Dubai Bank Kenya customers to know fate on September 1

Dubai Bank customers will know their fate at the end of this month when the Central Bank of Kenya (CBK) is expected to announce the financial status of the collapsed lender.

The CBK-appointed receiver manager, the Kenya Deposit Insurance Corporation (KDIC), says it expects to ascertain the bank’s financial condition by August 31, which will determine whether the bank can be revived or not.

“In this respect, KDIC will on September 1 inform the depositors, creditors and all other stakeholders the next process regarding access to their deposits, rights and obligations,” the agency said in a statement Tuesday.

More than 7,000 customers holding about Sh1.7 billion deposits in Dubai Bank as at December 31, 2014, face an uncertain wait in the wake of the bank’s collapse on Friday.

READ: 7,000 Dubai Bank customers face uncertain wait for deposits

KDIC says it will determine the most appropriate method of resolving the problems that led to the lender’s failure.

If these cannot be resolved, the agency will be appointed by the CBK as the liquidator to sell the bank’s assets and ultimately wind it up.

In this scenario, only 6,205 of the bank’s depositors will be fully compensated by virtue of holding balances below the maximum guaranteed sum of Sh100,000 as at December.

The 838 customers holding more than Sh100,000 deposit balances risk losing the most from the bank’s collapse.

This is because payments above this set threshold are not assured, and are contingent on KDIC realising significant surpluses from the lender’s assets.

“Any balances above this amount (Sh100,000) shall equitably be paid as and when the liquidator accumulates enough funds from sale of assets of the collapsed bank and recoveries from outstanding loans and debts,” KDIC said.

The customer and deposit numbers may, however, have changed significantly between January and Friday, when the lender was placed under receivership.

The Business Daily could not immediately obtain Dubai Bank Kenya’s current financial statements.

CBK shall determine the interest accruing on interest-bearing accounts, including fixed deposits.

Dubai Bank reported a net worth of Sh1 billion or 58.8 per cent of its total deposit liabilities in December.

CBK has previously accused the bank of cooking its books, making it difficult to ascertain its financial health.

Some of its large creditors include Bank of Africa Kenya Limited which it owes Sh48.18 million.

The September 1 announcement by KDIC is expected to shed light on availability of funds to pay the depositors and the compensation timetable.

Meanwhile, normal operations at the bank’s four branches have been suspended except for collection of loan re-payments or any other payments into the institution.

“Debtors are therefore encouraged to continue servicing their obligations,” KDIC said, adding that any change to the debt-collection services will be announced in due course.

Repayments by debtors, including those who had taken loans, will further boost funds available to compensate depositors. All types of accounts, including current, savings and fixed deposits, are covered up to the set limit.

For those holding multiple accounts in the same institution, the limit is still the same since all the accounts are consolidated and paid up to the maximum insured sum.

Corporate or joint accounts are, however, insured separately and protected as distinct deposits. Depositors are required to fill forms and lodge claims with the KDIC to be eligible for compensation.

The government is considering raising the maximum deposit from the current level that has remained unchanged since the KDIC started operations in 1989.

The reforms will be accompanied by changing the contributions of banks and micro-finance institutions from the current flat rate to one based on an institution’s risk profile.

Banks currently pay premiums to KDIC at the rate of 0.15 per cent of their average deposits in a year.

Changing this to premiums based on risk means unstable institutions will pay more to take and hold deposits compared with their more prudent rivals.
It remains to be seen how fast Dubai Bank’s customers will be paid.

Compensation of depositors in some failed banks — in the form of dividends from asset sales — has stretched for years.

The collapse of Dubai Bank could see large banks take more deposits as customers shun smaller lenders perceived to have relatively weaker capital and corporate governance.

Large banks held Sh1.1 trillion or half the industry’s Sh2.2 trillion deposits in December, followed by medium-sized lenders (Sh953.5 billion) and small banks (Sh202.3 billion).

CBK appointed KDIC to take over the bank’s operations for one year “to protect the interests of depositors, creditors and the public,” noting that it was in a weak financial position and had breached banking laws.

The CBK’s regulatory action was the culmination of years of poor corporate governance and deterioration of capital levels at the bank.