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How CBK ignored whistleblower red flag on Dubai Bank

One of the Dubai Bank branches in Nairobi’s
One of the Dubai Bank branches in Nairobi’s central business district on August 14, 2015. PHOTO | FILE  

The Central Bank of Kenya’s move to close Dubai Bank last week came after years of ignoring evidence of blatant breaches of banking laws from whistleblowers, including a former managing director, raising more questions about why the lender was allowed to stay in business for so long.

The latest such red flag was raised on March 17 this year when businessman Jacob Juma, a customer of Dubai Bank, wrote to the CBK pointing out alleged malpractices at the lender and seeking to know whether it was duly licensed.

“Our client would like your office to urgently confirm the financial standing and licensing status of [Dubai Bank],” Mr Juma’s lawyers, Liko & Anam Advocates, wrote to CBK’s director of banking supervision Fredrick Pere.

The letter, drafted after the bank failed to credit Kwanza Estates Limited’s account with Sh197 million despite a High Court order to do so, raised questions about the bank’s health.

Mr Juma said a market intelligence report, whose source he did not however reveal, indicated that Dubai Bank had been operating below the required liquidity ratio for a “considerable period of time”.

“Indications are that the ratio had fallen to as low as five per cent from the minimum ratio of 20 per cent,” says the letter.

“In view of the above, our client seeks an assurance from your office that the above bank is trading legally and that public deposits are safe. If the above facts are correct, then you have failed to discharge your duties as a regulator to safeguard and protect public interest as stipulated by law.”

Mr Pere, who died recently, wrote back to Liko & Anam Advocates on March 24, saying that the concerns had been noted and that Dubai Bank had a valid licence for the current year.

“We refer to your letter dated March 17, 2015 whose concerns we have noted,” Mr Pere said in the letter.

“We write to advise that Dubai Bank has a valid banking licence for the year 2015 and is, therefore, authorised to conduct banking business.”

This feedback was an extension of the permissive stance the CBK had adopted since 2012 when reports of illegal activities at Dubai Bank first became public.

It is instructive to note that Friday’s placement of Dubai Bank under the receivership of the Kenya Deposit Insurance Corporation (KDIC) came after a change of leadership at the banking sector regulator.

Gerald Nyaoma replaced Mr Pere, while Dr Patrick Njoroge took over as the CBK governor in July, replacing Njuguna Ndung’u whose term ended in March.

In announcing the collapse of Dubai Bank, the CBK cited the same malpractices that had long been pointed out by the whistleblowers, revealing the divergent regulatory approach between the current and former office holders.

“CBK as a prudential regulator has considered and determined that Dubai Bank Kenya Limited’s violations of banking laws and regulations, including failure to maintain adequate capital and liquidity ratios as well as provisions for non-performing loans and weak corporate governance structures, are detrimental to the interests of its depositors, creditors and the public,” the CBK said in a statement.

“In light of the above, CBK has been compelled to act and appoint KDIC as receiver for the bank.”

Dubai Bank’s malpractices came to a head in July when it started breaching the daily cash reserve ratio, which is set at three per cent of deposits.

Deterioration in this key metric means the lender’s ability to meet its short-term obligations had weakened substantially.

The bank had already defaulted on some Sh48.18 million it owed Bank of Africa Kenya Limited, which joins the list of its victims.

Several high-net-worth individuals, local and foreign companies have in the past three years taken Dubai Bank to court seeking settlement of transactions running into hundreds of millions of shillings.

Mr Juma, for instance, told the Business Daily he was claiming up to Sh50 million from the collapsed bank, a loss he blames on ousted chairman Hassan Zubeidi.

The businessman, who held an account at Dubai Bank through his firm Nectel Kenya Limited, says he went to court after the CBK refused to act against Mr Zubeidi, even after he filed several complaints.

Nectel has accused Mr Zubeidi of withdrawing the Sh16 million from its accounts in 2009 without authorisation and wiring the money to undisclosed offshore accounts.

The money was part of a Sh40 million medium-term loan that Nectel Kenya had negotiated with the bank and got approved for disbursement.

Mr Juma, who is the managing director and principal shareholder in Nectel, used a 5.5-acre parcel of land in Nairobi’s Karen estate as collateral for the loan.

Nectel says it has not received any portion of the money and says Mr Zubeidi remains in possession of the title for the land. The Sh50 million claimed by Nectel includes interest that has accrued on the principal.

Dubai Bank made a counterclaim of Sh37 million against Nectel but it was thrown out in 2013 after the lender failed to pursue the case.

But the most exhaustive accounts of Dubai Bank’s problems were revealed in a court battle pitting it against its former managing director Nereah Said, who had sued for alleged wrongful dismissal in 2012.

Ms Said documented theft of customer funds, insider lending, low provisioning for losses, parallel banking and default on facilities such as letters of credit.  

Despite being chairman, Mr Zubeidi was actively involved in the management of the bank where he had an office.

Ms Said claimed in court papers that her attempts to restore good corporate governance in the bank met hostility from Mr Zubeidi who allegedly boasted that he had the protection of the CBK governor and senior Criminal Investigations Department (CID) officers.

Her replacement, Binay Dutta, fled the country in May this year, having fallen out with Mr Zubeidi after a deal Mr Dutta helped strike went south and the CBK began investigating.

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