What you need to know:
- Just last year, Chase Bank got the greenlight to raise a Sh10 billion bond, out of which Sh4.8 billion was raised.
- Imperial Bank too was approved to raise a Sh2 billion bond last August, only for it to collapse two months after.
- Experts say the extent of rot in the banking industry is huge and that the worst may be yet to come as CBK continues to tighten regulations.
Despite the government’s assurance that the health of the banking industry is intact, questions remain about the extent of manipulation of financial statements in the entire sector and why regulators are failing to smell trouble in time, often acting when it is too late.
The Central Bank of Kenya (CBK), the industry regulator, and the Capital Markets Authority (CMA) which oversees capital markets, both failed to spot trouble at Chase Bank despite evident signs of weak corporate governance.
Just last year, Chase Bank got the greenlight to raise a Sh10 billion bond, out of which Sh4.8 billion was raised.
Imperial Bank too was approved to raise a Sh2 billion bond last August, only for it to collapse two months after.
Bond issuers ordinarily go through a rigorous approval process before being allowed to take cash from the investing public.
In both banks, the rot came to light after differences between the management spilled to the public, prompting CBK to place them under receivership.
In June last year, an investigation by the Sunday Nation revealed systematic plunder and misuse of resources by the management of National Bank.
But no action was taken until two weeks ago when the bank reported a Sh1.2 billion loss.
POOR CORPORATE GOVERNANCE
Analysts are now raising questions on the credibility of the country’s corporate governance structures.
They say the widespread existence of collusion between regulators, auditing firms and corporate clients is putting at risk investors’ money and the entire economy.
“If it is your small business, that can be excused, but these are public institutions where people put their money,” public finance analyst Robert Shaw said.
“For the development of a country, we need to encourage people to invest and save. But when people see these things happening, they ask themselves if it is necessary,” he said.
A meeting between the government, CBK and bank CEOs took place on Friday morning.
Sources say Treasury tried to mend relations between the regulator and the lenders, who wanted it to go slow on them.
In what is seen as an attempt to calm fears, CBK and Treasury later blamed the social media for the capital flight at Chase Bank, which caused it to crash.
CBK also insisted that the case, just like that of Dubai Bank and Imperial Bank, is isolated.
“No single bank in the world can sustain the pressure from depositors that Chase Bank witnessed this week,” said CBK Governor Patrick Njoroge.
“The situation is unique and is not affecting all banks. CBK has looked at all the banks and is continuously addressing issues that arise. I can assure you that all the banks are sound,” he said.
But experts say the extent of rot in the banking industry is huge and that the worst may be yet to come as CBK continues to tighten regulations.
“Regime change at the Central Bank and a more “rules-based’’ regulatory framework has shone the torch on the tier-three banking segment. A loan of Sh7.5b to an insider confirms that there was a more permissive environment at CBK,” Rich Management CEO Aly Khan Satchu said.
Dr Njoroge said he was merely doing his job. “If you give money to a bank and they start using it for their own use, they will be held accountable. For every institution in the industry, let it be known that if there are mistakes they will be dealt with,” he said.
But Mr Satchu said book cooking could be widespread not only in the banking industry but in the entire corporate sector.
“What we are witnessing now is a flight to quality across the economy. Reputation and good corporate governance are going to be put at a premium and the stock markets are proving this with the share prices of affected companies crashing,” he said.
End year financial results are critical in determining the amount of money a listed company will pay as tax. It also shows the soundness of the company, which is crucial in determining investor and employee confidence. There have been several incidents where listed firms were for long thought to be financially stable only to come tumbling down due to financial manipulation.
CMC Holdings, Mumias Sugar, Kenya Airways, Uchumi, and Haco Tiger brands are among the listed companies that have recently been involved in alleged financial scandals where book cooking was unearthed.
The Nairobi Securities Exchange (NSE) has for the past one year been on a bear run due to mass withdrawal of capital. At least 18 companies issued profit warnings before releasing their end year financial results.