Genesis of banking sector turmoil

National Bank of Kenya
A National Bank of Kenya branch in Nairobi. FILE PHOTO | NMG 

With the public still transfixed on the legacy of former President Daniel arap Moi who passed on this week, I found myself thinking about some of the major happenings in the banking sector under his regime.

We experienced the first bank runs in the early 1980s, beginning with the collapse of Andrew Ngumba’s Rural Urban Credit Finance Limited.

In the 1990s came the collapse of Continental Group, Jimba Credit Ltd, Union Bank Ltd, Kenya Savings and Mortgages, The Estate Group and the Nationwide Finance Group.

But in the history of the banking sector in this country, no banking institution has suffered as much mismanagement and corruption than the National Bank of Kenya.

Under the Moi regime, the political elite treated the State-owned bank as a source of inexhaustible largesse.


The problems that haunted the bank for decades paving the way for its recent take-over by the Kenya Commercial Bank have their origins in the fact that people in power under the Moi regime regarded it as any other parastatal from where they could draw money at whim.

Permanent secretaries and top government officials would routinely order chief executives of the National Bank of Kenya to lend hundreds of millions of shillings to questionable characters and wheeler dealers.

A handful of such large non-performing loans remained on the balance sheet of the bank for decades.

Invariably, the orders to the bank to lend to parastatals and wheeler dealers would be delivered through one-paragraph letters that could not qualify as government guarantees under the laws governing issuance of guarantees under the Public Debt Act.

A good example of the huge loans was a facility that the bank gave to Spare World Ltd, a company owned by one of the most famous wheeler dealers, Mr Ketan Somaia, to import what became known as Nyayo Taxis.

I went back to the archives and found that the transaction started through a one-paragraph-letter from the Treasury in August 1988 directing the bank to extend a facility to Mr Somaia.

Younger readers of this column may not remember the Nyayo Taxis. These were second-hand cars that had been imported from London by Mr Somaia.

When the taxis arrived in the country, and with the National Bank realising that Spare World was a shelf company without the capacity to run a tax service, the contraptions were literally dumped on local taxi operators almost for free.

Through the famous one-paragraph letters from top government officials, the management of National Bank also found itself giving out billions in unsecured loans to parastatals.

If you trace the trials and tribulations of the bank, you will find that the loans extended on the basis of one-paragraph-letters from top government officials are what eventually brought the bank to its knees.

These sticky loans include facilities extended to Nzoia Sugar Company, Muhoroni Sugar Company, Government Press and to private entities including Cyrus Jirongo’s Cypperr Enterprises, and another company owned by Somaia called Campglobe Ltd.

The latter was lent money under orders of a former permanent secretary in the Office of the President, the late Hezekiah Oyugi, ostensibly to service a contract where Mr Somaia was to import printing equipment for the Government Press.

Yet at the end of the day, it is the taxpayer who was made to bail out the bank.

From the archives, I saw an April 1993 letter by former Treasury permanent secretary Wilfred Koinange to then executive chairman of the bank, Mr Wanjohi Mureithi, informing him that he had instructed the Central Bank of Kenya to release Sh2 billion to the bank.

In 2006, the Cabinet decided to pump in a whopping Sh21 billion into the bank to repay what the government described as ‘government-initiated debts’ that had been sitting on the balance sheet of the bank for decades.

I still find it intriguing that when the time came to get the taxpayer to pay for the corruption that happened at National Bank, the two paragraph letter had to be given a veneer of legitimacy: it was now described as ‘letters of awareness’.

When the history of the banking sector under the Moi regime is written, the National Bank of Kenya will have a full chapter.