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Who will save Kenyans from rogue firms?

FINANCIAL STANDARD
By Frankline Sunday | April 12th 2016
Police keep watch outside a Chase Bank branch in Kisumu after customers stormed it demanding to know why it was placed under receivership. PHOTO: COLLINS ODUOR

NAIROBI: The spotlight is now on regulators in the financial sector after a third bank went into receivership in just nine months.

This has put into question the role of the Central Bank of Kenya (CBK) and Capital Markets Authority (CMA) with regards to their responsibility in protecting bank customers and investors in firms that have raised money through public calls for funds.

The other pertinent question is whether individuals who own and manage banks that have raised money through public listings have become too rogue, cunning and crafty for regulators to keep in check.

Chase Bank was placed under receivership in the early hours of last Thursday morning after customers panicked on news that the bank was in trouble.

It later emerged directors and shareholders had loaned themselves a staggering Sh16.6 billion. One director gave himself Sh7.9 billion, an amount way above the total capital limit of 25 per cent.

Further, the bank only revealed these loans the second time it published its results.

INSIDER FRAUD

A run on the bank intensified on Wednesday, the day Chase Bank released its second set of results, with customers withdrawing Sh8 billion.

The Chase Bank debacle follows Dubai Bank and Imperial Bank, which are also under receivership on account of cash-flow problems and insider fraud.

Imperial Bank got approval to raise Sh2 billion in a bond just two months before it was closed.

The latest dramatic closure of an institution that was under the watch of CBK and had been probed by the CMA will act as a stern test of whether these two regulators can actually bite as hard as they have barked.

Of particular interest will be the case of Chase Bank. CBK Governor Patrick Njoroge has said the Chase Bank case “is much easier” to resolve than Imperial Bank’s (which has a Sh38 billion hole), as its return to the market will depend on when shareholders will be willing to pump in more money.

Another point to consider is that the assets of the directors who borrowed the money will be easier to recover, since these assets are known.

Imperial Bank’s fraud goes back 13 years, and its mastermind, Abdulmalek Janmohamed, died last year.

Will CBK pursue the freezing of assets, including the properties and other bank accounts held by the directors behind these lenders’ woes?

The record on this has been dismal. Of all the Kenyan banks that have collapsed, CBK has only got court orders to sell off managers’ assets for two banks — City Finance and Trust Bank, and this was in 2014. The lenders, which shared directors, collapsed back in the 90s.

It is unclear, however, if the regulator was able to dispose off these assets and pay back depositors. Depositors are, however, insured up to Sh100,000 by the Kenya Deposit Insurance Corporation (KDIC).

LIQUIDITY ISSUES

Of particular scrutiny this week will be the announcement by Dr Njoroge over the weekend that CBK will now make available a credit facility to any bank facing liquidity issues “arising from no fault of their own”.

It has been reported that in the midst of last week when rumours were doing the rounds that Chase Bank was in dire need of cash, CBK turned down its request for additional liquidity. Was Chase Bank supposed to serve as a lesson to get other lenders to put their houses in order?

“We are now insisting on the factual reporting of financials in order to reflect banks’ true picture,” Njoroge said last week.

This intimates that CBK’s banking supervision unit has had oversight slip-ups in the past that have brought us to this point.

But as CBK gets tougher on banks, the poor state of corporate governance and ethics — which allowed misleading financial reporting to occur in the first place — has been highlighted.

The first line of responsibility lies with the all-important board of directors. It is tasked with ensuring a company runs legally, ethically and responsibly.

In the three banks under receivership, it has emerged that there were complicit board members.

CMA’s Corporate Governance Guidelines and Regulations published in 2014 require a third of board members be independent.

But scholars have said this could be one of the weaknesses that make businesses fail integrity tests.

“Commentators on corporate law are almost unanimous that the system of independent, non-executive directors is systemically dysfunctional,” said Jacob Gakeri, a senior lecturer at Nairobi University’s Department of Private Law.

CODES OF ETHICS

He added that neither their position nor obligations or constituency are clearly defined — whether they are accountable to the company or minority shareholders is unclear.

“What appears unassailable is that their effect on corporate governance is largely unnoticeable and few executive directors would welcome, let alone tolerate, individuals who are too keen on monitoring their activities,” Dr Gakeri said.

But CMA is mandated to enforce the rules of corporate governance and industry codes of ethics in companies that have raised money from the public.

Its charter notes: “The Authority further handles ... matters involving failure to comply with the Capital Markets Regulatory Framework by, for example, failure to submit financial reports or breaches on rules of governance and conduct of business.”

How deep was its scrutiny of Chase and Imperial banks before they were allowed to issue bonds? Did they look for ‘creative accounting’? And how will it protect the hundreds of investors who bought the bonds?

A few weeks after Imperial Bank was placed under receivership, CMA was feted as the top regulator in Africa for its innovation in introduction of new products and fostering good corporate governance in Kenya.

Indeed, it had a busy year in 2015. It found fault with 21 listed companies, investment firms and stockbrokers, with their offences ranging from delaying in financial reporting to outright deception in regulatory filings.

For instance, the regulator last year revealed that property developer Home Afrika had violated listing terms for its 2014 corporate bond.

The developer, and its advisers on the bond, NIC Capital, were accused of revising the return rate on the debt instrument in contravention of the terms of approval issued by CMA.

The regulator slapped the two with a caution, and in March this year asked Home Afrika to fully reimburse all the investors who had subscribed to the offer.

NIC Capital was further found guilty of “misinforming the Authority that an investor had made a subscription of Sh250 million in the full knowledge that the investor had made no such subscription”.

CMA is empowered to investigate and undertake enforcement or regulatory action. The punishments it can mete out to deter future violations include fines of up to Sh15 million, jail terms of up to seven years, censures and disqualifications of persons from holding positions in the industry.

Are the escalated cases of violations of corporate codes and ethical standards a sign of huge failings in boardrooms?

CMA’s acting CEO, Paul Muthaura, was unavailable for comment, but according to Gakeri, corporate governance in Kenya is an old concept in theory but quite recent in practice.

“Before the liberalisation of Kenya’s economy in the 1990s, which institutionalised the privatisation of State corporations, accountability in the public sector was largely non-existent,” he said.

“Nepotism, clientelism and corruption were pervasive, and this lack of accountability was replicated in the country’s private sector.”

He added that the absence of a corporate governance framework institutionalised inefficiency, which was made worse by the close ties between business and government interests.

“Senior government officials owned shares in the few publicly held companies, and the boards of directors of many listed companies consisted of friends, relations and political associates of government officials,” Gakeri said.

The formation of the CMA in 1990 did little to break these business and political cabals, and any attempts at enforcing a culture of corporate governance and ethics was cosmetic at best, with ugly results later on.

Over the next 12 years, more than a dozen banks were placed under receivership. Kenyans were left shell-shocked as the shroud was lifted from well-reputed banks, revealing them for the private slush funds they were for corrupt businessmen and politicians.

In June 2004, Sabatia MP Moses Akaranga spoke out against senior bank officials at a parliamentary session to debate the 2004-05 Budget that had re-ignited the debate on the Donde Bill aimed at capping interest rates.

“If you look at the former directors of the collapsed banks in this country, you will find that they are very rich people. Some of them own big buildings, farms and oil firms. It is unfair for somebody to start a bank, collect funds from the poor depositors of this country, disappear with the money and then go scot-free,” he said.

There have been slow steps of progress since then in the development and enactment of laws targeting financial misappropriation in the country.

For instance, Kenya passed the Proceeds of Crime and Anti-Money Laundering Act in 2012 that tightened financial reporting requirements, demanding bank officials take a proactive role in preventing and reporting suspicious deals among and between themselves.

However, the consequences of violating this law, and others, have yet to be decisively felt.

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