Chase Bank shocks market with Sh8bn secret insider loans

Chase Bank chairman Zafrullah Khan and group managing director Duncan Kabui resigned yesterday after the bank sent shockwaves in the market with a restatement of its financial results showing it had under-reported insider loans by a whopping Sh8 billion.  

Consulting firm, Deloitte, who are Chase Bank’s auditors, said in a note accompanying the statement that it had offered a ‘qualified’ audit opinion on the lender’s finances — the first for a Kenyan bank in nearly 20 years.

Chase Bank said Mr Khan and Mr Kibui had stepped aside following the publication of the 2015 results, indicating that their exit was linked to the lender’s failure to meet its reporting obligations, resulting in the republication of the financial report.

READ: Chase Bank chairman and MD step aside over credibility of financials

A qualified audit opinion ordinarily means the auditor received information on the company’s financial performance that was of limited scope or that the company’s accounting methods did not meet the requisite accounting standards.

Deloitte did not state its opinion on the financial report that Chase Bank published at the close of the reporting period last week, although it indicated that they were audited as required by law.

The restated financial results published yesterday show that insider loans — money advanced to directors, shareholders, associates and employees of a bank — stood at Sh13.62 billion last year against the Sh5.72 billion it reported on March 31.

At Sh13.6 billion, Chase Bank’s insiders effectively borrowed more than the lender’s total shareholder funds (equity), which stands at Sh11.19 billion.

The inconsistency in insider loan reporting was on the account of the bank’s directors and shareholders that was earlier reported at Sh2.6 billion but rose to Sh10.52 billion in yesterday’s report.

Loans advanced to employees of the bank remained consistent at Sh3.1 billion in the two sets of accounts.

The other changes in the financial statements show that the bank’s letters of credit and guarantees were revised upwards by Sh1.5 billion to Sh15.9 billion.

A letter of credit from a bank guarantees a seller full and timely payment from a buyer with the bank covering the payment in case of a default.

Mr Khan is one of the founding directors of Chase Bank, which was incorporated in 1995 through the acquisition of troubled Western Kenya Bank.

Mr Kabui was appointed managing director in 2014 and tasked with overseeing the lender’s strategy and investor relations. Other directors of the bank are Anthony Gross, Rafiq Shariff, Laurent Demey and Richard Carter.

Chase Bank now joins the growing list of lenders that have recently come under the Central Bank of Kenya’s (CBK) watch for dubious accounting practices.

Other lenders who have faced similar action from the regulator are collapsed Imperial Bank, Dubai Bank and National Bank of Kenya.

Chase Bank yesterday sought to dismiss rising concerns by depositors and the general public over the safety of their funds.

The bank said in a statement that “customers’ funds and investments are safe” and that “Chase Bank remains a strong, sound and transparent institution that has operated in Kenya for the past 20 years.”

CBK Governor Patrick Njoroge, however, declined to comment on the Chase Bank situation during a press briefing held at his office in the morning, insisting he does not comment on specific banks or institutions.

Dr Njoroge’s tenure at the CBK has been characterised by tighter regulatory scrutiny that saw the placement of Imperial Bank and Dubai Bank under statutory management.

The CBK’s tighter scrutiny, for instance, saw National Bank’s loan loss provisions increase from Sh525.3 million to Sh3.72 billion and a 63 per cent rise in non-performing loans to Sh11.76 billion in the 2015 financial year.

That was enough to turn the net profit of Sh2.2 billion the bank had reported for the nine months to September 2015 into a net loss of Sh1.15 billion for the full year.

National Bank also sent its managing director, Munir Sheikh Ahmed, and five top managers on compulsory leave one day ahead of release of the annual financial report. Chase Bank’s customer deposits stood at Sh94.27 billion at the end of last year, against a loan book of Sh103.3 billion.

In June, the bank raised Sh4.8 billion in the first tranche of a Sh10 billion cash call besides drawing in new cash in the form of equity from international organisations, some of who are now its top shareholders.

The list of institutions that have pumped money into Chase Bank in the past one year includes African Development Bank (Sh5 billion), Global Climate Partnership Fund (Sh3 billion) and French state fund AFD (Sh3 billion).

Rinascimento Global Limited has been Chase Bank’s leading shareholder with a 15.9 per cent stake, followed by Shegas Limited and Balst Investment Holdings Limited with of 13.9 per cent and 11.2 per cent stakes respectively.

Amethis Finance, a pan-African investment firm, has held a 10.9 per cent stake in the bank since 2013 while DEG, the German development organisation holds a 6.6 per cent.