Troubled lender Chase Bank irregularly advanced Sh16.6 billion to various entities, many of them associated with insiders, putting billions of shillings belonging to 55,000 depositors at risk.
Half of the irregular loans went to the bank's insiders, the Central Bank of Kenya (CBK) said in a statement on Thursday after it placed Chase Bank under statutory management.
The statement indicated, for instance, that one director lent himself Sh7.9 billion mostly without registered collateral and beyond regulatory limits.
The director gave himself more than the 25 per cent of the total capital limit set in the Banking Act.
The actions of the director -- whom the auditors called a significant shareholder -- have now made it uncertain as to whether the more than Sh95 billion deposits would be refundable to their owners, mostly small and medium-sized enterprises.
Central Bank Governor Patrick Njoroge said that apart from the Sh7.9 billion lent to the director, there were doubts as to whether additional Sh8.7 billion could be recovered, given that large segments of it were not being serviced or lacked documentation.
"What we have seen at Chase Bank is a situation where the auditor has expressed major concerns regarding recoverability of loans and unsecured insider lending," Dr Njoroge told a press conference in Nairobi.
MAJOR CASH CRUNCH
Chase Bank becomes the third lender to go into receivership in just nine months after Imperial Bank's closure last October and Dubai Bank's July shutdown.
Dr Njoroge said the last straw that broke the camel's back was a major cash crunch on Wednesday, in which the bank was incapable of honouring cheques or giving depositors their money.
"By the end of Wednesday, we realised that the haemorrhage was getting out of hand. We sat late into the night as we sought to find cash to plug the gap but were unsuccessful. It was at 4am that we made the decision to close the bank," Dr Njoroge said.
Central Bank said the cash crunch may have been averted had some $50 million (Sh5 billion) borrowed from the African Development Bank arrived by Wednesday. "Unfortunately, the money had not yet reached the bank by yesterday," Dr Njoroge said.
He, however, reported having met with the bank's shareholders and agreed to pump in money to revive the lender even as he emphasised that CBK was in the process of determining the exact state of the bank's affairs before any other action was taken.
The bank's chairman, Mr Zafrullah Khan, and Group Managing Director Duncan Kabui resigned on Wednesday after publication of the financial results showing the bank had not reported Sh8 billion insider loans.
CMA ON SPOT
Ms Muthoni Kuria, a bank director was appointed chairperson on Wednesday, but the CBK took over the management of the institution less than 24 hours later.
Mrs Kuria was once the chief executive of Southern Credit Bank, which merged with Equatorial Commercial Bank in 2010.
When Chase Bank was incorporated in 1995 through the acquisition of troubled Western Kenya Bank, Mr Khan became one of the founding directors.
Mr Kabui was appointed managing director two years ago. Both were sent parking on Wednesday.
The Capital Markets Authority has also come under the spotlight because it approved a Sh10 billion bond -- Sh4.8 billion of which was raised -- despite the glaring corporate governance weaknesses in the bank. By the time of going to press, CMA had not responded to our inquiries.
Chase Bank's troubles came with speed on Wednesday when depositors got wind of billions of shillings in insider loans that had not been disclosed in its reports.
The situation was made worse by the fact that the auditors -- Deloitte East Africa -- said they could not certify whether or not the accounts and financial statements represented the actual situation at the institution.
After noting that Sh16.6 billion in loans and advances raised serious questions, Deloitte said it issued a "disclaimer of opinion" to mean that enough evidence on the financial operations at the bank was not available.
"Because of the significance of the matters described in the Basis for Disclaimer of Opinion, we have not been able to obtain sufficient appropriate audit evidence to provide the basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements," said Deloitte. The firm also said it was unable to establish if proper books of account had been kept by the bank.
SECRET INSIDER LOANS
Deloitte on Thursday said it could not provide more information because of client confidentiality, and referred this reporter to CBK.
A number of audit queries have since arisen, including the fact that Deloitte had never raised the issue of secret insider loans or uncollateralised credit in their audit reports despite working for Chase Bank for years.
It was also not clear what role the audit firm played in Wednesday's restatement of the bank's results to provide for non-performing loans.
The restatement of the bank's accounts came with the requisite auditor's signature, which had been absent in the first results.
The signed auditor's report was dated April 4, 2016 yet the bank should have reported it six days earlier. Banks are required to report their previous year's audited results by March 31.
The bank changed the content of its financial statements in the restated results to provide for the non-performing loans.
Dr Njoroge said the fall of Chase Bank was more about inability to get cash from the market unlike that of Imperial Bank, which was as a result of fraud.
He said social media had contributed to the panic that finally felled the lender even as he agreed that there had been pressure since October.