Leslie is only four years old but has plenty going right for her. She already has a savings account with more than Sh400,000 in it, a lot more than people even five times her age could hope for.
Her future has since become uncertain, however, after the bank her parents held her savings in was put under receivership.
Leslie was to graduate from playgroup at the end of this year and start primary school in January. Her parents had already booked her a place in a school they knew would offer a solid foundation. Now, she may have to settle for a cheaper alternative.
Leslie’s parents have been saving for their daughter at Imperial Bank since she turned one, making sacrifices that would often see them forgo life’s little luxuries, such as family holidays or weekends out with friends.
“It is very devastating when you have saved so much only to lose it just like that,” said Faith, Leslie’s mother.
By last Friday, she had received no word from the customer relationship officer she frequently dealt with at the bank, and who had previously been just a phone call away.
“She picked up the phone just once since last week Tuesday when we learnt the bank was under Central Bank’s management. She cut me short, promising to call back because she was supposedly in a meeting. I haven’t yet heard from her,” Faith said.
There likely would not be much for the two to discuss, since the details of the situation at the bank go beyond the level of junior banking officials.
Wrong decision
The lack of information on what exactly is going on has worsened the pain for depositors like Faith. And as fate would have it, her husband, who is a businessman, had “a lot more” held in the bank, delivering a double blow to the young family, as they cannot access their cash. Yet, there will get no respite from food, rent or business obligations.
Faith settled on the bank after comparing all the products in the market for junior savers. Imperial Bank had the most attractive offerings, with a package that included the highest returns in interest, and promotional activities for the little savers.
In hindsight, Faith said, she thinks she made the wrong decision.
There are 55,000 depositors questioning their decision to bank with Imperial, following the Central Bank of Kenya’s (CBK) notice last week that suspended the operations of the institution. To many, it had been the face of stability and longevity, having existed for 23 years.
And it is not just individual depositors questioning how they will make rent or school fees payments. Sugarpie Cupcakes is a small business started in 2013 by Sandra Zhao, a 26-year-old entrepreneur who moved from New York to Kenya to set up shop.
Her business employs women who have had little to no access to schooling, with 10 per cent of her profits going towards a scholarship fund for staff members. It also largely sources for ingredients from local smallholders.
Sugarpie is among those affected by Imperial’s receivership.
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In an email to clients last week titled Imperial Bank Won’t Stop Us!, the company asked for help, saying: “As you may have seen in the news, Imperial Bank was closed this week, and our business is now in a precarious position, where all of our working capital and savings are inaccessible, and the future of Sugarpie is unclear.
“As it has become more apparent that we cannot rely on accessing those funds to support our business, at least in the near future, we decided that we wanted to be transparent with you, our customers, and we hope that you will support us. So, we’re asking for your help by ordering our cupcakes and cakes.”
It is hoped that under Kenya Deposit Insurance Corporation’s (KDIC) management over the next 12 months, the bank can return to normal operations soon.
But with depositors’ confidence bruised, it is unlikely that many would retain their accounts, much less their hard-earned cash, with the institution. Collectively, customers had more than Sh58 billion deposited in the bank.
Someone they cannot quite identify has knowingly ravaged their lives on a scale they may have yet to fully appreciate, considering the reasons given for the closure.
CBK’s notice said Imperial Bank was operating in “unsafe or unsound” business conditions.
The directors, who have the biggest direct responsibility in ensuring the bank and customers’ deposits were safe, say they just discovered the problem and brought it to CBK’s attention.
This was after a forensic audit by an international firm they had called in on suspecting something was amiss raised flags.
Bank run
Still, the bank has not shown indications of being unable to meet its financial obligations, which means liquidation may not be necessary.
But Imperial Bank staff feel the institution may be unable to go back to how things were. A source at the credit department of the bank said CBK’s first notice of receivership was “harsh” and left out the fact that the bank had approached the regulator. A second notice highlighted this.
However, given the emotion attached to cash, the bank is still likely to lose customers, despite the clarification, leaving it with few other options.
The focus in this unfolding saga now shifts to the possible outcomes that would define the end-game and recourse for depositors and other investors.
Ideally, once KDIC concludes its audit of Imperial’s books, it can recommend that the bank call for a capital injection from shareholders; restructures with changes in management and the board of directors; or reopens once its operations have been reorganised to prevent a recurrence of the conditions that led to receivership.
The last option will likely lead to a bank run as soon as deposits can be accessed, with customers whose loyalty has been eroded withdrawing their cash.
Faith is skeptical that much will be salvaged from the bank, given that she has been an indirect victim of another bank closure. A family member banked at Trust Bank, which went under in the 1990s, and has since been compensated only a proportion of the money held at the time of insolvency.
Kenya’s former star cricketer Steve Tikolo is also second-time unlucky at Imperial Bank after losing out two decades ago when Daima Bank was closed.
But the conditions in the 1990s when several banks fell in a wave are remarkably different from prevailing ones.
Back then, political interference was largely cited for the serial failures, with bank managers being coerced to lend cash on unsecured terms.
And in the cases where loans were backed by assets, the collateral would often turn out to be fake ownership instruments, or owned by entities other than the borrowers. Public assets, such as gazetted forest land, were sometimes presented as collateral that had been sanitised with fraudulent title deeds.
Things are much different now. Private and State-owned banks are operating in a market that is a lot more liberalised. This freedom has been listed among the reasons behind the sector’s vibrant growth, with entities that were once struggling becoming regional giants that have won global accolades.
Equity Bank is one such entity, and holds more than half of the country’s customer accounts.
However, it now appears that the ghosts of yesteryears have not been fully exorcised after all, with Dubai Bank and Imperial Bank closing their doors in a span of just two months.
Dubai vs Imperial
This comes just a few months after Dr Patrick Njoroge was recruited from the International Monetary Fund to become the number one banker. Could it be that he takes a different approach from his predecessor, Prof Njuguna Ndung’u, or is it that the two banks’ operations took a nosedive overnight? Opinion is divided.
In the case of Dubai Bank, however, the writing was on the wall for some time. Its chairman, Hassan Zubedi, even conceded in June that his settling a debt of Sh197 million owed to a litigant who had won in a suit against the lender would bring operations to an abrupt halt.
But even before that case, a fallout between the chairman and his top executives pointed to some unsound practices.
Before she was sacked, the bank’s former managing director had accused Mr Zubedi of approving unsecured loans to his friends, exposing depositors to high risks. The cash loaned out by a bank is generally not its own, but deposits belonging to customers like Faith.
Further, for about three years, the institution had made headlines for failing to honour its debts.
When putting it under receivership in August — just 10 days before ordering that it be liquidated — CBK noted that Dubai Bank had violated various banking laws, “including failure to maintain adequate capital and liquidity ratios, as well as provisions for non-performing loans, and weak corporate governance structures”.
Imperial Bank’s case is markedly different.
Customer deposits, loans and advances, profitability and other indicators had grown by double-digits, according to the bank’s recently published operating results. External auditors confirmed the financial reports gave a true and fair picture of the bank’s financial position.
Loan quality
It has also shown healthier numbers for some financial indicators than the industry average or regulatory requirements, including a liquidity ratio (the ratio between easy-to-sell assets and short-term debts) of 41 per cent, against a minimum of 20 per cent.
Further, reports from Uganda, where Imperial Bank has also been put under the management of the country’s central bank, indicate that operations are running as normal without any panicked withdrawals from depositors.
Our source at the bank’s credit department added that the health of the institution’s books increase its hopes of being packaged as an attractive buy to someone with pockets deep enough to buy up its assets and invest in rebranding it. In his opinion, even if KDIC gives it a clean bill of health, it would be near impossible to continue operations under the Imperial Bank name.
CBK and the Capital Markets Authority (CMA) also conducted audits of the institution’s books a couple of months back before giving Imperial the go-ahead to offer a Sh2 billion corporate bond in August.
Other insiders have told Business Beat that the problems afflicting the bank are more of a “lending problem” than a liquidity one, without giving details.
What is clear, however, is that the bank had a case of internal fraud that the directors found to be on a scale beyond their capacity to remedy, prompting them to call on the regulator.
It could mean that the quality of its loan book may be worse than reported, in that loans may have been disbursed to applicants who would otherwise not qualify, or even lacked the ability to repay.
While it is the management that typically makes the decision to lend or not, it is CBK, the board of directors and auditors who provide checks and balances continuously to ensure depositors are protected.
Panicked withdrawals
It is obvious that there was a disconnect that may have brought home grave implications.
For one, the directors who are said to have blown the whistle will claim innocence.
Imperial’s former managing director, the late Abdulmalek Janmohamed, who died last month, could be portrayed as the villain, and his replacement, Naeem Shah, as the people’s hero, having discovered money problems within weeks of his arrival.
Mr Janmohamed and the bank’s chairman, Alnashir Popat, were founders and had held their respective positions since the institution was established in 1992.
Another implication that affects the banking sector is that customers may leave small banks for larger ones, or at least force the former to invest in rigorous marketing to prove their stability.
“My chama has an account in what we have recently realised is a bank founded by an individual. We are now shopping for a bank that is either a multinational or has the Government as a major shareholder,” said Anne.
“We have already got burned in Imperial Bank, where we have about Sh250,000. We are not willing to lose any more money.”
And with CBK or KDIC yet to provide details of what it broadly labelled as unsafe business conditions at Imperial Bank, the situation is likely to get worse.
Analysts at SBG Securities are of the opinion that CBK needs to come out clearer about its findings at Imperial Bank, as the lack of clarity was unduly exposing small and medium-sized banks to capital flight.
mmichira@standardmedia.co.ke
