Depositors in panic as CBK puts Imperial Bank under receivership

Central Bank of Kenya (CBK) has put Imperial Bank under receivership over ‘unsafe business conditions’, stoking concerns among the more than 50,000 customers who cannot access their funds.

Yesterday, the CBK announced the decision to place the middle-tier bank under receivership to protect the interests of depositors, creditors and the public.

Capital Markets Authority followed later in the afternoon to suspend the trading of Sh2 billion corporate bond issued earlier in the month, effectively tying in the investors for an unspecified period.

Imperial Bank’s closure could cause ripples across the banking sector after another lender, Dubai Bank, was placed under liquidation only six weeks ago. “CBK has become aware of unsafe or unsound business conditions at Imperial Bank Ltd,” reads a public notice published yesterday, in part.

Devastated customers who tried to withdraw funds from the bank through the mobile money transfer service received an error message, while branches were closed. Stopping withdrawals from the bank is usually a first step taken to avert a run on a bank whose implications for any lender can be tragic. The bank has 30 branches in Kenya, and five in Uganda, making it among the bigger lenders in the region. The Kenya Deposit Insurance Corporation – an arm of the CBK, will assume management of the bank for 12 months. “KDIC is working closely with the board of directors of Imperial Bank Ltd for a resolution mechanism,” CBK said as it sought to calm the nerves of customers and the general public.

Yesterday, the corporate bond whose approvals were granted in August was meant to start trading at the Nairobi Securities Exchange but was put off indefinitely, CMA said. Ironically, it is the CMA that gave the bank’s corporate bond the green light less than two months ago, preceding the fund-raising that ended on September 17. CMA said in a statement yesterday that it was the directors of the bank who had reported the misdeeds to the CBK. “...directors of Imperial Bank Ltd brought to the attention of the CBK inappropriate banking practices that warranted immediate remedial action in order to safeguard the interest of both depositors and creditors,” reads the joint statement issued by the CMA’s Chief Executive Paul Muthaura and Dr Patrick Njoroge.

CMA moved to distance itself from blame. “The Capital Markets Authority grants approvals based on the information made available at the time of consideration and subject to the undertakings from the directors of the Issuer and their Professional Advisors that the disclosures in the Information Memorandum ‎are complete, provide all the information that investors require to make an informed decision and are not misleading,” CMA said.

“Where information arises following the grant of such approval, the Authority is vested with powers to take appropriate action and to give such directions as it deems fit in the public interest and to protect investor interests.”

Dyer & Blair were the lead arrangers and Hamilton Harrison and Mathews the legal counsel in the issue.

Imperial Bank, just like Dubai Bank, is Asian-owned. It will be the second bank closure since Dr Patrick Njoroge became governor of the CBK on June 19, which could be a significant pointer to the difference in approach from his predecessor, Prof Njuguna Ndung’u. In Ndung’u’s eight-year term that ended in March 2015, the banking sector reported steady growth that was also calm as not a single lender was taken over. He was however under pressure to reopen Charterhouse Bank, owned by billionaire politician Harun Mwau, which was clamped down in 2006 on suspicion of involvement in money laundering.

Billionaire business mogul Alnashir Popat is the single largest shareholder in a list of Imperial Bank’s owners that also includes the ex-managing director, the late Abdulmalek Janmohamed - who passed on less than a month ago. CBK did not provide details of the supposed ‘unsafe and unsound business conditions’ that prompted the closure whose implications go beyond just customers to the investors who only weeks ago lent more than Sh2 billion to the lender.

Mr Popat has interests in tens of companies in Kenya, and has in the recent months been linked with a proposed Sh3 billion-worth budget hotel in the Westlands suburbs, to be operated as a franchise of a global chain. Imperial Bank could come across as a surprise target for closure considering the significant size of its loan book, capital base and even profitability.

In the latest half-year results, the bank booked an after-tax profit of over a billion compared to Sh2.7 billion for the full year in 2014. Data from the CBK show that about 33,000 deposit accounts in the bank had less than Sh100,000 as at December 31, 2014, and 18,117 bank accounts with more than Sh100,000. Typically, depositors with less than Sh100,000 in their bank accounts are insured by the KDIC – the receiver manager.

Criminal activity

Such customers are usually the first to be compensated should their bank be found to be insolvent – as is the case with Dubai Bank and other lenders that have collapsed in the past. Focus about the closure of Imperial Bank now shifts to the CBK and the CMA, the two regulators who only six weeks ago gave the approvals to borrow the Sh2 billion through the corporate bond issue.

CBK is the primary regulatory authority in the banking sector, while the CMA is the watchdog over public transactions – such as the issuance of the corporate bond. Hardly any of the commercial banks that have collapsed in Kenya’s history has been revived. Euro Bank sank in 2003 with about Sh1.8 billion in customer deposits, sending shock-waves to several State corporations that held accounts in the tiny lender.

Imperial Bank Uganda Ltd, in which the Kenyan bank has a majority stake, was put under management of the Bank of Uganda in response to the Kenyan initiative, the Ugandan Central Bank said. It said the bank’s operations would continue normally but under central bank’s control.

Trust Bank, which went under in 1999, could not be revived, and even had its director charged in court over criminal activity. United Bank was placed under statutory management in 1995, but was acquired and rebranded as Chase Bank – in a rare feat.