Imperial Bank's fall and lessons from Ngumba

If you have been following the story of Imperial Bank’s Abdulmalek Janmohammed, and how he used to steal money — even from his grave — then you would certainly love the story of former Mathare MP Andrew Kimani Ngumba and his Rural Urban Credit Finance.

Ngumba, a former Nairobi mayor, and Janmohammed shared similar traits — the pseudo-belief that they were smart bankers and could outwit the system.

If you know Nairobi’s Ngumba estate, then you certainly know where part of the Ngumba cash went. But the story doesn’t start there.

Ngumba had a dream; a lofty dream.

He wanted to be a real estate, insurance, and banking tycoon.

Those who knew him say he was haughty, boisterous, and ambitious and aspired to have a life peppered with rich men’s toys — a beach house, a German car and a coffee plantation.

Ngumba had all that, and to top it all, the raucous politician had also purchased Plot 209/2401 on Nairobi’s Tom Mboya Street.

He named it Ngumba House. At night, the neon sign kept the name alive.

It is from this house that Ngumba started building his new multimillion-shilling empire by approaching a few business honchos — Stanley Mbugua, Karugo Gatama, and a gemstones dealer, Beth Mugo.

None of these could match Ngumba’s acumen; after all he had been one of the most astute Nairobi mayors, having staged a coup against Jomo Kenyatta’s daughter, Margaret Wambui in 1976.

It is now known that Ngumba, who was Wambui’s deputy, was eyeing the seat, which forced the President to save her daughter from embarrassment and appointed her the country’s Permanent Representative to United Nations Environment Programme (Unep).

ASTUTE BUSINESSMAN

In private, Ngumba had told a US diplomat that the City Hall elections could be postponed to save Wambui.

This never happened as Ngumba refused to step down despite a huge pro-Wambui demo in Nairobi and his removal as Nairobi’s deputy chairman of Gikuyu, Embu, and Meru Association (Gema) — the chest-thumbing political outfit from Mt Kenya.

Having won the political battle, Ngumba now turned to business.

From the sixth floor of his Ngumba House, he formed three companies: Blue Shield Insurance Company, Kenyawide Building Society and Countrywide Developers.

In those days, non-bank financial institutions had been exempted from the cash ratio rules and could also charge a higher interest rate than banks.

People loved them because they were friendly and flexible. They gave the existing banks a good run.

Rural Urban ran on a simple idea: Borrow money from commercial banks at a low interest and loan the same to investors.

It also took depositors’ money and managed to convince the National Social Security Fund (NSSF), and other parastatals, to open accounts with them.

Some of these were short-term deposits.

There was little financial sophistication in running Rural Urban.

President Moi had just allowed matatus to ply several Nairobi routes hitherto controlled by Kenya Bus Service.

Ngumba saw an opportunity to offer loans to would-be matatu owners and cashed on it.

BACK TO POLITICS

With a minimum deposit of Sh100, Ngumba would encourage depositors interested in owning matatus to join the unorthodox Matatu Savings Scheme where prospective customers were only asked to open a “save-as-you-earn” account, which acted as a surety for a loan to buy a matatu.

Ngumba dished hundreds of matatus this way, and for the first time, the 14-seater matatus became the norm in Nairobi.

They were all insured by Ngumba’s Blue Shield Insurance and every Sunday, owners would meet at the Ndururu Kiboro playground in Mathare to exchange views.

At first, the Rural Urban Credit “save-as-you-earn” concept seemed to work.

After six months of saving, customers were instantly eligible for loans and the financial institution became a hit for people who could otherwise not qualify for bank loans.

In just two years, Ngumba had registered 10,000 customers.

Buoyed by the runaway success, Ngumba tossed himself back into politics in 1983 and won the Mathare seat against Dr Munyua Waiyaki, a veteran of Nairobi politics.

He had failed to get the seat in 1979.

Back at Ngumba House, another idea had been born — development of real estate.

With the Rural Urban Credit Finance performing beyond his expectation, Ngumba decided to form Kenyawide Building Society to offer loans to those who wanted to develop their properties.

Again, the idea was simple: Rural Urban would fetch the capital, Kenyawide Building Society would buy the plots on behalf of subscribed members, and Ngumba’s Countrywide Developers would undertake actual construction and Blue Shield would insure the investments.

The four companies worked together from Ngumba House, thus maximising profits for the Gatundu-born politician.

He had become the most notable indigenous banker and within a short time co-operative societies, municipal and county councils and private property developers had opened accounts to cash in on the 1980s housing boom.

AN EMPIRE ON THE ROCKS
Kenyawide Building Society had started with 250,000 ordinary shares of Sh20 each, giving it a Sh5 million share capital.

To take off, Ngumba decided to use his Mathare constituents as his premier customers; approaching them in public rallies and urging them to open accounts and save to buy plots, houses, and vehicles.

His other customers were from his Gatundu backyard where he had the support of leading Kiambu politicians.

Ngumba started developing three Nairobi estates — Kahawa, Kahawa Sukari, and Ngumba as his stature and ego as a banker reached crescendo.

Inside Rural Urban, Ngumba had turned to fiddling books to conceal accumulating debts — like any other rogue banker. He had also broken all the rules of prudent lending.

One cold July morning, 1984, inspectors from the Central Bank visited Ngumba’s office.

The pompous politician was in and they wanted to check the health of his bank.

They carted away some papers and what they found was shocking.

The bank was owed Sh140 million in loans, which had matured but had not been paid on demand.

Among the desperate depositors hoping that Ngumba would pay was Co-operative Bank of Kenya, which had put Sh29 million, Murang’a County Council (Sh7.5 million), Kenya National Capital Corporation (Sh52 million) and many others.

Ngumba had apparently advanced money to two private companies: Kahawa Sukari Limited and Kahawa Properties Limited and they were unable to repay him on time.

As he rushed to court hoping to force them to pay, the Co-operative Bank rushed to another court and put Rural Urban in receivership.

Ngumba’s empire was on the rocks.

The task fell on Bernice Gachegu, the daughter of a Kenyan diplomat, who was given the task of placing Rural Urban in receivership.

Ngumba submitted all his assets for scrutiny as investigators continued to dig deep into the fraud.

FLEEING TO NOYWAY

As the hunt for Rural Urban debtors began, matatus dished out by Ngumba were pulled off the roads and auctioned.

Ngumba went into hiding and some of the projects, including Ngumba estate, ground to a halt.

From his Kamiti Road farm, Ngumba decided to do the unthinkable – flee the country.

He found his way to Norway from where he started issuing scathing attacks against the Moi regime.

Norway was housing several of Kenya’s dissidents led by former Nakuru North MP Koigi wa Wamwere.

By mixing with the dissidents and issuing political statements, Ngumba gave the Kanu regime a chance to deride their calls for constitutional change.

In one of the demos staged in Nairobi, the demonstrators waved placards written: Ngumba-Mwizi, Koigi-Mjinga, Ngugi –Mwenda Wazimu, Nyayo – Juu!!

Ngugi was in reference to then US-exiled literature don, Prof Ngugi wa Thiong’o.

Effigies of the trio were burned in countrywide demonstrations led by Kanu branch chairmen.

While Ngumba’s bank had the most dramatic fall, several others came to fill the void.

The most notable was the October 1984 registration of Equity Building Society — now Equity Bank — which was registered to provide mortgage financing for the majority of customers who fell into the low income.

Another one that was registered in 1984 was Githunguri-born Titus Muya’s Family Finance Building Society.

The two institutions, like Rural Urban Credit, encouraged customers to take mortgages, buy plots and get into saving schemes.

FINANCIAL LESSONS

They did not want to make the Ngumba mistakes: borrow short-term money to invest in long-term projects.

Again, Ngumba had relied on political institutions such as NSSF and National Bank as his lifeline.

When President Moi ordered them out of unstable banking institutions, the banks started falling like a house of cards.

And they were many - Nationwide Finance, Pioneer Building society, Jimba Credit Finance, Pan African Credit Finance, and Continental Credit Finance.

Perhaps, rather than run to exile, Ngumba should have borrowed a leaf from Jimna Mbaru whose Jimba Credit also fell.

Though shocked by the turn of events, Mbaru issued a statement thanking President Moi for “taking the initiative to assist the banks and financial institutions currently facing severe cash-flow problems, of which our group is one. This timely action shall ensure that depositors’ funds are safeguarded. We would also like to thank the President for the various steps he has taken to restore confidence in the financial market.”

Three decades after Ngumba’s experiment, the closure of Imperial Bank is another chapter of how not to run a bank.