A more cautious CBK may have stopped run on Chase Bank

Majority of Kenyans believe directors of Chase Bank are culpable for the bank's collapse, and they should be hanged. It’s understandable given the pain of disruption to their lives and businesses. After all, the Companies Act imposes a duty of care and trust, and fiduciary responsibility on the directors. The shareholders entrusted them to manage the business on their behalf, in accordance with the law and regulations governing the enterprise.

Others believe it’s the Central Bank of Kenya that was responsible for their plight as the regulatory authority mandated to oversee the operations of banks and safeguard their deposits. They have adequate legal mechanisms for enforcement, and have the requisite power and authority to prevent such a scenario but they failed. Similarly, many others hold the view that the external auditors are culpable; they had given clean bill of health just days earlier. The shareholders, depositors and other stakeholders all rely on their opinion on the financial status of the bank.

I believe the CBK was singularly responsible for the closure of the bank. The facts relating to the irregular practice by the directors notwithstanding, it is CBK’s irrational and hasty decision that sparked fears that the bank was in a crisis, and led to the run on the bank. CBK made a unilateral decision to shut the bank in the wee hours of the night, after precipitating an unnecessary chaos. And the auditors who should have known better simply cheered on, inapprehensive of the consequences of the decision.

Reports say that the bone of contention was an unsecured insider loan of Sh7.9 billion at the bank’s Islamic finance window. Directors reportedly argued that the loan was a ‘Musharaka’ facility, which is a bank product duly approved by the CBK, and the collateral assets were held through a special purpose vehicle in compliance with Shariah principles. CBK and the auditors would not accept the arrangement and reportedly demanded that the assets be charged to the bank, a decision the bank directors ultimately agreed. CBK then turned around and demanded the money be paid immediately. Requests by directors for time, or proposals to pursue even temporary inter-bank facility were reportedly rebuffed by CBK whose weeklong incessant pressure led to panic run on the bank. It similarly dismissed a request for a temporary cash cover as a lender of last resort, a facility it announced days after the bank was closed.

The loan may have been irregular and illegal but that did not warrant the regulator’s action at all. This bank had deposits of over Sh90 billion belonging to over 55,000 deposits. Its balance sheet was healthy; it had no liquidity or cash crisis, and had published an unqualified annual report a few days earlier. CBK could have allowed the bank to proceed with business as usual after it published its report and pursued the directors later to regularise the loan or penalise it.

How does CBK expect the removal of the chairman and the group chief executive, and the publishing of a new set of accounts with the unsecured loan will not raise alarm among the depositors? It was wholly wrong for the regulator to have focused on punitive action against the directors, at the expense of the larger interest of the economy. The same irrational action aimed at punishing the directors led to the sudden closure of an otherwise liquid Imperial Bank.

Those in the know say it’s all the about the management style of the new CBK governor that led to the crisis. The auditors too failed their client by their actions.