To understand the recent actions by Central Bank (CBK) in appointing third parties to manage Chase and Imperial Banks, a little history is required. In 1986 the Moi Government decided to get into the 20th financial century and created the Deposit Protection Fund Board (DPFB), which was only operationalized four years later in 1989. The purpose of the DPFB was twofold: To create a fund to offer protection to depositors in Kenyan banks and to take on the role of liquidator for failed banks. Between 1989 and 2012 DPFB had managed 24 banks in liquidation, the earliest being Inter Africa Credit Finance which was put under liquidation on 31st January 1993 and the latest being Daima Bank on 13th June 2005. There is no documented successful revival of any bank in those 26 years of the DPFB’s existence since the prevailing regulatory framework provided for statutory management leading to liquidation. The results speak for themselves: 24 banks in question had Kes 22 billion in deposits of which only Kes 1.5 billion were protected deposits. (Remember that the law provides insurance of up to Kes 100,000 per depositor). The DPFB in that period managed to pay out Kes 1.1bn or 74% of the protected deposits by the end of the financial year June 2012. It is noteworthy that the DPFB has an excellent record of publishing its accounts via its website since 2003, which accounts are audited by KPMG on behalf of the auditor general. The organization has been profit making from inception and by the end of FY June 2012 recorded a surplus of Kes 5.1 billion. Cash was certainly not what prevented DPFB from making 100% payment to protected depositors. One conclusion that can easily be drawn therefore is that the 26% protected depositors that weren’t paid simply didn’t make a claim for their money. Now let’s take a look at the loan recovery. In the same period the 24 banks had Kes 41.1 bn in loans outstanding, of which DPFB managed to recover Kes 6.4bn or 15.5% of the loan stock. Either DPFB was very inefficient or they quite simply couldn’t make the offending borrowers repay their (insider) loans and couldn’t find quality securities that would realize some value to extinguish those debts. My money is on the latter reason. As a result of clawing back a little in the form of loan repayments, DPFB managed to pay some depositors over and above the statutory minimum of Kes 100,000/-. Referring to this as “dividends” in their annual report, up until FY 2012 DPFB had paid only 28% or a total of Kes 5.6 bn cumulatively to depositors out of Kes 19.9 bn in unprotected deposits. In light of this less than stellar history of recovering the distressed assets and liabilities of the banking sector, the Kenya Deposit Insurance Act 2012 was enacted, which replaced the DPFB with the Kenya Deposit Insurance Corporation (KDIC).
KDIC-with-power-foam was created to make whites whiter and colors brighter. This piece of legislation gave the new institution far more operational discretion and a solution driven approach to managing failed banks than its predecessor. KDIC was now motivated to breathe life into failed banks rather than play the lugubrious mortician role of its predecessor. Through Section 53 of the Act, KDIC is given a tight timeframe – 12 months to be precise with a window to extend for a further 6 months- to either cure the bank of the matters that caused it to go under receivership or put the bank in liquidation. Twenty six years of experience had also led the former DPFB team to realize that perhaps the solution to keeping a bank open is to outsource receivership to a third party (with the necessary operational capacity) who would be nimbler in putting the structures in place to begin assessing loan viability and recovery thereof in order to pay suffering depositors and creditors. We have a different perspective now on how to manage failed banks, a perspective that allows for industry experts to step in and help KDIC execute its mandate. A perspective that allows for employees to continue working, borrowers to continue paying and depositors to receive funds over and above the historical statutory minimum.
The aim to maintain a going concern would be an unprecedented win for CBK as it would stabilize jittery depositors, calm foreign investors who were now having doubts about the wisdom of investing in Kenya and allow legitimate borrowers to continue utilizing much needed working capital facilities that were the lifeblood of their businesses. The first trial of the KDIC’s going concern experiment was with the appointment of KCB in April 2016 under S. 44 (2)(b) (iii) of the KDI Act that essentially allows KDIC to appoint a third party to manage the assets, liabilities and affairs of the institution. That KCB has a fully-fledged debt recoveries department that can land on errant borrowers like a ton of bricks is without question. This is business as usual for them. It is only through the active management of the loan book that depositors and creditors will get paid, and, hopefully a going concern is maintained. More importantly, the credit risk team at KCB should also be able to actively manage the performing loan book with a view to ensuring that businesses are not starved of the loan facilities that are needed to keep their businesses afloat. Providing mirror loan facilities on KCB’s own books provides an obvious solution to legitimate and well performing businesses. Operational capacity and deep industry experience is what third parties appointed by the KDIC under S. 44 (2) (b) of the Act bring to the table. But it’s a day long and a dollar short for the shareholders of Imperial Bank when energetically stating righteous indignation at CBK’s actions to appoint third parties to help recover the bank’s assets. Those energies should have been better placed keeping a tighter lid on the co-shareholder who led them down the rabbit hole of fraud in the first place.