In December 2018, the Central Bank of Kenya (CBK) announced acceptance of the binding offer from KCB in regard to Imperial Bank (in receivership). This announcement effectively brought to an end a tumultuous three year resuscitation process for two major commercial lenders (the other being Chase Bank).
It was also a period that brought out an ugly side to bank failure resolutions. In any case, they are never pretty. Currently, resolution of bank failures is governed by the Kenya Deposit Insurance Corporation (KDIC) Act, 2012.
The corporation is also the institution that manages the deposit protection fund; some kind of a rainy day pot that compensates people who lose money if a bank fails (of course subject to a prescribed maximum).
Resolution itself entails two processes, namely receivership and/or liquidation. The Act vests full ownership of these two processes on the KDIC. Prior to the Act, resolution as well as deposit protection was largely an in-house execution (within CBK). But given recent events, how effective has the Act been in resolving bank failures?
On a scale of one to five, one being ineffective, I’d generously score it at two. It is not progressive and too dogmatic, to say the least. In essence, it is, in my view, overdue for review. The KDIC Act, 2012 outlines a two-pronged approach to failure resolution.
First, upon notification (from CBK) of non-viability of a regulated deposit-taking institution, the corporation (KDIC) has two options, (i) ask the institution to put in place corrective actions either by way of restructuring the whole or part of its business, and (ii) assume control as a receiver of the businesses and affairs of the institution.
Second, if an institution is unable to come back to life, the corporation is handed the task of liquidating it. Let’s critically examine the implications of these two items. The business of deposit-taking, led by banking, is quite sensitive. This is primarily because it is made of a social contract between the institution itself and the depositing public.
It is a deal drawn by a prudential regulator (a central bank) and governed by trust and, by extension, confidence. Trust and confidence are held together by a candle in the wind. Consequently, windy words such as receivership can easily blow them away. How do we break the wind in the current resolution framework?
Two things. First, there needs to be an alternative to the current receivership framework-and probably a curatorship system should be considered.
There is some difference. In curatorship, the intention is to rehabilitate the bank, which embedded with an element of business rescue. Receivership, on the other hand, usually appears to pay little attention to business rescue.
The South African Reserve Bank’s resolution framework operates on the curatorship model. African Bank remains a classic success story of the South African system. Indeed, after being placed under curatorship in 2014, it transformed into a healthy bank again. Further, a curator, in certain cases, can also be another much larger bank.
Nigeria and Ghana have numerously employed the use of other larger banks to curate failed institutions by way of transfer of assets and liabilities. In that way, the failed bank’s doors don’t close overnight.
Bank of Uganda recently employed the same tactic, albeit implicitly, in the Crane Bank case. This tactic has proved successful in those markets and don’t easily blow away confidence and trust.
Second, liquidation, as outlined in the KDIC Act, 2012, is still aligned with the provisions of Part VI of the Companies Act, which has since been repealed and replaced by the more progressive Insolvency Act, 2015. That is also overdue for a re-alignment.