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Chasing Banking Criminals To The End

Earlier this month I penned a piece about Iceland and Ireland being the only two known countries that had jailed bankers following the 2008 global financial crisis. As fate would have it, I visited Dublin a few weeks ago and got to chatting with a very friendly driver on my way back to the airport. First things first, the Irish people are as warm as Kenyans, and remarkably welcoming and hospitable. “We are not like the French,” said my driver with his tongue in cheek, “so we don’t go protesting in the streets when we are unhappy about something.” By this time, we were talking about the effect of the global financial crisis and the Irish economy’s painful but steady recovery over the last 9 years following property price crashes and banking failures.

According to my driver, the public was not satisfied with the arrest and subsequent jailing of the three bankers I wrote about a few weeks ago. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. But David Drumm, the CEO of Anglo Irish Bank, fled to Boston in the United States in 2009 when it became clear that the bank was going to collapse and filed for bankruptcy under Massachusetts law in 2010. The Irish public wanted justice. They wanted Drumm to come home and answer for his crimes.

According to Wikipedia, the hearing at the Boston-based court heard from the Irish Bank Resolution Corporation, which fought Drumm’s claims for bankruptcy, as he owed it €9 million. It was alleged during the case that Drumm had transferred money and assets to his wife, so they could not be seized during the bankruptcy proceedings. In early 2015, the court ruled the application inadmissible, ruling that he could be held liable for debts of €10.5m in Ireland.
Subsequently, the Irish Office of the Director of Public Prosecutions (DPP) recommended a number of charges be brought against Drumm. In 2015, the DPP successfully sought the extradition of Drumm who was arrested by US Marshals based in Boston in October and extradited back to Ireland in March 2016. Drumm was charged with 33 counts including forgery, counterfeiting documents, conspiracy to defraud, the unlawful giving of financial assistance in association with the purchase of shares, and disclosing false or misleading information in a management report.
Collective Irish indignation, coupled with dogged determination on the part of the Irish DPP, led to the arrest and extradition of one man who played a part in the collapse of an Irish bank that cost the Irish taxpayer € 29 billion (Kshs 3.3 trillion). He is currently out on bail awaiting trial later this year, with part of his bail terms having him report to his local police station twice daily. “People are angry and they want to see justice,” my driver went on. “No one will ever forget what that Drumm chap and his colleagues did to us.”

We have spent an inordinate amount of time in Kenya focusing on the role of the regulator in the case of Dubai, Chase and Imperial banks. We have waxed lyrical and railed continuously about how the regulator, being the Central Bank, is not doing enough to bring the perpetrators of the malfeasances in the respective banks to book. But the regulator has played a big part, via Kenya Deposit Insurance Corporation, in attempting to get justice by filing civil suits against senior management, directors and shareholders of both Imperial and Chase Bank this year. The buck for criminal charges sits squarely in the office of the Director of Public Prosecution who is supposed to represent the collective Kenyan indignation, anger and thirst for retribution. But given our growing Kenyan apathy to the corruption that bestrides both the public and private sector like a colossus, such righteous indignation may be lacking. And just like that, the fraudulent bankers will walk away into the sunset, having paid a monetary price for their crimes if the civil cases are successful, but free to walk amongst us.

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Iceland’s Breaking Bad

In a hodgepodge of squat low slung single storeyed buildings, which were built more for function than for aesthetics, sit some of Iceland’s finest bankers. According to a March 2016 Bloomberg article titled “This Is Where Bad Bankers Go To Prison” by Edward Robinson and Omar Valdimarsson, Kviabryggja Prison is a converted farmhouse nestled in between the frigid North Atlantic ocean on one side and fields of bare, unyielding lava rock on the other. Sigurdur Einarsson who was the chairman of Kaupthing Bank, Iceland’s largest bank before the 2008 financial crisis, and Hreidar Mar Sigurdsson who was the bank’s former chief executive officer were convicted of market manipulation and fraud leading up to the collapse of the former top bank.

The same article highlights that they are kept in the good company of Magnus Gudmundsoon who was the former CEO of Kaupthing’s Luxembourg unit and Olafur Olafsson who was the second largest shareholder in the bank at the time of its demise. The dream team is serving sentences up to five and a half years, which may be low in criminal conviction terms but huge in a global financial industry that saw not a single individual jailed in the United States or the United Kingdom for misdeeds arising out of the greed derived financial crisis. Starting in 2010, the special prosecutor for the Iceland banking cases had successfully prosecuted 26 banking officials by March 2016.

Following deregulation in the early turn of the 21st Century, Iceland’s top 3 banks had accessed European money markets and borrowed €14 billion in 2005 alone, which was double their intake in 2004 and paying 0.2% over benchmark interest rates. The banks lent the funds back out to Icelanders at high interest rates, raking in huge profits. Flush with easy credit, Icelandic households bought flats in London, took shopping trips to Paris and jammed Reykjavik’s streets with Range Rovers. By 2008 the banks’ assets had swollen to ten times the Icelandic $17.5 billion economy. Once the 2008 financial crisis hit, the Icelandic banks lost their short term funding and could no longer service their own debts. The local currency’s value fell, making loans denominated in foreign currencies more expensive and leading to the top 3 banks defaulting on more than $85 billion in debt and households losing more than a fifth of their purchasing power, conclude Robinson and Valdirmasson.

Further south in the Atlantic Ocean, Ireland joined Iceland as the only other country to criminally convict bankers for their pre-financial crisis misdeeds. According to a July 2016 article in the Irish Times by Ruadhan MacCormaic, three former bankers were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent (ILP) were involved in setting up a circular scheme where Anglo moved money to ILP and ILP sent the money ban, via their assurance firm Irish Life Assurance, to Anglo. The article describes further that the scheme was designed so that the deposits came from the assurance company and would be treated as customer deposits, which are considered a better measure of a bank’s strength than inter bank loans. The sham transactions were aimed at demonstrating that “Anglo Irish Bank had €7.2 billion more in corporate deposits than it had.”

Kenya stands head and shoulders with its Icelandic and Irish banking counterparts who have had executives accused of market manipulation and fraud. Some shareholders and executives of Imperial Bank and Chase Bank have been taken to court by the Kenya Deposit Insurance Corporation for corporate malfeasance. However, these are civil suits aimed at recovering the money and levying monetary penalties rather than extracting criminal convictions for actions that have caused manifest pain and suffering to both depositors and genuine borrowers. These cases may drag in court for years as history has shown us, rendering very little present value vindication to those suffering today. But for what it’s worth, it’s a good start and a large prick on the conscience of many Kenyan bank boards today.

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The Life and Times of Whistle Blowers

Do you remember that annoying classmate in primary school who always provided to the teacher unsolicited reports of those who were “making noise” when the teacher had stepped out of class? Or the one in boarding school who reported to the dorm master when colleagues had scaled the fence using military grade subterfuge and sneaked out of school to have a good time? In school we referred to these dystopian citizens as “snitches” or “tattle tales” but this was largely informed by the folly of youth where everyone was supposed to be bound by the Mafian oath of omerta or silence when such indiscretions were being perpetuated. However in adulthood, the role of these informers in an organization is absolutely critical in providing information about criminal activities that are being perpetuated by staff, management or, in extreme cases, the board of the organization itself.

Such an informer is called a whistle blower and is defined as a person who informs on a person or organization that is engaged in an illicit activity. A bank I know had a whistle blower call in to say that the branch manager was stealing from the branch. An auditor was sent over to the branch but he couldn’t find any evidence of the stealing. The whistle blower was tenacious and called again, this time saying “tell the auditor to put a camera in the backroom where the ATM is loaded with cash. He will see.” Sure enough a hidden camera was placed and the branch manager was busted in all his glory skimming money from the ATM cassettes as he ostensibly loaded them with cash.
The Capital Markets Authority (CMA) code of corporate governance practices for issuers of securities to the public 2015(we should probably reduce that mouthful to two words: “The Code”) specifically mentions whistle blowers three times. Some context around its genesis would be useful here. The Kenyan private and public sector space has a litany of cases of gross malfeasance perpetuated by senior management, very often leading to the eventual collapse of institutions for lack of cash flow. More often than not, staff knew what was going on but did not have the avenue to report such activities, as it would lead to instant dismissal, or in some extreme cases, grave personal injury. Imperial and Chase Banks are classic cases of organizations that could have done with a whistle blower policy, but they also beg the question: who do you whistle blow to, when it’s the owners or key officers of the institution perpetuating the fraud? The CMA Code tries to address this, on the premise that companies issuing securities to the public – such as shares via the Nairobi Securities Exchange (NSE) or bonds – have the basic corporate governance framework of a board of directors where the buck should stop. Section 4.2.1 provides that the board shall establish whistle-blowing mechanisms that encourage stakeholders to bring out information helpful in enforcing good corporate governance practices. Sounds a bit la-di-da right? Like some flowery language meant to incorporate current buzzwords such as “good corporate governance” and “stakeholders”.
But a second and far more robust attempt is made further down the Code under Section 5.2.5 which states that the board shall establish and put into effect a Whistleblowing Policy for the company whose aim shall be:
a) To ensure all employees feel supported in speaking up in confidence and reporting matters they suspect may involve anything improper, unethical or inappropriate; b) To encourage all improper, unethical or inappropriate behavior to be identified and challenged at all levels in the company; c) To provide clear procedures for reporting of such matters; d) To manage all disclosures in a timely, consistent and professional manner; and e) To provide assurance that all disclosures shall be taken seriously, treated as confidential and managed without fear of retaliation.

Why should you wake up and take notice if your company is not listed on the NSE? The CMA Code covers any company that has issued securities to the public. Therefore an Imperial Bank, which had issued a CMA approved bond to the public not too long before it crashed and burned, would have been expected to be applying the code within its own corporate governance framework had it lasted long enough. Section 7.1.1 (w) of the Code gets even more prescriptive by declaring that the board shall disclose the company’s Whistleblowing Policy on its annual report and website.

The CMA Code is a fairly modern and well thought out regulatory framework that encourages issuers of securities to “apply or explain” the guidelines provided therein. It will therefore require an inordinate amount of CMA supervision to ensure that issuers of securities are religiously submitting annual returns where they undertake the self-evaluation mechanism that an “apply or explain” framework presumes. If the CMA does this well, it then provides a second level of scrutiny to banks that may have inadvertently escaped the Central Bank of Kenya’s statutory hawk eyes and wish to take money from the public in a different form.

The institutions that do this well outsource the whistleblowing framework to an independent third party whose number is widely circulated within the organization. Staff members are encouraged to call that number or send an email with the assurance that the information will be handled sensibly by a non-aligned entity. The third party entity provides these reports directly to the organization’s board audit committee for directive action to be taken. It is imperative that the feedback loop on the whistleblowing falls outside of current management for obvious reasons: management might be part of the problem. Outsiders have no way of knowing what rot goes on inside an institution until the crap hits the fan. What the CMA Code has done is provide a way to protect investors and enable them to hold issuers of securities to a higher standard of transparency. However, this can only work successfully if the CMA plays its enforcement role judiciously.

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A Day Long and a Dollar short for Imperial Shareholders

[vc_row][vc_column width=”2/3″][vc_column_text]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.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Chasing The Truth In Parliament

[vc_row][vc_column width=”2/3″][vc_column_text]Last week, an unlikely source in the form of a Parliamentary Committee helped to unseal the tightly held lips of the Chase Bank’s board of directors. The directors had been summoned to assist the Committee to understand the challenges that faced the Bank, resulting in the same being placed under receivership by the Central Bank of Kenya. This was an opportunity for the board to give its side of a controversial story, a tale that has as many versions as there are heads to the Greek mythical hydra. The story caught my attention for one reason only: The directors called the auditors professionally ignorant. Actually let me quote the exact statement here: “The Musharakah Agreements for each of the SPVs clearly show Chase Bank’s 99% interest in the Musharakah assets. Deloitte’s insistence on treating this as a normal loan or advance can only be labelled as professional ignorance at best.” Part of the dispute between the auditors, Deloitte in this case, and the board of directors has been on the treatment of a series of real estate transactions either as internal loans to a key shareholder (according to the auditor) or as Musharakah assets (Islamic financing terms according to the directors). So I pored over the submissions made by the directors in their vigorous defence of these assets.
Banking is premised on the fact that there are depositors who want a safe place to put their money, and there are borrowers who require to borrow funds for consumption. The bank is simply an intermediary. In the case of Islamic banking, the institution applies Sharia compliant procedures in the booking of those deposits and loans. The key point here is: there must be a customer. Period. Finito. Whether it is mainstream or Islamic banking there must be an individual or an entity who is the customer. But the directors state thus in their parliamentary submissions:
“Subsequently, Deloitte rejected the Musharakah Agreements and Deloitte insisted that the Musharakah properties be charged to the bank, thus effectively classifying the SPVs as Loans and Advances rather than Islamic investments as documented. These loans would then become technical insider loans, as the shares in the SPVs were held by the two directors, albeit held in trust for the Bank. Chase Bank’s Management emphasised to Deloitte that treatment of the Musharakah assets as Loans and Advances would be in contravention of not only the principles of Islamic banking (and therefore a breach of trust with Islamic depositors), but also of Section 12(c) of the Banking Act and
would incorrectly treat these as an insider loan. It was evident that Deloitte were simply not interested in appreciating the nature and substance of the Musharakah Assets or the principles of Islamic banking.”

I scratched my head and read the report twice over. At no point did the directors say who the ultimate customer was. I mean, a bank doesn’t wake up and decide to give a loan out to a customer, whether Islamic or otherwise. Why was there no attempt to say that this was an unfair treatment of a yet-to-be-named customer who had borrowed from the bank in good (Islamic) faith? That the assets were bought in the name of the SPV is not in doubt. That the SPV has two Chase directors as the shareholders is not in doubt. But where the shareholders were holding the shares “in trust” for the bank is where it starts to get “grab-a-bag-of-popcorn” interesting. The directors fail to mention if a “deed of trust” was provided to the auditors as evidence of that understanding between Chase Bank on the one hand and the SPV shareholders on the other. I mean, one doesn’t assume trust falls off the back of the Kisumu express train, it must be documented somewhere, right? The directors beat their Islamic financing drum further by dragging in the regulator into their drama: “On 26th July 2012, Chase bank wrote to the Director of Bank Supervision at CBK requesting CBK to revise the Central Bank Prudential Guideline on Publication of Financial Statements and Other Disclosures to accommodate Islamic products and
specifically:
(i) the Islamic Banking Income received to be reflected separately in the Profit and Loss
Account;
(ii) The Islamic Banking Expenses also to be reflected separately in the Profit and Loss
Account;
(iii) The Islamic Banking investments or Financing Activities as a separate Asset line in the
Balance Sheet;
(iv) The Islamic Deposits or Liabilities as a separate Liability item in the balance Sheet; and
(v) A separate Off Balance Sheet line item for Islamic banking.
The CBK has not objected, in the absence of any changes to the Prudential Guidelines, to the classification and treatment in any of its reports to the Bank.”

I have to admit, that this submission by the directors stumped me. If you wrote to the regulator and asked to be reporting Islamic Banking products separately, and the regulator did not object, then why do your 2014 and 2015 financial accounts not reflect the same? I zoomed across to the only fully-fledged Islamic Banks in Kenya, Gulf African Bank and First Community Bank (FCB) websites to see how their Islamic assets are recorded. Their professionally competent auditors in the name of KPMG and PriceWaterhouseCoopers (PWC) respectively reported loans as “financing activities (net)” exactly as Chase had requested the CBK to do in (iii) above. (It’s noteworthy that PWC audited the FCB accounts in 2014 but the 2015 published accounts are silent on who their auditors were) If Chase directors had knowledge as far back as July 2012 on how “Musharakah Assets” should be recorded on the balance sheet why wait until June 2016, or four years later, to call their auditors professionally ignorant? And why are the Islamic depositor funds not separately recorded yet the directors have vigorously highlighted the potential breach of trust for the Islamic depositors if Musharakah Assets are treated as loans and advances?

The Chase Bank saga is a case study of corporate governance failure, weak internal controls, questions on the auditors’ scope and depth of review and a passionate to almost rabid love for the brand by its most loyal customers. But on the back of all of that are innocent depositors who must always remain in the minds of all bank directors whose oversight role gets heavier with each passing day.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Banking Crisis in Africa

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago, I quoted extensively from a speech given by the former Nigerian Central Bank Governor, Lamido Sanusi, in February 2010 where he was explaining, with painful honesty what had gone wrong in the Nigerian banking industry following the global financial crisis which impacted the Nigerian economy hard. He could have been describing the Kenyan industry in many ways. Do we have a problem in Africa? Do we have a problem distinguishing customer deposits, from revenue? And further, distinguishing revenue from profits? The fact is that banks have only one product: cold, hard cash. That’s all that they deal with, and therefore a great responsibility is placed upon them as that cash, with the exception of the capital that shareholders put in, is largely from our pockets. Our sweat, blood and tears in the form of salaries, business revenues and savings is what we place in the hands of total strangers, believing with every fibre of our native beings that they will make it available to us as and when we need it. We trust that the management of these banks will make the distinction between what belongs to us and what belongs to them. A distinction that is clearly difficult to make once a rogue management crosses to the dark side. Sanusi explains the Nigerian experience thus:
“The original title of this paper was “Transformative Disruption: Relocating theNigerian Banking Crisis from the Economic to the Social.” The choice of title
was informed by a strong desire to articulate a correct narrative, in an
environment in which we are confronted by a multi-vocal opportunism
determined to subvert history through the fabrication of false narratives.
Among these, is the assertion that the actions taken by the Central bank are
part of a grandiose “northern” agenda against southern Nigeria. Or that
perhaps it is an “Islamic” agenda being pushed by a Muslim fundamentalist.
There are also other subtler and more sophisticated-albeit just as
opportunistic-narratives. For example the new claim by public officers and
politicians that there is really no corruption in the public service, that
politicians are not corrupt, and that the real corruption is only in banks.
What we have done in the Central bank, is to fire the opening salvo in what could potentially be a revolutionary battle against the nexus of money and influence that has held this country to ransom for decades. This would not be the first time banks
collapse nor are brought to the brink in our national history. And it will certainly
not be the last. But this time there is a difference.
In previous crises we said some banks had failed a passive and complicit
phrase that masked a gross irresponsibility and crass insensitivity. “The bankhas failed”.

……And that is exactly what happens when we refer to “failed banks” as if the
bank itself, some impersonal structure made up of branches and computers,
somehow collapsed on its own. By using-or abusing- the term “failed bank” we
are able to mask what is almost always a monumental fraud. But it is a
deliberate act of prestidigitation. Thousands of poor people, who have kept their life savings in the bank, lose it. Children’s school fees, savings for retirement, medical bills, gone into thin air. And who is to blame? No one really. Or maybe the poor people who were foolish enough to keep their money in a bank that “failed”.
How many people have died of heart attacks due to this tragedy? How many
honest businessmen have been rendered bankrupt? How many people have
committed suicide? How many have died because they were unable to pay
medical bills as their monies were trapped in these institutions? How many
children have dropped out of school? We do not know. Because we live in a
society in which they do not matter. They are anonymous. They are poor.
What we do know is that we have today, among those parading themselves
as role models in society, people who profited from failed banks. Owners and
managers who go on to become governors and senators. Bad debtors who
are multi- billionaires, having taken the money belonging to those poor dead
souls and not paid back.
So here is the reality. The owners and managers of banks, the rich borrowers
and their clients in the political establishment are one and the same class of
people protecting their interest, and trampling underneath their feet the
interest of the poor with impunity.
So this time we turned the tables and said “enough is enough”. The banks did
not fail. They were destroyed and brought to their knees by acts committed by
identifiable people. Do not say that government money has been
stolen. Name the thief. And so, in keeping with that tradition, we did not say
that banks had failed. We named human beings-the management that stole
money in the name of borrowing, the gamblers that took depositors funds to
speculate on the stock market and manipulate share prices, the billionaires
and captains of industry whose wealth actually was money belonging to the
poor which they “borrowed” and refused to pay back.
Fortunately, the President, Umaru Musa Yar’Adua, understood from the first
day that this was an ideological choice we had to make. We could side with
the rich and powerful, and say the banks had failed. Or we could side with the
poor and save the banks but go after the criminals. And we chose the latter.”

That KCB has swung in to provide much needed stability in the wake of the Chase Bank fiasco is nothing short of a miracle pill engineered by Kenya’s Central Bank Governor. But this is not the time to exhale from a dodged bullet. There’s blood in the water and significant public goodwill to see the elite “financial accounting wizards” get what they deserve. A nice room with enough light that will allow them far more time to sit and reflect on the distinction between deposits, revenues and profits.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Chasing The True Numbers

[vc_row][vc_column width=”2/3″][vc_column_text]Last week I started reflecting about the key issues that were driving the current turmoil in the banking sector, and concluded that both the regulator’s banking supervision unit as well as the guilty bank boards were culpable. Today, I want to take a closer look at the financials of one of those banks, Chase Bank, as much was written last week regarding the disputed audited financials that gave rise to the run it experienced that led to its closure.

I began by pulling up what they published on their website as the audited financials for the year 2014. I then looked at what was published in black and white, tucked into the back end, classified section of the Standard Newspaper on Wednesday, April 6th 2016. I will refer to these as the gospel truth accounts. This was a good six days after a full set of color financials had been printed in the Nation newspaper on March 31st 2016, which was the last date that a regulated financial institution in Kenya could publish their full year audited accounts. A few items clearly stood out as having been restated in the 2014 audited accounts. What do I mean? The 2014 audited accounts that were published in 2015 did not have a qualified opinion (I will refer to these as the chameleon accounts). However, when the gospel truth 2015 accounts were published on April 6th 2016, a few items in the 2014 numbers had been restated, which begs the question: what caused the chameleonic changes? Let’s begin at the top. In the published 2014 chameleon accounts, customer loans had been booked at Kes 53.8 billion. In the gospel truth accounts, customer loans for the same 2014 financial year were now reflected as Kes 64.4 billion, a difference of Kes 10.6 billion. Evidently in the 2015 audit, the auditors decided to treat certain assets differently, and found Kes 10.6 billion worth of new loans in the 2014 financial year, which had previously not been picked up in the 2014 audit that had been passed. But a balance sheet doesn’t just change dramatically; the movements on one line have to balance with movements on another. So I dug a little deeper and found the offending items. In the 2014 chameleon accounts, “other assets” were booked at Kes 11.9 billion. This is where the Islamic financing assets were said to have been parked. In a sudden change of heart (likely caused by missing documentation to convince the auditors that the other assets were indeed booked appropriately as Islamic financing products) the 2014 numbers restated “other assets” as Kes 3.4 billion, suddenly yielding up Kes 8.5 billion as the corresponding surprise entry in loans into the gospel truth accounts.

But that means that I needed to find Kes 2.1 billion in order to balance the figure of Kes 10.6 billion in new loans that appeared in gospel truth accounts. The only other significant movement that I found was that 2014 chameleon accounts showed that cash held at the Central Bank was Kes 7, 105, 986 by December 31st 2014. The gospel truth accounts reflected a different position of Kes 4, 953,180 by the same December 31st 2014, a difference of Kes 2.1 billion. Now that is a remarkably curious finding to which I have no answer. How does the same auditor convert funds that are reflected as held at the Central Bank in one year into customer loans the following year?

I bundled on some roller skates and slid into the profit and loss statement, as this was becoming an interesting ride. The 2014 chameleon accounts reflect a total staff cost figure of Kes 1.9 billion while gospel truth accounts restate this amount to Kes 1.7 billion a difference of Kes 200 million. The auditor, come the 2015 review, clearly did not accept some staff costs. What did the auditor discover that was different? I guessed that the answer was sitting in the other operating expenses line as it had moved by a similar Kes 200 million, from Kes 2.3 billion in chameleon accounts to Kes 2.5 billion in gospel truth accounts. Someone had tried to park Kes 200 million worth of expenses as staff costs, and while the auditor bought that story in 2014, he clearly wisened up in the 2015 audit process and restated the 2014 numbers accordingly.

That was just a cursory view on the 2014 numbers, as much attention has been paid to the 2015 full year numbers without looking at the significant restatements of key areas of the 2014 results. This restatement was a key contributor then to the growth of two numbers: the gross non-performing loan (NPL) numbers in 2015 as well as insider loans to directors, shareholders and associates. Gross NPLs moved from Kes 3.1 billion in 2014 to Kes 11.3 billion in 2015, an increase of Kes 8.2 billion and a figure quite close to the movement in the other assets line stated above. Insider loans grew from Kes 1.3 billion to Kes 10.5 billion in 2015, an increase of Kes 9.2 billion. This would mean that includes Kes 8.2 billion of “other assets” plus an extra Kes 1 billion that has emerged as new loans. Insiders had a few busy years clearly! The challenge for the receiver or for any new investor were the bank to be sold, will be to realise the securities held against these insider loans, assuming of course, first that the insiders do not have the capacity to repay these surprise loan entries and secondly that the true realizable value of the securities is reflected. If the insiders do have the capacity to repay, then that’s another story. Public focus has largely been on the insider loans, but the rubber will meet the road when proper due diligence is undertaken on the existing loan book, a large part of which sits as un-amortizing over drafts. Therein lies the true challenge in establishing capacity to repay.

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