How to avert another bank crisis after Chase Bank

It started with Dubai Bank, then came Imperial Bank. But who would have imagined that Chase Bank, the pre-eminent Kenyan relationship bank, would have been the next patient to be wheeled into the “ICU Emergency Room” by Central Bank of Kenya (CBK)?

For two years in a row, that is 2014 and 2015, Chase Bank has been honoured as the “Best Company to Work For in Kenya” by Deloitte.

Having positioned itself as the one-stop SME bank of choice by alluring and courting up to a million customers both in Kenya and the diaspora with very competitive financial products and suave marketing brand equity, she was no doubt the darling ‘light-skin’ of the banking sector.

It was the bank of choice for several investment clubs (chamas), young and upwardly mobile professionals who connected well with the vibrancy of the Chase brand as well as lawyers – what with the dazzling “Wakili Account” on offer?

Its e-banking and m-banking platforms were world-class. Yet ironically, it is these same platforms that would later turn out to haunt the bank as they became the leading channel of capital flight, precipitating a financial haemorrhage of a record Sh8 billion in a single day.

The CBK Prudential Guidelines allow a bank to lend internally to staff and directors to a maximum of 25 per cent of core capital.

In the case of Chase Bank, the core capital is Sh11 billion, whereas the insider loans amounted to Sh13 billion, inferring that internal borrowing had skyrocketed to 118 per cent of core capital.

This is a gross contravention of the “Banking Marriage Act” (read CBK Prudential Guidelines). In fact, it is alleged that one director alone could have personally secured a Sh7 billion loan, approximately 64 per cent of the entire bank’s core capital. It is such “clandestine affairs” that are largely blamed for catalysing the bank’s liquidity quagmire.

The Way Forward

According to the provisions of International Accounting Standard No. 39 (IAS 39), loans and receivables for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, should be classified as available-for-sale (IAS 39.9).

All the three banking crises that Kenya has witnessed in the past nine months have been dogged by boardroom wrangles that have ended up making these banks ungovernable and seeking the intervention of the CBK.

Going forward, it will be vital for the regulators, both the Capital Markets Authority (CMA) and the Central Bank of Kenya (CBK), to do a fresh vetting of the management and directors of the boards of all the banks and financial institutions and disqualify those who are unfit to hold the fiduciary duties on behalf of the shareholders, depositors, customers and the public interest.

These managers and directors should then pay a visit to the Directorate of Criminal Investigations (DCI) and seek clearance by obtaining a certificate of good conduct. They ought to equally renew their ethics clearance certificates from the EACC on an annual basis.

They should also annually file their individual returns as well as those of their spouses and immediate family members to both CBK and CMA, detailing their financial dealings with the banks they represent in order to avert Kenya’s banking financial meltdown.

The writer is the Founder & CEO of Burnley & Co, a business strategy consulting firm that advises financial institutions, investors, entrepreneurs, NGOs and development partners in the areas of corporate finance, financial inclusion, business valuation, financial modelling, taxation, audit, risk management & corporate governance.