NYS cases expose Central Bank limitations in policing lenders

Central Bank of Kenya Building on Haileselasie Road Nairobi. [Wilberforce Okwiri/Standard]

The Central Bank of Kenya has come under greater scrutiny over its ability to control the banking sector following the new push to prosecute bank executives over the Sh8 billion National Youth Service (NYS) scandal.

The theft of funds at NYS happened right under the nose of the regulator, with the movement of unusually large sums of money expected to have raised CBK’s suspicion.

CBK is now accused of abdicating its role for recommending that executives of banks that handled the cash be investigated by the Directorate of Criminal Investigations.

“This a bad move by CBK. The apex bank, as is best practice, should just have used its regulatory powers and deal with the banks,” Mohamed Wehliye, an advisor to Saudi Arabian Monetary Authority wrote on twitter.

“CBK should be managing the reputation risk of the system. It will now get sucked into a mess and its supervisory framework will also be prosecuted.”

Heavy fines

The regulator had already imposed heavy fines on five lenders - KCB, Equity, Standard Chartered, Cooperative and Diamond Trust – for Sh392.5 million.

It said the lenders had not done enough to stop the looting and fined them for lapses in their systems.

“CBK has reviewed each bank’s response to the penalty assessment and has concluded that the submissions were not sufficient to alter the findings of the investigations and the penalties assessed. Consequently, CBK has levied the penalties as assessed,” Governor Patrick Njoroge said.

In one of the said responses seen by The Standard last year, KCB fought back against the Sh149 million fine.

It accused the industry regulator of being lax on its part, stating that from 2015 to August last year, it had made 653 reports on suspicious transactions, among them the NYS, but never received any feedback from CBK.

“KCB has filed Suspicious Transaction Reports (STRs), including the 653 filed since 2015. No feedback has been received and or issue raised by FRC (Financial Reporting Centre) or CBK as to the practice or standard of the STRs reported,” the lender said.

KCB said the duty of ensuring the genuineness of the NYS transactions lay with the CBK.

“It is important to note that all SWIFT inward transfers from NYS were received from the CBK accounts. The duty to ensure genuineness of inward SWIFT payments from NYS to KCB Bank customer accounts through CBK, rested with CBK as the remitter bank,” it said.

“This included primary responsibility for obtaining adequate documentation to support the transfers made.”

CBK also continues to operate under the cloud that some of its officers were directly linked to the troubles of collapsed Imperial Bank.

Imperial Bank staff for years allegedly gave CBK officials loans and even school fees in exchange for helping hide unauthorised debt, according to documents filed in court by various parties seeking to recover their money.

Reports by news site Bloomberg also pointed to collusion between staff at CBK and Imperial Bank.

In May 2012, for example, a CBK inspection team is said to have approved a report that showed Sh5.34 billion shillings in loans to the top 50 borrowers, a third of the actual Sh14.3 billion that had been given out.

At the end of the same year, officials rubber-stamped a report of Sh7.4 billion shillings in loans, half of the real amount granted.

Several senior CBK officials are named in the Imperial Bank suits but there is no information in the public domain on whether Dr Njoroge has ever taken action on the allegations.

Former CBK Governor Andrew Mullei, commenting on the collapse of Imperial Bank, also faulted CBK officials for being too cosy with lenders.

“A regulator can never be seen or heard to be anywhere close to the head of a commercial bank,” he said in The Central Shank, a documentary on the collapse of Imperial Bank.

Laws clear

Dr Mullei took over from Nahashon Nyagah - who left under a cloud following the collapse of Eurobank - and closed several lenders including Charterhouse, which led to his own exit.

“The laws are very clear, the laws to set up a commercial bank are laid out, the laws to manage a bank and operate efficiently are laid out. If you do not follow carefully all the stipulations you are risking the possibility that the institution could fail,” he said.

The current governor has made significant efforts to ensure the laws are up to date by instituting new guidelines every other day.

Njoroge, for instance, issued new prudential guidelines in 2015, notice to follow rules on vetting of new directors and compliance with anti-money laundering laws.

But banks have either ignored some of these rules or found a way to circumvent them.

For instance, lenders defied the regulator and changed interest-earning deposit accounts into transactional accounts to shield themselves from the deposit rate imposed by rate cap law.

A review by Standard Investment Bank on supply of money showed that the value of interest-earning accounts contracted by Sh176.23 billion to Sh1.017 trillion in the wake of the new law, levels last seen in 2014.

“Review of money supply shows contraction in value of banks’ savings and time deposits following passing of interest rate controls between August 2016, when new law controlling interest rates was enacted, and December 2016,” SIB said in the report.

Analysts have also pointed out that CBK lacks capacity or the optimal staff to police the whole sector especially as technology outruns the institution.