How Dubai Bank chief took billions from customers

Dubai Bank founder Hassan Zubeidi used depositors’ funds to guarantee his private companies some Sh1.6 billion, the Central Bank of Kenya (CBK) says in papers it has filed in court in a case involving the collapsed lender’s managers.

The CBK, the financial sector regulator, wants the High Court to freeze Mr Zubeidi’s bank accounts and assets after it discovered that he amassed substantial wealth through irregular insider lending deals he covered up by cooking books.

The regulator, through the Kenya Deposit Insurance Corporation (KDIC), says in a status report it has filed in court that Mr Zubeidi who served as the bank’s chairman guaranteed his firm, Africa Energy Limited, €12 million (Sh1.39 billion) and $2 million (Sh205 million) without security.

“The facilities including guarantees and loans were advanced without securities. Several insider lending transactions were noted comprising overdrafts, guarantees and loans advanced without securities to Mr Zubeidi or companies associated with him,” says the KDIC.

The report says that some of the guarantees to five companies associated with Mr Zubeidi have been called up, and that the former chairman’s assets should be attached to recover the funds depositors lost to such dealings.

“Letters of credit of €12 million and $2 million were opened on account of Africa Energy and Sh95 million on account of Kemu Salt Packers and Africa Energy, associated with Mr Zubeidi,” says the KDIC.

The corporation, which is tasked with liquidating Dubai Bank and refunding depositors, says it found 334 title deeds for parcels of land in the bank, 248 of which are under the Zubeidi-owned Africa Energy. The title deeds were found in a safe within Mr Zubeidi’s office.

Most of the title deeds are for land in Limuru, Kijabe, Nairobi and Mavoko.

The liquidator has enjoined Africa Energy, Suleiman Enterprises Company, Kamp General Engineering Company, Kemu Salt Parkers Production Company and Maestro Properties in the suit, claiming they are either owned or controlled by the former Dubai Bank chairman.

Court papers indicate that aside from the civil suit that the KDIC has filed against Mr Zubeidi, the Dubai Bank founder could also face criminal charges for alleged misuse of depositors’ funds.

“The Anti-Bank Fraud and Criminal Investigations Department of the Kenya Police are also undertaking own investigations and have already interrogated Mr Zubeidi,” the agency says.

READ: Dubai Bank owner’s case to unravel collapse mystery

Justice Eric Ogola last Friday declined to issue orders freezing Mr Zubeidi’s accounts and assets until he has heard the former Dubai Bank chairman’s response. The case is fixed for hearing on October 19.

Court papers show that some of the guarantees Dubai Bank issued to some of its clients were kept off the bank’s books, a development that could culminate to the loss of Sh3.1 billion.

Mr Zubeidi is also accused of overstating the bank’s cash balances as part of a book cooking plan aimed at hiding the institution’s true financial status.

Mr Zubeidi is also accused of advancing unsecured loans and overdrafts to the bank’s employees — giving the example of the lender’s executive director Geoffrey Ndambuki who overdrew his account by Sh15 million without a letter of security.

“Contingent liabilities, including guarantees and letters of credit amounting to Sh3.1 billion, were not disclosed in the bank’s books. Advances to one director Bashir Sheikh were non-performing and unsecured. Mr Ndambuki overdrew his account by Sh15 million without security,” the liquidator says.

Dubai Bank had by August advanced Sh4.1 billion in loans, 98 per cent of which had not been serviced for more than three months, raising fears that more than half the amount would not be paid.

The KDIC’s report shows massive irregularities that forced the regulator to declare the bank insolvent. It found that the lender’s board had only three directors, contrary to the minimum of five required by law.

Mr Zubeidi sat on the board alongside Ali Bashir and Hassan Nandwa.

The regulators also found that Mr Zubeidi held both executive and non-executive directorships, contrary to the Banking Act, a move that gave him absolute control over the lender’s affairs.

“There were no substantive heads of departments for key operational positions such as chief executive officer, head of IT, operations, internal audit, risk management, finance and credit. It was confirmed that the bank has consistently been violating the CBK guidelines and the Banking Act over the years,” the KDIC report says.

The report further reveals that most of the bank’s deposits were held by only 20 of the 7,743 account holders. The 20 depositors have Sh659 million collectively or 48 per cent of the total.

Supplies company Richardson & David, for instance, held Sh115.2 million in its account, Shanxi Geological Engineering Company had Sh101.5 million, the Catholic Diocese of Garissa had Sh37.3 million while late politician Martin Shikuku had Sh14 million.

Richardson and David have filed a suit seeking to stop the KDIC from liquidating Dubai Bank. Justice Eric Ogola will hear the case on October 8.

Dubai Bank has also been cited for disregarding customer instructions to conduct transfers. The KDIC says the lender failed to remit Sh41 million of clients’ money despite receiving instructions to do so.

The list of firms whose instructions for funds transfer were ignored includes Kemu Salt Packers, which is associated with Mr Zubeidi.

The central bank announced closure of the bank in August citing gross 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.

The CBK ordered the bank’s liquidation through the KDIC barely two weeks after placing it under receivership.

Payments to the collapsed lender’s depositors began on September 7. Dubai Bank held Sh1.7 billion in customer savings at the end of last year, according to CBK data, but the amount had dropped to about Sh1.4 billion at the time of collapse.

Managing director Binay Dutta fled Kenya in May amid a court battle in which a Turkish businessman, Sevket Tunc, was seeking court orders to wind up the bank for breach of contract.

The dispute with Mr Tunc caught the CBK’s attention, causing the regulator to look deeper into the bank’s books, a move that revealed it had been flouting regulations.

The CBK has been accused of ignoring evidence of blatant breaches of banking laws from whistle-blowers, including former CEO Nereah Said, raising more questions about why the lender was allowed to stay in business for so long.