Why Kenyan Banks Fail

In the last 32 years, almost all bank failures in Kenya have been of Kenyan-owned banks. Here is why they failed.

Among the flurry of tweets that became viral the day Chase Bank was finally placed under receivership, one stood out. Jimnah Mbaru, one of Kenya’s veteran bankers, tweeted “The problems facing Chase Bank has brought to the surface the enormous hostility towards indigenous capitalism by Kenyans.”

The tweet has since been deleted, and those of us who took the time to call Jimnah out on it promptly blocked. But it caused such furor because of who was saying it. It seems like a pretty profound if not innocent accusation, but it needs some context.

A screengrab of the deleted tweet.

A screengrab of the deleted tweet.

In 1980, Jimnah quit his job and founded three financial institutions that wouldn’t survive the decade. Under the umbrella Jimba Group, he had Jimba Credit, Union Savings Bank, and Kenya Savings & Mortgages. All three collapsed and were swallowed up into Consolidated Bank in 1989. The reasons, much like the three recent bank failures, were dressed in colorful words like “non-performing loans and poor management practices.”

Jimnah’s three financial institutions were one eighth of all the bank failures that collapsed between 1984 and 1995. Of the 24 that collapsed in that decade, all but one were Kenyan-owned. The one foreign-owned bank, Meridian BIAO, whose tagline was “out of Africa and for Africa,” also collapsed because of liquidity issues. There was a third crisis in 1998, also of banks run and run down by “indigenous capitalists.”

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At independence, Kenya had only nine banks, all foreign-owned. To ease government finance, the government formed three commercial banks and several development finance institutions in the next decade. In came Co-operative Bank (1965), National Bank of Kenya (1968) and KCB (formerly National and Grindlay’s).

By 1980, there was still no Kenyan-owned private bank. At the time, there were 8 non-bank financial institutions. In banking lingo, a non-bank financial institution does not have a full banking license and is, or rather back then was, not supervised by the CBK. These institutions could charge a higher interest rate than banks, but also had less rules than bigger banks. It was a gray-area then.

Demographics had changed and the existing banks’ requirements for credit were too rigid for small businesses.

Within five years, there were 4 Kenyan-owned banks and 24 financial institutions. Capital requirements were so low that almost anyone who could, did open a bank or non-bank institution. All of them were drawn from a small pool of people could afford the $1 million minimum capital requirement. All of them had political links.

2 banks and nearly half of the non-bank institutions didn’t survive the year. Five more banks and 10 institutions followed in 1993-4, and 2 more banks in 1996.

The sector grew though, especially around non-bank institutions which later became banks. There were 17 Kenyan-owned banks and 35 institutions by June 1994. A good number of the latter, a good example being Imperial Bank, were formed around this time.

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The first Kenyan-owned banking institution to fail, in July 1984, was Rural Urban Credit Finance. Owned by a former Nairobi mayor, Andrew Ngumba, for whom Ngumba estate is named, that failure set the stage for what has become an all-familiar tale. Ngumba founded and used his banking institutions to campaign for the Mathare political seat. He gave unsecured loans to his would-be constituents to buy matatus, and then cleverly cooked the books to hide the widening hole in bad loans.

The failure rattled the market, and Moi ordered government parastatals and institutions to move money to solid banks. What that triggered was a domino effect of small, politically-correct banks failing. The next casualties were Continental Bank and Continental Finance, and then Jimnah’s Union Bank. But hidden behind that history is the fact that most of these institutions existed to do their founders’ and directors’ bidding. They worked like chamas, from where owners withdrew whatever they wanted from the pool of deposits.

When Pan-African Bank collapsed, in 1992, it was the fifth largest bank in the country. More than half of its entire loan portfolio had gone to its Chairman’s company. If this sounds familiar, it’s because it’s the same thing that has been happening at Chase Bank. A single director there had a loan of Shs. 7.2 billion. Collectively, Chase Bank’s directors had borrowed more than they had invested.

It was even worse at International Finance Company where almost the entire loan portfolio (90 percent), had gone to the owner, then a government minister. At Trust Bank, which would fall in 1998, the directors had an unauthorized account with hundreds of millions of shillings in debt. Between September 9, 1998 and September 16th, seven days later, Ajay Shah and his co-directors withdrew Shs 207, 385.083 through that account. That triggered an investigation, and the bank’s closure two days later.

ajay shah

Ajay Shah in court. In March 2014, 14 years after his bank collapsed, the High Court allowed CBK to auction his assets. [Source]

Within a few months, Ajay Shah’s second bank, City Finance Bank, also failed. Then Reliance Bank that December. Like Chase Bank, Reliance and other banks that collapsed then had given most of their loans to directors and staff. Loans to insiders attracts a lower interest, and even then, most were not being repaid. The banks had, as they are now, become wormholes where customer deposits disappeared. It was a looting spree, one that never stopped.

In the prologue to his book, Transforming Africa: New Pathways to Development, Jimnah attempts to explain why banks and financial institutions, including his own Jimba Group, failed. He cleverly places “diverse socio-economic, management, business and political factors” above “poor lending policies and management” of the banks. He also goes into “drought over this period, and the 1982 attempted coup” before he even mentions his banks. When he inevitably gets to them, he makes it look almost accidental, like an act of God: “The Jimba Group, then soundly and solidly managed by myself, was caught up in this melee and came under the Consolidated Bank in take-over.

In retrospect, it seems that Jimnah and his ilk who led banks and institutions that failed have always blamed political interference above poor management. His reply to the collapse of his Group was a cleverly worded statement, thanking the President for “taking the initiative to assist the banks and financial institutions currently facing severe cash-flow problems, of which our group is one.”

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Indigenous capitalism, the paradigm that Jimnah referred to, would involve supporting local banks and businesses. It makes sense for one, as an economic patriot, to invest and support businesses owned by people he or she shares national borders with. But with a solid history of blatant fraud and illegal self-enrichment, that argument loses steam. Should we be patriotic with money?

Shouldn’t we be hostile to indigenous bankers who steal?

A few things became clear while I was researching The Sack of Imperial Bank.

One of them was that Kenyan bankers had learnt “the best way to rob a bank is to own one.” It is homegrown economic terrorism at best. The other was that everyone and every institution that should have stopped such robberies were in on it. The auditor at Imperial was a business partner to the bank’s managing director. He also had Central Bank employees help him cook the books to hide the gaping holes. Had Imperial Bank’s depositors known this in good time, they would have fled with their money. And rightly so. They had worked hard for their money, and it deserved a bank that was safe from thieves and pilferers.

In 1993, National Bank suffered a bank run. It had been in the red nearly all its life, with political connections determining to whom loans were given. This particular bank run was triggered by the fall of Post Bank Credit, a bank owned by the government. If another government bank was to fall, depositors reasoned, then it would definitely be National Bank fell.

The bank had recorded a huge loss in 1979. This was right at the start of the banking boom that set the stage for the banking crises. When banks were failing in 1986, National Bank had 40 percent of its deposits in banks that were collapsing or had already collapsed. In response, the government got rid of NBK’s top management, gave it loan guarantees and money, and got NSSF to transform its deposits into shares. It was fast and decisive action.

The stark differences between the histories of two government banks, KCB and National Bank, best show why Kenyan-owned banks fail. When the Kenyan banking sector was in turmoil from 1986, KCB was in fact expanding. From its previous life as Grindlay’s, KCB inherited a sound commercial banking culture. At the heart of its culture was secure lending, which translates to only giving loans to people who could pay them back. At National Bank, the system was always rigged to give political pressure more weight in who got loans.

After the 1984-9 banking crisis, the government went into overdrive with the window-dressing. It panel-beat Jimnah’s three institutions and several more into Consolidated Bank. It also formed the Deposit Protection Fund, passed the Banking Act (1989), and promised to strengthen bank supervision. That was 27 years ago.

Andrew Ngumba, the father of Kenya's Bank Failures.

Andrew Ngumba, the father of Kenya’s Bank Failures. [Source]

Barely three years later, a young Central Bank clerk passed a treasure trove of documents to opposition legislators. In them they found that public funds had been stolen from the Treasury through Central Bank itself and four Kenyan-owned private banks. The guard, it turned out, was the one who really needed guarding. In reaction and to save face, Central Bank liquidated 16 financial institutions that year.

Of all the banks that have collapsed in the last 32 years, only two have ever been re-opened, and one didn’t even survive. Trust Bank was reopened in August 1999 while Bullion Bank was reopened in January 2000. The depositors in both banks had agreed to capitalize part of their deposits as shares. Only Bullion survived though. It was acquired by Southern Credit, then merged with Equatorial Commercial Bank.

Between 2000 and 2006, six more banks collapsed. One of them, Charterhouse, had a litany of crimes from money laundering to tax evasion. The whistleblower, internal auditor Peter Odhiambo, went into exile and no one was ever jailed.

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Money just doesn’t disappear from banks. Bankers craft ways to enrich themselves and their friends with depositors money in the full knowledge that they will never be caught. And even if they are, nothing will ever happen to them. They might have to fight a few court cases for years, and perhaps pay up a small portion of what they stole, but that’s that. The penalties for abuse are mere discomfort.

Despite a solid history of people forming banks for the sole purpose of making themselves rich, very little has changed since Rural Urban credit catapulted Ngumba to Parliament and infamy. Outright theft and fraud is still dressed in phrases like “poor management”, “non-performing loans”, “poor lending practices”, and “an uncertain banking environment.” Once it has this garb, it looks almost as if it is the work of an unstoppable force majeure.

Depositors are still expected to toe the line and be patriotic, not sensible, with their money. Central Bank’s newest boss, the 9th Governor, has already sold the narrative that it was social media, not fraud, that brought down Chase Bank. It’s a cheesy narrative, one that blames the victim for the crime. Bankers also lead with this, a good example being National Bank’s sternly worded press statement warning bloggers against “spreading malicious rumors.” Almost all those rumors are now being proven to have been founded in fact.

The idea behind this narrative is to silence whistleblowers and those who help them. With a complicit mainstream media, new media now offers a new wild animal that needs taming. It’s become a marketplace, one where the story of Chase Bank’s massive hole in deposits refused to die down. It is a brilliant early warning rooted in our cultural need to furnish each other with information of looming danger. But it’s dangerous to a system that has run amok with bank deposits for decades. One where those who should safeguard those deposits are more than complicit, they defend it. In between, depositors won’t be able to access money they woke up each morning to work hard for, and spent decades saving up. The system isn’t broken, this is it’s actual design.

Kenyan-owned banks will continue to fall not because of social media but because people are stealing money and no one is getting punished for it. Banks are not magical institutions and fraud is not an incurable disease.

 

PS: We turned 6 years old today! Thank you for reading.

Owaahh, 2016.

One story is good,

till Another is told.