Contrary to my earlier article, Central Bank of Kenya (CBK) put Chase Bank under receivership on 7th April 2016. CBK appointed Kenya Deposit Insurance Corporation (KDIC) as the receiver of Chase Bank.
CBK stated in their press release that failure of Chase Bank to meet its financial obligations was the reason behind the receivership. The statement reiterated that the bank experienced liquidity difficulties following inaccurate social media reports and the stepping aside of two directors.
One may note that the regulator stated that the reason for receivership was liquidity constraints rather than bad corporate governance issues. This does not mean that there were no corporate governance issues. In fact, the markets were spooked by news of bad corporate governance leading to panic withdrawal of cash from the bank.
Looking deeper into the receivership move, the regulator may have considered letting the bank continue its operations and find other means of solving the corporate governance issues. The bank run that occurred after the social media outburst forced the regulators hand to put the bank under receivership.
Insider lending was the main reason why the market was spooked. Insider lending includes all loans issued to directors and employees of the institution. Banking institutions have a maximum limit of 25% of core capital to use for insider lending. Chase bank insider lending ballooned from Kenya shillings 1 billion to over 13 billion after the auditor of the bank Deloitte disputed the recently released financials by the bank. Core capital for the bank was 12 billion at the given time hence insider lending was over 110% of core capital.
This was a breach of CBK prudential guidelines which led to the Chairman Mr Zafrullah Khan and group managing director Mr Duncan Kabui to step aside. The decision coupled with the loss the institution made the previous financial year only added fuel to the already enraged market who sought to withdraw their cash from the bank causing the bank to be unable to meet its obligations.
What’s next for Chase Bank Clients?
KDIC has been appointed as the receiver manager for Chase bank for the next twelve months in accordance to the provisions of Sections 43(1), 43(2) and 53(1) of the Kenya Deposit Insurance Act, 2012. 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.
The period may be extended for another six months by Central Bank of Kenya if deemed necessary. Upon completion of the term of receivership, KDIC would confirm to CBK that Chase bank has complied with the matters that necessitated the receivership or recommend to the CBK that Chase bank should be liquidated.
In case of compliance, business would continue as usual otherwise liquidation will be enacted where clients would be compensated in accordance to the provisions of Section 55(1) of the Kenya Deposit Insurance Act, 2012.