Bailout fund to keep troubled banks afloat

What you need to know:

  • Dr Patrick Njoroge said the bailout would help to inject stability in the sector. 

  • As the lender of last resort, the CBK will advance money to cash-starved institutions without a limit.
  • Dr Njoroge insisted that inaccurate information circulated in social media caused Wednesday’s panic withdrawals

Central Bank of Kenya on Sunday announced an emergency bailout fund for banks in a strong push to calm the market and restore confidence in the banking sector.

While acknowledging that last week’s closure of Chase Bank had triggered panic withdrawals, especially from small banks, Dr Patrick Njoroge, the CBK governor, said the bailout would help to inject stability in the sector. 

“From tomorrow, Monday, at 11am, we will provide a facility to any bank or microfinance institution that comes under pressure arising from no fault of their own,” Dr Njoroge said in a press briefing Sunday.

As the lender of last resort, the CBK will advance money to cash-starved institutions without a limit, which Dr Njoroge cited a powerful tool to calm the market.

Asked why the CBK did not have such a facility or did not use it to bail out Chase Bank, Dr Njoroge said Kenyan financial institutions “are in as state of flux and, as such, the need to improve the instruments in our toolkit”.

“We have never had a problem in regard to hysteria in the financial market,” he said.

Earlier in the day, President Uhuru Kenyatta warned that owners of collapsed banks would be forced to return depositors’ money, saying “those who run banks will not be allowed to steal from depositors”.

“[The money] will be paid by those owners who took massive loans and did not repay them,” said President Kenyatta at ACK St Andrew’s Cathedral in Thika, where he attended the Sunday service.

The President has already asked Treasury Cabinet Secretary Henry Rotich to ensure that customers in the banks that crashed get their money.

The President also supported Central Bank Governor Patrick Njoroge’s crackdown on rogue banks, saying the financial sector must be strengthened to prevent it from crumbling.

However, he said, the sector was not in a crisis but only needed a clean-up to cure it from non-compliant lenders.

Chase Bank is the third bank to go under in the past nine months, coming after Imperial Bank and Dubai Bank.

PANIC WITHDRAWALS

Dr Njoroge insisted that inaccurate information circulated in social media caused Wednesday’s panic withdrawals that led to the sudden closure early the following morning.

He said talks were going on with Chase Bank shareholders — including DEG, the German government investment agency, and Amethis Finance, a French-based private equity — on the future of the lender.

“There is interest from local and international potential suitors in the bank. We hope that will lead to a quick conclusion,” said Dr Njoroge, adding that account holders of Chase Bank would access their cash soon after the CBK reopens it.

He defended the decision to put Chase Bank under statutory management over its inability to meet its financial obligations, saying trust among customers had been deeply eroded.

“No single institution can sustain a run on deposits,” he said. “Institutions are built on the principle of confidence and trust.”

Chase Bank irregularly advanced Sh16.6 billion to various entities, many of them associated with top managers and shareholders, without proper security — putting billions of shillings belonging to its 55,000 depositors at risk.

People familiar with the matter said negotiations went into high gear yesterday after two CEOs of the competing buyers flew in from trips abroad to support their teams in the talks.

The takeover negotiations are being done with the CBK’s oversight.

Chase Bank owners, who have lost nearly half of their wealth with the rapid erosion of the lender’s value from about Sh30 billion late last year to about Sh14 billion, are said to be in favour of offers from suitors that had promised to keep the troubled lender alive as a subsidiary as opposed to those that want to swallow it up through a merger of operations.

Speaking on Thursday night in Berlin before his flight from a state visit to Germany, President Kenyatta had said Dr Njoroge was in order to put struggling banks in receivership.

“I am not worried about the banking sector,” said the President. “I support the governor on this."

Welcome!

You're all set to enjoy unlimited Prime content.