When dreams of banking empires became nightmares

It was the best of times and the worst of times for boisterous Nairobi politician Andrew Ngumba.

For a couple of years, he believed he was well on the way to building a formidable financial empire.

His financial institution –Rural-Urban Credit Finance – was growing by leaps and bounds.

Ngumba ran his budding empire from a building he had purchased along Nairobi’s Tom Mboya Street and named Ngumba House.

He formed three other companies: Blue Shield Insurance Company, Kenyawide Building Society and Countrywide Developers.

Like everyone else, Ngumba’s non-bank financial institution had taken advantage of a banking law that accorded them a competitive edge over banks.

It exempted them from the cash ratio rule and allowed them to charge higher rates on credit.

Rural Urban, with a minimum deposit of Sh100, would encourage depositors interested in owning matatus to join its 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.

Those interested in owning houses were given loans by Kenyawide Building Society on condition the houses were developed by his Countrywide Developers. Ngumba was overzealous; – a man in a hurry to become one of Kenya’s leading indigenous bankers.

The company had begun well with fully paid 250,000 ordinary shares of Sh20 each giving it a Sh5 million share capital.

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 to the hitherto unloanable poor registering 10,000 customers in just two years.

Leading co-operative societies, municipal and county councils and private property developers opened accounts in the craze and the financial institution started developing three Nairobi estates; - Kahawa, Kahawa Sukari, and Ngumba Estate.

Then things started falling apart for Rural Urban, opening the floodgates that will drown eight other similar institutions.

In July 1984, the Central Bank inspectors knocked on Ngumba’s door as word went round that Rural Urban was unable to meet its financial obligations.

What they found was shocking. The institution was owed Sh140 million in deposits which had matured but had not been paid on demand.

Among the desperate depositors was Cooperative Bank of Kenya which had put in Sh29 million. Others were Murang’a County Council (Sh7.5 million) and Kenya National Capital Corporation (Sh52 million) .

Ngumba knew that if he let go off the bank easily, chances of going to jail were high for embezzling depositors’ money.

He opted to fight in the court where he pursued two of the bank’s main debtors, Kahawa Sukari Limited and Kahawa Properties Limited.

But before this pursuit could commence, the Co-operative Bank rushed to court and put Rural Urban in receivership.

In October 1984, Equity Building Society (EBS) – now Equity Bank- was registered to provide mortgage financing for the majority of customers who fell into the low income population first targeting the Murang’a populace where it opened its initial branches.

To compete with the new Murang’a bankers, Githunguri-born Titus Muya registered Family Finance Building Society after resigning from the Ministry of Tourism.

What encouraged Muya, as he would later say, was the success of F. T. Nyammo’s Kenya Finance. The others playing in the same league included the Murang’a-born Jimna Mbaru who had founded three financial institutions:

The Union Bank, Jimba Credit Corporation Limited, and Kenya Savings and Mortgages – all of which he was the chairman. Others were Nationwide Finance, Pan African Credit Finance, Investment and Mortgages, Continental Credit Finance and Louis Muthemba and Eliud Nyamu’s Pioneer Building Society.

Enticing customers to take mortgages, buy plots and get into saving schemes became the mainstay of all these new financial institutions. One of the mistakes that some of them made was to borrow short-term money to invest in long-term projects.

There was easy money at the National Social Security Fund which became the life stay of some of these institutions. The years 1984 and 1985 saw President Moi consolidate his power as he edged out all those thought to be linked to Charles Njonjo.

Also, land buying company directors were forced to issue title deeds to their shareholders as the central administration intervened into what were private companies.

Parliament was told that the National Social Security Fund (NSSF) was owed about Sh1.5 billion by financial institutions and an Assistant Minister for Labour, Chris Obure told Parliament 12 financiaI institutions had been lent money by NSSF.

Obure said the government was taking measures to withdraw such funds.

In August 1986, Moi announced that he would have “no mercy” with directors of financial institutions who embezzled depositors’ money.

He also warned government institutions against putting their money in shaky banks and told a rally in Kiambu that bank fiddlers who had put wananchi and the country in an embarrassing situation “will suffer sleepless nights.”

On August 7, 1986, as Moi was issuing his warning, Continental Credit Finance Limited and Continental Bank of Kenya Limited were placed under receivership even as he protested that the bank was not in trouble. Kenya and the NSSF.

The closure of Continental Bank and Continental Credit Finance (CCF) – thought to be solid – caused panic in the market.

Many depositors with the indigenous banks and financial institutions, fearing the fate that befell Continental Group - which owned Nairobi’s Continental House (now housing offices of members of parliament- might spread to their own, made massive withdrawals sending the whole industry reeling.

What followed was total collapse of all the financial institutions ran by Kenyans.

Only two of the institutions founded in these turbulent times survived: Equity Building Society (now Equity Bank) and Family Building Society (Family Bank).