The Death and Resurrection of Chase Bank
Kenya banking sector has been under tremendous pressure recently after the closure of Imperial and Dubai banks. Receivership of Chase bank only added pressure to the already strained market. Much has been said about the reasons behind the receivership and liquidation of the banks. What has been left unarticulated is the reinstatement of Chase Bank and why this was the best move for the regulator (CBK).
Chase bank was reinstated on 27th April 2016 with the endorsement of Central Bank of Kenya (CBK) and Kenya Deposit Insurance Corporation (KDIC) under KCB acting as the appointed Manager.
To understand the whole picture, we have to look at the process of how Chase bank was reinstated after being placed under receivership for 20 days. Chase bank was placed under receivership on 7th April 2016 by Central Bank of Kenya (CBK) in accordance to the provisions of Sections 43(1), 43(2) and 53(1) of the Kenya Deposit Insurance Act, 2012. The move was instigated after Chase Bank failed to meet requirements of section 43(2)(e) of the act – following inaccurate social media reports which caused a bank run – which states that the institution is likely to fail to meet any financial obligation or meet its depositors’ demands in the normal course of business.
A bank run is a situation where a large number of customers withdraw cash at the same time from a given financial institution causing it to be unable to meet its short term obligations. Underlying corporate governance issues on mismanagement of internal lending limit of the bank agitated the market causing the bank run.
Receivership is a situation where an institution is being held by a custodian who is given decision making powers to manage assets and liabilities of the received institution. Once Chase bank was placed under receivership, KDIC assumed control of Chase bank assets and liabilities.
The receivership period is usually twelve months but it can be extended by the Central Bank of Kenya if deemed necessary for another six months. Upon completion of the term of receivership, KDIC would confirm to Central Bank of Kenya that the received institution has complied with the matters that necessitated the receivership or recommend to the CBK that the institution should be liquidated.
In the case of Chase bank, KDIC confirmed to CBK that the institution may be in a position to comply with the matters that necessitated the receivership. This decision on Chase bank was different from the decision reached in the case of Imperial and Dubai bank which were liquidated. Liquidation is the process by which an institution is brought to an end and the assets of the institution are distributed to cover its liabilities.
Now this is where KCB comes in play in the case of reinstatement of Chase bank. In accordance with Section 44(2)(b) of the Kenya Deposit Insurance Act, KCB was appointed as the “Manager” of Chase bank. What this means is that Chase bank was undercapitalized due to the corporate governance mishaps and the ensuing bank run. KCB which has a balance sheet of over 500 billion with a solid brand and sufficient human resource was in a position to meet Chase bank’s liquidity and short term obligations.
KCB undertook management of Chase bank for the foreseeable future ensuring that the bank meets all its obligations. Once Chase bank has stabilized, it can be released from receivership and KCB may acquire a majority stake in the institution. From here, KCB can decide to rebrand Chase bank or let it continue as a subsidiary of the KCB Bank Kenya Ltd.
Reinstatement of Chase bank was a classic move by the regulator which prevented a freeze of liquidity in the local market. In my earlier article “Why CBK may not let Chase Bank follow the Imperial and Dubai Bank route”, I had reiterated that CBK would not allow Chase bank to fail. This view came from a simple basis that the local market had already been spooked by the close of two banks. Closure of another bank would only have eroded the market confidence further which would have been devastating for the local economy through a liquidity freeze – a situation whereby banks fail to lend to each other in the interbank market due to high uncertainty in the pricing of risk associated with the collapse of another bank leading to an economic slowdown.
Only time will tell how the resurrection of Chase bank will play out but I remain optimistic that Chase bank, just like the proverbial phoenix, will rise again from the ashes – renewed and reborn.