resources to support the bank’s future growth, stability of the financial sector, enhance corporate governance and broaden shareholding,” the report adds.

Parliament also wants the bank’s management to put in place strategic measures, including auctioning debtors’ properties to reduce the high levels of the non-performing loans.

“The bank should strictly adhere to the provisions of Section 39(3) to (6) of the Public Audit Act 2003 on publishing its audit report only after issuance of the Auditor General’s Report,” the report adds.

The bank was however commended for clean reports and for financial prudence during the years under review that saw it get an unqualified opinion from the auditor general.

The bank reported a Sh16 million net profit for the nine months ended September 2015 down from Sh35 million reported in June.

The performance was an improvement from a loss of Sh154 million posted in September last year.

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