Six individuals and their companies were behind last year’s sudden collapse of Dubai Bank, an auditing firm that inspected the lender’s books in the past decade has revealed.
Crowe Horwath, through its local partners Horwath Erustus and Company, told Parliament that Dubai Bank collapsed under the weight of a Sh4 billion loan book, out of which Sh2.5 billion was non-performing, at the end of December 2014.
Celphas Osoro, the external auditor in charge of Dubai bank at the time of its collapse in August last year, told the National Assembly’s Finance, Planning and Trade Committee that Sh1.9 billion of the non-performing loans had been disbursed to 10 companies, some of which had common shareholding.
“If you are to lift the corporate veil, you will find that five or six persons had been lent Sh1.9 billion that were non-performing. This represented 76 per cent of the non-performing loans,” Mr Osoro told the committee chaired by Ainamoi MP Benjamin Lang’at.
A search at the Registrar of Companies revealed that Dubai Bank’s heavy borrowers’ list is made up of politically connected businessmen such as former Nakuru stalwart Geoffrey Asanyo, Cyrus Jirongo and Benson Ndeta.
The committee is investigating the circumstances that led to the collapse of Dubai Bank and two other lenders, Imperial and Chase banks, in a span of nine months.
Mr Osoro told MPs that most of the individuals behind the six companies at Dubai Bank “were politically exposed persons, one of whom had loans amounting to Sh890 million or 88 per cent of lenders core capital”.
The list of “politically exposed persons” and companies with non-performing loans at Dubai Bank includes Zap Group (Sh889 million), Kwanza Estates (Sh412 million), Sololo Outlets (Sh103.2 million), Kuza Farms and Allied (Sh249 million) and Torino Enterprises Limited (Sh138.9 million).
Mr Osoro said that known individuals were responsible for more than Sh1 billion of the bank’s non-performing loans portfolio, indicating that Dubai Bank’s business model was imprudent.
“If you have a core capital of Sh1 billion and two people get loans of Sh1.4 billion, then you are doing very bad business. The two people were just customers and not shareholders of the bank,” he said.
Mr Osoro, however, refused to disclose the names of the people behind the six companies after his lawyers advised him against the move.
Kitutu Masaba MP Timothy Bosire demanded that the auditors reveal the “politically related persons” behind the companies and insisted that Sololo Outlets is associated with Mr Jirongo.
The committee said that Crowe Horwath’s reluctance to name directors of the companies meant that those involved are untouchables. “We need to unmask those who are fleecing poor Kenyans of their hard-earned wealth,” said committee vice-chairman Nelson Gachuhie.
Crowe Horwath’s legal team cited Article 118 of the Constitution that confers upon a committee of the House certain powers, including receiving certain privileged information in camera.
“If the information is given in the presence of the media, it might prejudice other people who can appear before this committee. It is important to note that the borrowers were companies and not individuals,” said Crowe Horwath.
The audit firm was ultimately spared the burden of revealing the names of the persons behind the six companies but the committee directed its secretariat to write to the register of companies asking for names of the directors of the affected firms.
The auditors also revealed that Dubai Bank’s collapse was caused by several other factors, including insider lending, disbursement of unsecured loans, inadequate working capital and lack of an internal audit unit and a chief finance officer.
Dubai Bank had a capital base of just over Sh1 billion at the end of December 2014 and reported a profit of Sh4 million for the year.
“The bank had been strangled off working capital and was running on empty. If you look at advances to deposit ratios, it was 153 per cent when the Banking Act allows 75 per cent of deposits to advances,” Mr Osoro said.
Crowe Horwath said it had worked with the Central Bank of Kenya’s (CBK) bank supervision unit to deal with the issues its predecessor Deloitte Consulting had raised in a qualified audit opinion of the collapsed lender’s 2012 books of accounts.
Deloitte qualified Dubai Bank’s financial statements on the basis of a material suspense account and uncertainty in the amounts disclosed on guarantees.
Deloitte had issued a management letter for the year ending December 31, 2012 outlining 61 points of weaknesses of which 11 could have contributed to the collapse of the bank.
The list of issues raised includes core capital requirements, single borrower limits, non-compliance with CBK regulations on unsecured loans and advances granted to related parties and liquidity rations.
Mr Osoro told MPs that the CBK’s bank supervision team also carried out a review of Dubai Bank in 2013 and raised 10 broad non-compliance and risk issues, including corporate governance, compliance risk, credit risk, liquidity risk and operational risk.
Crowe Horward said it had hired an ICT auditor to help address the issues raised in the Deloitte audit qualification and the expert concluded that the system deficiencies had been rectified by the vendor of the software and the audit engagement team concurred with the findings.
Mr Osoro proposed a number of legislative actions and reforms that are necessary to prevent corporate and financial services sector failures.
These include mandatory rotation of auditors for public interest entities over five to seven years in order to reduce the familiarity threat, joint audits for public interest entities, exclusion of non-audit services (tax, financial advisory, risk, human resources consulting provided to an audit client) for public interest entities and protection of internal whistle blowers.
The auditors further recommended a reduction of the current 20 per cent of core capital that a single borrower or person can borrow, increased CBK supervision, a review by auditors of quarterly results of banks and protection and guarantee of independence of audit and risk committees by the regulator.