Why Kibaki wants the bank he ‘sold’ for Sh20 back

So KCB is taking over Chase Bank. Well, there is another story in town and it is about Consolidated Bank and the defunct Nationwide Finance Company and has been pending in court for many years.

The bottom line is that former President Mwai Kibaki, who was one of the main shareholders of Nationwide and seven other petitioners, want back a bank taken away from them through a presidential order and forcibly merged with several other shaky institutions to form what is today known as Consolidated Bank.

The petitioners deny willingly selling their bank for a paltry Sh20! Yes, twenty.

Put another way, the court is being told that President Daniel arap Moi’s government not only downgraded to junk status a bank associated with his former vice-president but also forced it to enter into an unsolicited merger with some rogue banks that were walked down the halls of infamy.

Nationwide insists in court papers that it was nowhere near trouble. That it was different from the financial institutions formed in early 80s and manned by some slick tycoons, well-connected and with itchy fingers, whose sole aim was to squirrel away and inherit the loot.

Last month, Justice Isaac Lenaola said it was “unacceptable” that Nationwide’s case had not been resolved 10 years after it was filed.

“Many other matters that are even more complicated than this one have been expeditiously determined in that period,” the judge observed.

FORCED TO GO UNDER

Now, when that case begins, we shall be in a position to know whether political notoriety of the Kanu regime forced some banking institutions to go under or whether they had been mismanaged.

Affidavits filed in court offer interesting insights into our world of banking.

The story starts when Kibaki, then Finance minister, joined hands to found a bank with his under-secretary Joseph Mwaura Gachui who, in 1988, became Gatanga MP but lost in 1992 on Kibaki’s Democratic Party ticket. He has since died.

Others were land economist J.K. Mbuu, Kibaki’s cousin the late Kibaki Muriithi (former Narc chairman), and lawyer Peter James Kiragu Mwangi of Kiragu Holdings.

The group formed a financial institution, General Credit Savings Ltd, which later changed its name in September 1981 to become Nationwide Finance Company Limited.

But Kibaki, perhaps due to his position in the Cabinet, never sat at the board of the company and had appointed his cousin Muriithi - who held 13 shares through his Kbkanne Investments Ltd - to be his proxy.

Kibaki’s interests of 14 shares were held through his company Pinpoint Investments Co Ltd.

The main shareholder was Mr Gachui who held 32 shares through his Tagaka Holdings and one share in his name. The balance, 23 shares, was held by Mr Mbuu.

BOOMING ECONOMY

The early 1980s was an interesting period in Kenya’s banking sector. Several finance houses had been registered to provide easy banking services and loans to the low income population as the economy boomed.

Among those that had joined in the fray were Jimnah Mbaru’s Jimba Credit Corporation Limited, F.T. Nyamo’s Kenya Finance, Dalmas Otieno’s Thabiti Finance, Peter Munga’s Equity Building Society and Mugo Mungai’s Pioneer Building Society and Capital Finance.

(Mr Mugo is in court seeking Sh7.3 billion claiming that the receivership of his two companies was a ploy by the then Registrar of Building Societies to acquire assets owned by the two lenders.)

There were many other non-bank financial institutions holding money-lender licences and giving a big challenge to established foreign-owned banks, which feeds to the narrative that some of these institutions were deliberately brought down.

Whether true or not, some of the banks had been started by financial shylocks eager to cash in on the growing economy.

It was after the December 1984 liquidity crisis of Mathare MP Andrew Ngumba’s Rural Urban Credit Finance Company that depositors started shying away from emerging banks and financial institutions leading to its take-over in December 1985.

A much bigger crisis took place in 1986 after Continental Bank, the biggest privately owned bank, and its affiliate Continental Credit Finance, experienced a run on its deposits after it was ejected from the Nairobi inter-bank clearing house by the Central Bank.

This not only caused a major scare in the banking sector but it saw President Moi order government institutions to stop depositing money in them.

Jimnah’s Union Bank and its affiliates Jimba Credit Corporation and Kenya Savings and Credit became the first casualties.

Although Kibaki was still vice- president, he had lost his Finance portfolio to newcomer George Saitoti who was appointed to that position in 1983.

That Kibaki was struggling to fend off attempts to make him irrelevant was politically known.

In August 1986, Kibaki had attacked Kanu’s National Disciplinary Committee, formed in January of the same year and chaired by Okiki Omayo, over its pettiness and described it as a tool for intimidation “by people who have no strength of their own”.

It was also the same month that queue voting was introduced to replace the secret ballot in the 1988 polls.

SPECIAL INVESTMENT COMMITTEE

In the same August, Moi appointed a committee known as Special Investment Committee (SIC) under Saitoti to advise on how to raise public and private funds to refloat the troubled financial institutions.

Members of this committee included Philip Ndegwa, the CBK Governor, Harris Mule, Permanent Secretary for Finance, Micah Cheserem, chief accountant East Africa Industries, B.M. Gecaga, chairman, British American Tobacco, Peter Nyakiamo, minister for Health, Robert Ouko, minister for Planning and National Development, and Simeon Nyachae, Chief Secretary, Office of the President.

Not all banks were troubled, or had been run down.

“Among the majority of indigenous banks and financial institutions that were well managed, the most devastating impact was caused by the withdrawal of all government deposits from these institutions following a directive by the government that all deposits of public institutions be moved to the “more secure” state banks – a reference to the National Bank of Kenya and Kenya Commercial Bank,” says Nationwide’s former managing director Kiragu Mwangi, in an affidavit.

He says that the “composition of the SIC was remarkable by the conspicuous absence” of Mr Kibaki who was a long-serving Finance minister.

“In the premises the membership of the SIC was prone to generate cloudy political perceptions from the outset,” he avers.

The court papers accuse Moi and Saitoti of starting “an orchestrated campaign not just against the owners of the indigenous banks and non-bank financial institutions, but also targeting the Kikuyu as a community at large”.

President Moi had told a public rally in Kakamega that the collapse of local financial institutions was meant to sabotage the economy and accused local newspapers and Parliament of downplaying the issue.

He said he was not in favour of placing the institutions under receivership “since such a move would not stop the directors of those institutions from continuing to exploit wananchi”.

By the time SIC was appointed, Nationwide was not in trouble and owned a prime property, L.R. No. 8581 on Nairobi’s Koinange Street, now known as Consolidated House.

SPECIAL INVESTIGATION

Although its profitability was dented following the withdrawal of deposits by parastatals, it was not until November 1989 that the then Governor of the Central Bank of Kenya, Mr Eric Kotut, informed the management that he had appointed Messrs Bellhouse Mwangi Ernst & Whinney to carry out a special investigation to determine the bank’s financial position as at October, 1989.

By this time, Kibaki had fallen out of favour and had been replaced as vice-president by Dr Josephat Njuguna Karanja, a former University of Nairobi vice-chancellor.

When Kotut appointed Bellhouse Mwangi Ernst & Whinney, the audit firm had disagreed with the bank leading to a delay on that year’s audited accounts.

“We were shocked by the said appointment of investigation because first the CBK had not asked for reasons of the delay by Nationwide to submit its audited accounts which mainly related to disagreements with our auditors.

Secondly, the appointment of NFC’s auditors Messrs Bellhouse Mwangi Ernst & Whinney - who had not formally ceased to work for us - to investigate its accounts was both confounding and testament of ulterior motives in the said appointment,” says Mr Kiragu in court papers.

“My co-petitioners and I verily believe that the Governor of CBK and Messrs Bellhouse Mwangi Ernst & Young were undeclared agents of the SIC and in the premises their actions were vitiated with illegality, fraud and abuse of office.”

After Bellhouse did the Kotut audit, the court is to be told, it “amazingly increased” Nationwide’s provision of bad debts from Sh3.76 million in 1987 to Sh158 million against total advances of Sh212 million.

“The basic effect of this report was to declare NFC technically insolvent despite the fact that all debts were secured and all provisions were only made for cautionary reasons,” say court papers.

WORLD BANK EXPERTS

Although the Kibaki-associated bank wrote to Saitoti who was now vice-president and minister for Finance, and submitted a memorandum detailing how it would improve its performance for three years, the government appointed two World Bank experts to reconstruct 14 ailing banks and financial institutions - including Nationwide - into a third state-owned bank known as Consolidated Bank of Kenya.

An attempt to sell the Nationwide headquarters for Sh92 million to inject capital into the bank was frustrated through a caveat.

The Nationwide owners now say that they never “sold their companies for a peppercorn (symbolic payment) consideration fee of Sh20 before walking out” according to the report that recommended the formation of Consolidated Bank and say they were “surprised by the said report given that we had not negotiated with the Government for the sale of NFC let alone agreeing to sell it for 20 shillings”.

It was Mr Saitoti who said in 1990 that the institutions taken over were not ailing (those ailing were under receivership already) but were “too small to operate profitably and achieve economies of scale in a highly competitive field”.

When Saitoti called the directors for a meeting in January 1990, also attended by Kibaki, they were not allowed to make any representations and were “pressured and coerced by the SIC to agree to a peppercorn payment of Sh20 for each shareholder for the net assets of the company.

“We left the meeting at about 4.30pm in total dejection, humiliation and agony for losing our cherished and valuable investment in NFC for a peppercorn payment of Sh20 to each shareholder,” Kiragu’s affidavit says.

It was a year after the takeover that Attorney-General Mathew Guy Muli published the Consolidated Bank of Kenya Bill, 1991, to legalise its operations.

And it was only after Moi had left power (and Kibaki taken over) that the directors started demanding a return of their company and its main asset - the multi-million-shilling building occupied by Consolidated Bank on Koinange Street.

That case has been pending for 10 years and is set for hearing soon. It might reveal what happened behind the scenes when banks collapsed and whether, indeed, Kibaki and his co-investors were forced to sell their bank for Sh20.

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It was interesting reading your article in the Sunday Nation last week.

In the period between 1979 and 1981 the District Officer in Gatundu was a man who I had known in Taveta, when I was the OCS (Officer Commanding Station) there and he the district clerk. He was a Mtaita and he later became a PC and had some role in Mombasa port.

Anyhow, I telephoned him and asked if I could come and have a cup of tea with him and his wife and also be shown around the Gatundu hospital and he kindly agreed.

When I arrived there, the hospital consisted of a couple of wards and a reception area. There was no operating theatre and no X-Ray room. There was no maternity wing. We had a good cup of tea and a chat.

As a matter of interest, who has paid for the current building - shown in the photo in the newspaper? Was it the Kenyatta family - as it should have been - or the public purse?

J. Forster,
Nairobi.

Mr Kamau is the Acting editor, Investigations and Special Projects. [email protected] @johnkamau1