Failed banks hold Sh13bn in customers’ cash— IMF

Customer deposits worth Sh13.7 billion are still held up in some Moi-era banks that went bust up to three decades ago, a new International Monetary Fund (IMF) report has shown, underscoring the high cost of liquidating banks and selling off assets to settle liabilities.

According to the IMF report, the 17 banks, 14 of which were liquidated between 1994 and 2003, were holding assets worth Sh84.6 billion, which includes unpaid loans and properties that could be actively generating returns in the market.

This is the first time that authorities have compiled the total balance sheet of the lenders under liquidation after the IMF said they had the potential to affect money supply in Kenya.

The Bretton Woods institution said that if those deposits were acquired by existing commercial banks and included as deposits in broad money, the maximum impact would be to increase 0.51 percent of broad money in the economy.

Kenya Deposit Insurance Corporation (KDIC) provided the Central Bank of Kenya (CBK) with a trial balance data for each of the 17 commercial banks in liquidation as of January 2018.

“In aggregate, total assets of all banks in liquidation amount to Sh84.6 billion, accounting for 1.9 percent of commercial banks’ total assets. Loans outstanding account for 3.1 percent of commercial banks’ loans. Deposits account for 0.45 percent of commercial banks’ deposits both included in and excluded from broad money,” the IMF advisory team said.

BITTER LIQUIDATION PROCESS

Resolution of several institutions have dragged for three decades, leaving dispossessed depositors in their wake as the KDIC tries to sell off the banks’ properties and go after borrowers to repay depositors.

Since 1993, several lenders including Post Bank, Trade Bank, Trust Bank and Euro Bank, have collapse due malpractices and irregular lending by executives and political cronies.

Dubai Bank, which was the last lender to be liquidated in 2015, was linked to dubious lending worth Sh1.3 billion to a dozen firms associated with Moi-era powerbrokers, including former Youth for Kanu ‘92 chairman Cyrus Jirongo, according to an audit report by Crowe Horwath East Africa. Upon its collapse, nearly 99 percent of its borrowers stopped repaying loans totalling Sh4.4 billion, prompting KDIC to resort to collateral and litigation to recover some money with which to pay depositors.

KDIC also sought to attach Sh1.1 billion that the bank’s founder and former chairman, Hassan Zubeidi, was demanding from a Khartoum-based contractor, Active Partners Group, in a separate case indicating the extent to which the corporation was willing to go to get back depositors’ money.

The bitter process of liquidation forced CBK and KDIC to try and resolve the collapse of Imperial Bank and Chase Bank, which went under shortly after Dubai Bank.

The regulator carved out the assets of Chase Bank and sold them to the State Bank of Mauritius while Imperial Bank’s assets were carved out for Kenya Commercial Bank, a deal that is yet to be concluded to date, risking another long process of liquidation. Although Imperial Bank has not been liquidated, it has been under receivership for almost five years, leaving tales of woe by depositors who lost money.

Bank collapses have also inspired reforms in the sector with KDIC promising that no bank would collapse under its watch as it would proactively engage struggling banks to find ways of resolving their weaknesses before they dissipate. KDIC has also introduced risk-based insurance cover on deposits so that risky banks pay more as a motivation to ensure prudent lending.

KDIC chief executive Mohamud Ahmed Mohamud said from July this year, the corporation will increase deposit coverage from the current Sh100,000 to Sh500,000.

“With this move we will increase coverage from 90 percent of the deposits to 98 percent and in terms of value we will increase cover from eight percent of deposits to 20 percent,” Mr Mohamud said in an earlier interview.

Kenyans had saved up Sh3.55 trillion in deposits as at October 2019, according to CBK data. In turn, banks have issued loans worth Sh2.82 trillion. However, Sh347.7 billion worth of these loans were not being paid back, posing a risk to the sector.

In an earlier report on Kenya’s fiscal transparency, the IMF revealed that KDIC had an exposure of Sh261 billion in terms of the money they insured.