Pain for Chase Bank depositors gets even worse 

The Central Bank of Kenya (CBK) and the Kenya Deposit Insurance Corporation (KDIC) last week lauded the yet to effected deal by Mauritian lender SBM Group to take over Chase Bank as landmark stating it would lessen the pain for affected depositors.

But while the SBM acquisition will turn the page on Chase Bank’s rocky months as the troubled lender struggled to attract a suitor, several experts have raised eyebrows over the level of safety nets by the regulators in ensuring that depositors’ cash is safe.

Chase Bank was placed under receivership on April 7, 2016 following a run on deposits after reports of liquidity hitches spread online.

It was re-opened on April 27, 2016 under the management of the KDIC.

CBK governor Patrick Njoroge and KDIC chief executive officer Mahmoud Mohamed in a joint briefing Friday last week, announced that Chase Bank customers will access 75 per cent of the Sh76 billion deposits locked in the troubled lender in staggered phases over a period of three years.

The process for releasing the funds to about 3,100 affected depositors, they said, will kick off “in a matter of weeks”, without giving a specific timeline.

Experts singled out the lengthy three year period the bank’s large and small customers will have to endure to access their savings as setback.

“You cannot punish depositors and savers for the failure of the managers and directors of the bank, given that they have waited for so long to access their funds. Telling the depositors and savers to wait for another three years is untenable and will certainly cripple them,” said independent banking analyst Marubu Munyaka in an interview.

As part of the deal, Dr Njoroge said, 25 per cent or about Sh19 billion will remain as part of other “assets and liabilities” with Chase Bank.

This means that customers will not have access to all their funds until CBK successfully seeks prosecution of the bank’s managers and owners who are implicated in the bank’s woes to attach their assets and borrowers who stopped paying after it was put under receivership, according to Dr Njoroge.

The initial payouts will also start after the planned execution and implementation of the binding offer by SBM to take over Chase Bank.

Under the staggered approach, 18.75 per cent of the deposits will be placed in current accounts operated by depositors. Another 18.75 per cent will be placed in savings accounts of the depositors earning 7 per cent interest.

The rest of the 37.75 per cent will be available annually in term deposits over a three year period earning interest of 7 per cent. “I surely feel that it has taken CBK very long to resolve some of the matters. I think focus should be on how to avoid similar crisis in future. I feel CBK governance and oversight has to be more stringent,” said Kunal Ajmera, chief operating officer at consultancy firm Grant Thornton.

“CBK needs to review the banks in a more thorough way with stringent requirements on key ratios and liquidity requirements. Banks, on their part, also need to be prepared for increased oversight and scrutiny and invest into systems and procedures.”

Mr Ajmera welcomed the requirement by CBK to have ICT audits done for banks as “a very good initiative especially in this day and age of digital economy.”

According to Mr Munyaka, if the idea by CBK and KDIC is to contain a potential run on deposits and savings when the new owners come in, then the Central Bank’s approach “is completely wrong” and not in line with the international and regional best practice as seen in the recent financial crisis.

He cited the 2008 financial crisis that befell the US and spread to the rest of the global marketplace but with differing severities.

“In order to avert the financial crisis of 2008, the Federal Reserve Bank of United States (Fed), the European Central Bank (ECB) and the other global central banks made capital injections,” he said.

“During the last quarter of 2008, these central banks (Fed, ECB and Other Central Banks) purchased $2.5 trillion of government debt and private assets from troubled banks.”

SBM, according to the CBK governor, will also retain “a maximum number of staff,” in the deal that does not require it to keep all employees. The lender’s staff count is estimated at 1,300 in about 62 of its branches. Mr Munyaka faults this.

“The worst case scenario now is to allow an investor to come in and lay off staff when the economy is at its lowest ebb,” he said.

He said while employees routinely face redundancy after mergers or buyouts as the whole point of the process is to achieve efficiency through cost cutting, CBK should have borrowed a leaf from other jurisdictions to protect its citizens.

READ: CBK to shake down Chase Bank owners for Sh20bn

“I am of the view that staff of Chase Bank would be ready and willing to take a salary cut like they did in the case of Chrysler Motors in the United States of American when Lee Iaccoca took over the management of the company in the early 80s. Instead of laying off staff, the latter agreed to take a 50 per cent salary cut and in return were given shares equivalent in the company during the period the company was undergoing recovery and turnaround,” noted Mr Munyaka.

“Reducing the level of unemployment is objective number one for any national government world over. It is also the objective of any monetary authority to reduce level of unemployment at any given moment in time.” There are precedents locally too.

In November 2016, the Kenyan competition watchdog in a rare move ordered listed banking services firm I&M Holdings to retain employees of a small commercial bank it acquired, as a pre-condition for approval of the takeover.

The Competition Authority of Kenya (CAK) director-general Wang’ombe Kariuki argued then that it had given the nod for the takeover subject to retention of the 108 Giro Commercial Bank employees.

The announcement came as huge relief for Giro Commercial Bank employees, quite a number of whom were expected to lose jobs in the buyout.

Calls have also been made for the deposit insurer to raise the threshold for the maximum depositor compensation of Sh100,000 which customers view as too little too late and leaves many depositors exposed.

“KDIC needs to reconsider the cover currently being provided to depositors. A cover of mere 100,000 does not serve its purpose currently. Surely there will be cost implications to increase the coverage but the additional cost burden can be shared by the large number of the depositors (perhaps linked to the amount of deposit kept) but it is very much possible,” said Mr Ajmera.

His comments were echoed by Mr Munyaka who claimed to have authored the concept paper that led to the creation of the deposit insurer.

“The savings and deposits have been insured by the KIDC to the tune of Sh100,000 a figure that is far below the cost of living index adjustment given that the KDIC was established in 1985,” he said.

“When I wrote the Concept Paper that created the KDIC in that year, the exchange rate was approximately Sh12 per US dollar. Today the exchange rate is Sh103 per US Dollar. This implies that the amount insured today should be in the region of Sh858,333 which can be rounded up to Sh1 million. The review of the insured amount is therefore long overdue,” he added.

Other experts said regulators keep turning a blind eye to outstanding gaps that facilitated the fall of two lenders.

“The issue of collusion between the bank management and auditors is quite serious. What is really concerning is that despite two large banks falling under, no action has been taken on the auditors of the said banks,” said a bank employee who sought anonymity.

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