How Chase Bank director lent himself Sh7.9 billion

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

Half of the irregular loans went to the bank’s insiders, the Central Bank of Kenya (CBK) said in a statement released Thursday after it placed the lender under statutory management.

The CBK statement indicated, for instance, that one director lent himself a total of Sh7.9 billion, mostly without registered collateral and beyond the set regulatory limits.

The director lent himself more than the 25 per cent of the total capital limit set in the Banking Act.

The actions of the director – whom the auditors called a significant shareholder – has now made it uncertain as to whether the more than Sh95 billion  deposits will be refundable to their owners who are mostly small and medium-sized enterprises (SMEs).

CBK governor Patrick Njoroge Thursday said that apart from the Sh7.9 billion lent to the Chase Bank director, there were doubts as to whether an additional Sh8.7 billion could be recovered given that large segments of it were not being serviced or lacked documentation.

“What we have seen at Chase Bank is a situation where the auditor has expressed major concerns regarding recoverability of loans and unsecured insider lending,” Dr Njoroge said at a Press conference in Nairobi.

Chase Bank becomes the third lender to go into receivership in just nine months after Imperial Bank’s closure last October and Dubai Bank’s July shutdown.

Dr Njoroge said the last straw that broke the camel’s back came in the form of a major cash crunch on Wednesday that rendered the bank incapable of meeting its obligations such as cheques or withdrawals that were due.

“By the end of the day (Wednesday), we realised that the haemorrhage was getting out of hand. We sat late into the night as we sought to find cash to plug the gap. but we were unsuccessful. It was only at 4am this morning that we made the decision to close the bank,” said Dr Njoroge.

The CBK said the liquidity crunch may have been averted had some Sh5 billion ($50 million) borrowed from the African Development Bank arrived by Wednesday.

“Unfortunately it was too late. The money had not yet reached the bank by yesterday,” Dr Njoroge said.

READ: Chase Bank secures Sh5 billion AfDB facility for SMEs

ALSO READ: Chase Bank shocks market with Sh8bn secret insider loans

He however reported having met with the bank’s shareholders and agreed to pump in money to revive the lender even as he emphasised that the CBK was still in the process of determining the exact state of the bank’s affairs before any further action was taken.

The bank’s chairman Zafrullah Khan and group managing director Duncan Kabui resigned on Wednesday after publication of the financial results showing the bank had not reported Sh8 billion insider loans.

Muthoni Kuria, a director at the bank, was appointed chairman on Wednesday, but her tenure only lasted hours before the CBK took over management of the institution less than 24 hours later.

Mrs Kuria was once the chief executive of Southern Credit Bank, which merged with Equatorial Commercial Bank in 2010.

When Chase Bank was incorporated in 1995 through the acquisition of troubled Western Kenya Bank, Mr Khan became one of the founding directors. Mr Kabui was appointed managing director two years ago.

The Capital Markets Authority is also coming under the spotlight because it had approved a Sh10 billion bond – Sh4.8 billion of which was raised – despite the now glaring corporate governance weaknesses in the bank. By the time we went to press, the CMA had not responded to our queries.

Chase Bank’s troubles came with speed on Wednesday after depositors got wind of the fact that it had reported billions of shillings in insider loans that had not been previously disclosed in the accounts.

The situation was made worse by the fact that the auditors – Deloitte East Africa – said they could not certify whether or not the accounts and financial statements represented the actual situation in the bank.

After noting that Sh16.6 billion in loans and advances raised serious questions, Deloitte said it had issued a “disclaimer of opinion” to mean that enough evidence on the financial operations at the bank was not available.

“Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph (Sh16.6 billion loans), we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements,” said Deloitte.

The accounting firm also said it was “unable to establish if proper books of account have been kept by the bank.”

Deloitte yesterday said it could not provide further information because of client confidentiality, and referred this reporter to the CBK. A number of audit queries have since arisen, including the fact that Deloitte had over the years audited the company but never raised the issue of secret insider loans or uncollateralised credit in their audit reports.

It was also not clear what role the audit firm had played in Wednesday’s restatement of Chase Bank’s results to provide for the dud or nonperforming loans.

The restatement of the bank’s accounts came with the requisite auditor’s signature, which had been absent in the first publication of the results.

The signed auditor’s report was dated April 4, 2016 yet the bank should have reported its results six days earlier. Banks are required to report their previous year’s audited results by March 31 of every year.

The bank changed the content of its financial statements in the second (restated results) to provide for the huge non-performing loans that caused panic among depositors.

Dr Njoroge however said that the fall of Chase Bank was more about inability to get cash from the market unlike that of Imperial Bank, which had experienced fraud.