Central Bank, CMA on the spot over Imperial’s sudden closure

Tuesday’s sudden closure of Imperial Bank Wednesday sent shockwaves across Kenya’s financial services sector even as pressure mounted on the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) to come clean on the matter.

The CBK, the banking industry regulator, and the CMA, which oversees the capital markets, are on the spot for failing to smell trouble at the mid-tier lender which got their approval to issue a bond only two months ago.

Bond issuers ordinarily go through a rigorous approval process before being allowed to take cash from the investing public and Imperial Bank’s collapse soon after the two regulators allowed it to borrow Sh2 billion from the public has left many questions in its wake.

“The regulators may want to spin this as action they have taken in the interest of depositors and shareholders but that will never answer the many questions being asked as to whether they properly played their role of protecting the public interest,” said an investment manager who invested millions of shillings in the Imperial Bank bond. “It destroys the confidence we should all have that whoever comes to the market with their approval is fit to take our money.”

The CBK and the CMA gave the bond the green light, leaving depositors and investors to conclude that their assessment of the bank ahead of the bond issue was not up to scratch or that massive fraud occurred shortly after the approvals warranting the action.

The regulators Wednesday spent hours battling the adverse impact of Imperial Bank’s closure after they came under heavy criticism in the social media for their inaction that had created impression that more banks could be in trouble.

False allegations

“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’. The CBK wishes to assure financial markets and members of the public that this information and the allegations therein are false,” said the CBK in a statement meant to calm nerves in the market.

It did not help that the regulators have not made public the nature or magnitude of the risks that led to the drastic decision of placing Imperial Bank under receivership.

The central bank said it could respond to queries on the bank’s closure which were undergoing legal processing — giving the clearest indication that the matter is headed to the courts.

The CBK’s admission that it was Imperial Bank’s board that informed it of malpractices in its ranks further cast doubts on the quality of bank supervision, suggesting the regulator failed to smell trouble and relied on the goodwill of the lender’s directors and managers.

“The board of directors of Imperial Bank Limited brought to the attention of the CBK inappropriate banking practices that warranted immediate remedial action,” said the CBK in a statement.

Notably, Imperial Bank’s board of directors collectively own a third of the bank, raising the question as to whether they expected the regulator to respond as it did after they blew the whistle.

The directors and companies associated with them held Sh1 billion in deposits with the bank at end of last year.

The CMA defended its role in the Imperial Bank bond approval, saying it was based on professional advice of the transaction team leading to its issue.

“As a matter of policy, the CMA assumes no responsibility for the correctness of any statements or opinions made or reports contained in this Information Memorandum,” the financial markets regulator said, arguing that its role is to check whether the issuer has complied with all requirements.

The CMA, however, pocketed an approval fee of Sh2 million, which is equivalent to 0.1 per cent of the bond issue and higher than the Sh1.8 million paid to the reporting accountants.

Also caught in the muddle of Imperial Bank’s collapse are its auditors, lawyers and arrangers of the bond. PKF was the reporting accountant, with Hamilton, Harrison and Mathews as legal advisers and Dyer and Blair the lead arrangers.

It remains to be seen whether suspension of the bond from listing on the NSE will affect investor participation in future issues.
It is not lost to keen observers of the Imperial Bank crisis that revelation of the unsafe business practices were made after the appointment of a new chief executive.

Naheem Shah was appointed in an acting capacity a month ago following the sudden death of Abdulmalek Janmohamed, who had served as the bank’s managing director since its formation in 1992.

Dubai Bank

Imperial Bank also became the second bank after Dubai Bank to be put under receivership since the change of guard at the CBK in June when Patrick Njoroge succeeded Njuguna Ndung’u, who retired in March.

The changes at the CBK also saw Gerald Nyaoma return to the supervision department following the death of Fredrick Pere in July.
In his inaugural press briefing Dr Njoroge had warned that he would not hesitate to crack the whip when called upon.

Dubai Bank’s collapse did not have a shock effect as the management had been accused of multiple malpractices for a period exceeding a year, including default at the interbank market and cooking of financial reports.

The action on Imperial, a mid-tier lender holding Sh58 billion in deposits and controlling 1.8 per cent of the Kenyan banking sector, has, however, caused ripples, leaving the regulators scampering for reasons to give assurances of the sector’s health.

The bank had 28 branches in Kenya and five in Uganda, which have also been taken over by the Bank of Uganda. The bank is also likely to have been holding cash belonging to other banks owing to participation in the interbank market.

“The CBK stands ready to use all instruments at its disposal to provide adequate liquidity support to the banking system to ensure its stability and robustness at this time,” said the CBK Wednesday.

The Kenya Bankers Association said it did not expect the placement of Imperial Bank under statutory management to erode public confidence as the cause was limited to the bank.