THE 'FALL' OF DUBAI BANK AND IMPERIAL BANK IN KENYA: KEY LESSONS.

News are still unfolding on what really happened with the declared insolvent banks in Kenya, Dubai Bank and Imperial Bank. What happened? What are the commonalities and differences if any? What are the lessons learnt? Are our existing banks safe and sound?

DUBAI BANK.

On 14th August, 2015, Central bank of Kenya (CBK) announced it has appointed the Kenya Deposit Insurance Corporation (KDIC) as a receiver in the interest of (Dubai Bank’s) depositors, creditors and members of the public. “CBK has closely monitored Dubai Bank’s daily cash reserve ratio from July 14, 2015 when the bank began breaching its daily cash reserve ratio requirements,” CBK statement reveals. “(We have) also been in contact with Dubai Bank to attempt to redress the situation, but there has been no compliance by the bank.” The non-compliance has to date attracted a total penalty of Sh 5.4 million.


CBK cited a number of causes for the move such as deteriorating cash reserve ratio position and Dubai Bank’s failure to honour financial obligations, including Sh48 million due to Bank of Africa Kenya, violations of banking laws and regulations, including failure to maintain adequate capital and liquidity ratios as well as provisions for non-performing loans and weak corporate governance structures.

CBK tasked KDIC to review the lender and propose a way forward for its future,reported that "considering the magnitude of weaknesses of Dubai Bank Kenya Limited, liquidation is the only feasible option." CBK has also appointed KDIC as liquidator of Dubai Bank Kenya.

As a result, depositors with over Sh100,000 held in the collapsed Dubai Bank will have to wait for at least a year to get their money. According to the Kenya Deposit Insurance Corporation (KDIC), only insured deposits of the same amount will be paid forthwith upon verification of their details. “Balances of deposits above the insured threshold and other creditors’ claims will be paid equitably as and when the liquidator accumulates enough funds from the liquidation process which usually takes a year or so,” KDIC’s acting chief executive officer Aggrey Bett said. Debtors will, however, continue to service their loans with the bank and which will now be collected by the KDIC.

However, one of the largest depositor of the bank Richardson and David Limited had moved to court seeking to block the liquidation of the bank. They argued that a decision by the KDIC to advertise the assets of Dubai Bank confirmed the fears that its sole intention was to strip the bank of all its assets to the detriment of creditors and depositors. Dubai Bank founder and chairman Hassan Zubedi has also come out fighting against liquidating the bank, saying some of the allegations against him are false and malicious.

As a result, the dissolution of Dubai Bank has been stopped after the High Court ruled that the Central Bank move to wind up the lender was premature and accused the Central Bank of Kenya (CBK) over negligence.“The CBK has slept on the job and its supervisory powers have been abused. Dubai Bank’s problems are not recent. The CBK is trying to shield its lack of inspection and is attempting to escape scrutiny."

“The liquidation of Dubai Bank is suspended by order for 60 days. The CBK is to consider the proposal by Dubai Bank" the judge ruled.

IMPERIAL BANK.

In October 2015, the Central Bank of Kenya (CBK) put another Kenyan bank-Imperial Bank, under statutory management, barely months after after taking similar measures against Dubai Bank. The regulator revealed it had taken the drastic decision after learning that “unsafe and unsound business conditions to transact business” existed in the bank. “The board of the directors of Imperial Bank brought to the attention of the CBK inappropriate banking practices that warranted the immediate remedial action in order to safeguard the interest of both depositors and creditors,” said CBK governor Dr Patrick Njoroge as he announced he had appointed the Kenya Deposit Insurance Corporation (KDIC) as the manager for the lender for twelve months.

"Normal operations of the Bank are suspended except for collection of loan re-payments or any other payments into the bank. Debtors are therefore encouraged to continue servicing their obligations. For this reason, KDIC will in the meantime keep all the branches of the Bank open for such transactions,” said Njoroge.

KDIC started to pay depositors Ksh 100,000 as required by law while those with large amounts were to wait until further notice. But December 2, CBK announced that it will start paying bank's depositors up to Ksh 1 million through KCB and DTB. “We have been receiving claims up until the last two days. Our objective is to process all the claims by Christmas, but if some come late then there is only so much we can do,” Dr Njoroge said yesterday.

COMMONALITIES AND DIFFERENCES.

All above mentioned banks are accused of fraudulent, dubious and shady transactions. The point of difference is that while Dubai Bank main perpetrator is its founder and chairman of BOD Mr. Hassan Zubedi, at Imperial Bank the perpetrator is founder and chief executive officer Mr. Abdulmalick Janmohamed.

In both cases, there are allegations of complicity that involves former boss of CBK Prof. Njuguna Ndung'u. "Accusations against Prof Ndung’u were made by former Dubai Bank managing director Nereah Said’s lawyer in court papers indicating that the lender’s chairman and principal shareholder, Mr Hassan Zubeidi, had invoked his name and those of other senior officials at the bank and CID." However, the fate of the CBK boss is unknown.

In both cases, there has been low turnout of depositors to collect their cash. At Dubai Bank, only 561 out of the 7,700 depositors lodge claims on CBK’s offer to collect deposits below Sh100,000. At Imperial bank, out of 50,000 depositors only 10,600 have lodged claims through the Kenya Commercial Bank (KCB) and Diamond Trust Bank (DTB) to demand their cash. This has raised concerns about the true identity of the depositors. Out of 10600 customers, 6,600 have already been verified and validated as the CBK runs to beat the Christmas timeline in two days, within which he had promised to make the payments.

About 500 claims were rejected because they had been filed in duplicates and will have to be filed again while 1,900 had missing information and Dr Njoroge says the owners will have to furnish Kenya Depositors Insurance Corporation with fresh details. Only 1,500 claims were currently being processed and would likely get cleared before Christmas eve.

Notwithstanding, each of the two banks are doing all they can to save themselves from liquidation even if by playing'blame game'.

KEY LESSONS.

1. Don't put all eggs in one basket. Bank customers should take it seriously that placing your hard earned life time investments and savings in one bank can be detrimental and risky. At the time Imperial Bank taken over by KDIC the bank had about 53,000 customers. Their deposit estimated at Ksh 58 Billion at end of June 2015 are still tied up. Despite of CBK recent decision to pay out depositors of under 1 million through KCB and DTB, the wise advise not to place all finances in one institutions or investment instruments is self evident. Diversification is a must and useful to protect your money.

2. 'Ghost account holders' in the banking system? This sparks more questions than answers. Why they don't claim? Have they being engaged in illegal trade? Who are these guys? Important to recall that in 2014, Kenya Parliament’s Public Accounts Committee reported that top Internal Security ministry officials opened a secret NBK account where Sh2.8 billion was wired and spent on items marked as ‘confidential’.It points an accusing figure at former accounting officers in the security docket at the Office of the President. Could it be that these accounts are of government officers?

Furthermore, Cairo International Bank in Kampala sued by nine former East African Community workers for fraudulently paying out their Shs 63bn fund to ghosts. Prosecution alleges that the bank and General Manager Mr.Tarek conspired with public service ministry officials to steal more than Shs 165 billion by creating 2,605 ghost beneficiaries. The bank [Cairo] accused of opening up to 1,018 accounts using pictures with telephone numbers of the alleged account holders. Most of the telephone numbers either did not exist on the alleged network or were wrong numbers not matching with the names and pictures of the alleged account holders.

With this reports in mind, the public has a lot in stock waiting to come to light on these accounts whose owners are yet to claim their deposit.

3. Central Banks prone to sleeping on the job. The recent ruling by the High court judge stopping dissolution of Dubai bank sends shock waves to regulator which is not accused of sleeping on the job. The judge said " The banking regulator knew that Dubai Bank was ailing and should have stepped in to solve its problems before ordering its winding up... The decision to liquidate Dubai Bank after 10 days is unreasonable action by CBK. Its supervisory powers have been abused. CBK is obliged to consider proposals for injection of capital. Hassan Zubeidi has deposed to a proposal to inject capital."

The speed at which the CBK wanted Dubai Bank dissolved was wanting. They were even stopping those who wanted to save the bank. That contradicts the regulators role of protecting depositors. Therefore, depositors must be careful and trust regulators at their own peril. Prudent way is to take personal responsibility by evaluating banks they deal with and be satisfied that they are safe, robust and sound even if by incurring extra costs to professional banking consultants for advise.

4. Insiders pose substantial risk than outsiders. Swahili have a say 'Kikulacho kinguoni mwako!' These two banks are classical proof of the wisdom. While banks faces substantial risk of fraud from customer's, robbers and bandits such fraud never takes the banks to receivership compared to insider's fraud. The two banks suffered great deal under the fraudulent schemes of the top level management. Therefore, Central Banks must tighten their vetting process of the bank's top level management beyond examining criminal records but by monitoring and reviewing their lifestyles (lifestyle audit) and of those connected to them in collaboration with security agencies.

Ethics in financial sector has demonstrated to be the key ingredient for survival of the financial system. All we have to do is ensure ethical-minded people who undergo 'ethical tests' are at the helm of our financial institutions, otherwise the public is doomed and our financial markets are at high risk than ever before.

5. Go beyond 'return the money'. Rather than asking those who benefited from the fraud to return the money and go scot free, it is critical to close the loop and clam them. Experience has shown that one firm might be involved in fraud scheme for two or three collapsed banks and 'return the money' policy won't be the best policy. Time is now to go beyond by freezing assets of those firms and individuals implicated in the scam. CBK move to freeze the assets of all involved is commendable and must be supported if we are serious to get the rotten fish out before the whole system suffers.


SOUNDNESS OF THE BANKS.

The Central Bank of Kenya (CBK) has assured that the country’s banking sector remains safe and robust even after two banks were put under receivership. On Wednesday, October 14, 2015, CBK issued a statement dismissing reports that more banks were facing possible closure after failing to meet certain standards.

“It has, however, come to the attention of the CBK that there is erroneous information circulating in the social media purporting to identify banks that have failed to meet ‘certain thresholds’. CBK wishes to assure the financial markets and members of the public that this information and the allegations therein are false,” the statement reads.

The plan to raise the core capital form KSh 1 billion to KSh 5 billion, within three years, was proposed by National Treasury Cabinet Secretary Henry Rotich during his 2015/2016 Budget speech. However, CBK objected the idea and it was not approved by parliament.

Note:
The CBK press release can be obtained at https://www.centralbank.go.ke/images/docs/media/2015/DubaiBankpressrelease.pdf.