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Kenya: Law firm pins blame on CBK for laxity in protecting fallen banks

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A group of lawyers has accused Kenya’s banking regulator, the Central Bank of Kenya (CBK) on its laxity to protect financial institutions and guarding depositors’ savings.

Tracking a series of events in the banking industry since the country gained independence, the commercial law experts say regulator has done very little in its capacity in protecting interests of depositors and growth of lending institutions.

MMC Africa Law says that of all the banks that have collapsed over the years, only two have ever been re-opened, and one did not even survive. This is despite CBK having at its disposal the Banking Fraud Investigations Unit (BFIU).

“None of the directors of the collapsed banks has ever been successfully prosecuted and convicted. This fortifies the view that CBK has been part of the problem and not the solution. It is time for CBK to be held accountable,” said Mr Edward Muriu, Senior Partner and Team Leader of MMC Africa Law.

Trust Bank was reopened in August 1999 and Bullion Bank in January 2000. The depositors in both banks had agreed to capitalize part of their deposits as shares. Only Bullion survived having been acquired by Southern Credit, then merged with Equatorial Commercial Bank.

The collapse of banks between 1984 and 1989 necessitated amendments to the Central Bank Act and the Banking Act in 1989 to create firmer licensing and credit regulations. The Deposit Protection Fund Board, a precursor to the present Kenya Deposit Insurance Corporation was also established providing insurance to depositors’ money.

Despite the enhanced legislative and regulatory measures, there was a second wave of bank failures between 1993 and 1995 when nineteen banks went under. Most of the banks that collapsed during this period were linked to the Goldenberg scandal.

“It is unfortunate that the Central Bank of Kenya, which should have taken prompt action to ensure compliance with the statutory and regulatory framework, failed at the hour of need to protect depositors,” says Muriu.

There are claims that one of the CBK’s auditors for Imperial Bank was a business partner to the bank’s managing director.

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In the case of Imperial Bank the former Central Bank Governor, Prof Njuguna Ndung’u, together with other Central Bank officials, including, manager banking supervision Reuben Cheres and assistant director banking supervision Matu Mugo are said to have been in improper relationships with Imperial Bank’s senior management—comprising of the late Abdulmalek Janmohamed (Group MD), James Kaburu (Chief Finance Officer) and Naeem Shah in providing false financial records.

CBK brought in American firm FTI Consulting on board to carry out a forensic audit on what precisely transpired the day before Imperial Bank was placed receivership. It is reported that the audit report by FTI Consulting indicated that the bank’s managers could have stolen up to Sh 45 billion through dubious loans, but the Central Bank of Kenya has never made this report public, the law firm claims.

“This then begs the question; what does the Central Bank of Kenya have to hide? Are they trashing their own commissioned report in an attempt to cover up their own negligence?’’

CBK’s main role is to foster the liquidity, solvency and proper functioning of a stable market-based financial system.  It oversees the licensing and regulation of financial institutions. Every institution seeking to transact banking business or financial business has to get approval from the CBK.

As it issues licenses, the CBK also has the mandate of vetting the management of the institutions as to their professional and moral fitness, and this is also from time to time. However, facts and history openly show that the Central Bank of Kenya has failed to reign in errant bank managers.

“As a supervisor to banking institutions, the CBK headed by Governor Patrick Njoroge is required to inspect books of accounts, audit, oversee maintenance of minimum capital requirements and regulate general operations of financial institutions. All this is meant to protect depositors’ money, but how do you protect depositors’ money when it is already gone? CBK is only proving to us that if you want to rob a bank, just own one,” says Muriu on CBK culpability.

“The administrative action by Central Bank to close the commercial banks hence depriving the depositors’ access to their hard-earned money is a violation of Human Rights under Chapter 4 of the Constitution of Kenya 2010. In view of that Constitutional violation the saving grace for the depositors is spelt out under Article 23 (3) (E) of the Constitution which provides for compensation,” says the advocate.

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