Economy

How State averted fresh wave of bank collapses

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Depositors of collapsed Imperial Bank during a demonstration. FILE PHOTO | NMG

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Summary

  • Most of the historical bank failures have been due to a mix of fraud, political interference, excessive risk-taking and inadequate capital.
  • Yatani says continuous surveillance of financial institutions had helped in the early detection of shady financial transactions and malpractices and arrest of additional failures.

The government battled major bank scandals behind the scenes last year, staving off a new wave of collapses, Treasury Cabinet Secretary Ukur Yatani has revealed.

Mr Yatani said that continuous surveillance of financial institutions had helped in the early detection of shady financial transactions and malpractices and arrest of additional failures that would have eroded investor confidence and hurt depositors.

“Through Central Bank of Kenya, FRC [the Financial Reporting Centre] and other government agencies, the government has continued to monitor financial institution and detect any suspicious financial transaction and financial malpractice,” he said in his draft 2021 Budget Policy Statement (BPS).

“Early detection of such major corporate scandal has elicited early intervention that has avoided some financial institutions from collapse.”

He did not mention the firms whose viability was threatened and neither did he expound on the crimes perpetrated by the insiders. Most of the historical bank failures have been due to a mix of fraud, political interference, excessive risk-taking and inadequate capital.

Kenya has witnessed the collapse of more than a dozen banks since 1993 — including Euro Bank, Trust Bank, Charter House, Prudential Bank and Trade Bank — due to corporate malpractices such as irregular lending by executives.

Recent bank collapses – including those of Dubai Bank in August 2015, Imperial Bank in October 2015 and Chase Bank in April 2016 – have been as a result of fraud and insider dealings. Insurers such as United Insurance, Standard Assurance, Blue Shield Insurance and Concord Insurance were also placed under receivership between 2005 and 2013, joining those which had gone under earlier, including Kenya National Assurance Company, Lakestar and Stallion Insurance.

Bank collapses have inspired reforms in the sector, with the Kenya Deposit Insurance Corporation (KDIC) raising the minimum deposit guarantee per customer to Sh500,000 last year from the previous Sh100,000.

The agency has also said it would strive to ensure that no other bank will collapse on its watch, pledging to proactively engage struggling institutions to find ways of resolving their weaknesses. The KDIC has also introduced risk-based cover on deposits so that risky banks pay more as a motivation to ensure prudent lending.

The enforcement of the new regime, which was suspended by a year to July 2021 as a result of Covid-19 pandemic shocks on the financial services sector, will see high-risk lenders —as gauged by their liquidity positions, capital adequacy, asset quality and governance structures —pay a higher premium to the KDIC.

“Premium deposit payment taking effect on July 1 will be based on the risk appetite of a bank. If let’s say the perceived risk of a bank is high, they will pay a higher premium and vice versa,” KDIC chief executive Mohamud Ahmed Mohamud said in a recent interview. The State has intensified its supervision of financial institutions, especially banks, to fight crime and avoid insolvencies.

All financial institutions — including banks, insurers and saccos — are by law required to file daily reports on crimes such as money laundering, terrorism financing, proceeds of crime like piracy, organised crime, bribery and all suspected illicit cash flows to the FRC.