The sack of Imperial Bank and the run on Chase Bank could be triggers for yet another banking crisis in the country. In the past 36 years, Kenya has experienced three waves of financial meltdown with the first episode experienced in 1980. Here is a visualization of the effect of the banking crisis on the economy.
- Kenya missed on a healthy economic growth due to a series of banks collapse.
- Uganda had a GDP higher than Kenya in 1987.
- Two banking crises occurred when the GDP hit the $450 million mark.
The period prior to 1980 had a relatively positive economic growth bolstered mainly by agricultural exports such as coffee. Surplus revenue needed to find new avenues for investments and banking was an attractive venture given the relatively good returns that had been posted by multinationals in the country. A class of local businessmen, both African and Asian, emerged with accumulated capital to open a several commercial banks and Non-Banking Financial Institutions (NBFI). The good part was the capital requirements for setting up a bank had not changed for 24 years.
The race was on, who will lend the most cash. National Bank of Kenya (4th largest bank at the time) become the first casualty of this mad dash. In 1979, the bank recorded a loss incurred by non-performing loans brought about by over lending. By 1984, 40 percent of NBK deposits were wiped-out due to losses incurred by its NBFI subsidiary KENYAC – caused by a large loan made to a real estate developer.
Most of the borrowed money went to real estate speculation in Nairobi as can be attested by the number of court cases relating to land that ensued between bank and individual during this period. Institutions also started to invest in real estate by borrowing from banks. The total investments in real estate during this period amounted to Kshs. 5 billion with single projects that had budgets upwards of Kshs. 500 million. Only 20% of the money came from deposits, 80% percent were loans.
The period saw 24 banks and non-banking institutions collapse due to non-adherence to banking regulations such as providing unsecured loans, large director loans and ignoring proper due diligence of loaners’ ability to pay back. Here are the banks that went under together with 20% of the GDP.
The CBK responded by setting up the Deposit Protection Fund board in 1985 whose mandate is to capital injection in banks that are near collapse.
The Goldenberg Era
(1). The Goldenberg Scandal
This was the era of madness in the banking sector. The scene opens with Kamlesh Pattni setting up the greatest con in the country. Through his bank Exchange bank, he defrauded the Central Bank of Kenya by falsifying gold export certificates in order to benefit from the Exchange Compensation Scheme – a program setup by CBK to encourage gold export in the countty. In 1993, 6% of the GDP was lost through the Goldenberg Scandal – a massive Kshs. 5.8 billion was paid to Delphis Bank, Exchange Bank, Post Bank Credit, Trans-National Bank and National Bank of Kenya. Following the breaking of the story by David Munyakei, CBK went into action.
- License of Exchange Bank was withdrawn on 23rd September, 1993
- License of Pan African Bank was withdrawn on 21st October, 1993
- Post Bank Credit put under liquidation on 20th May, 1993
(2) National Bank of Kenya
Same year of 1993, the National Bank of Kenya was back to the business of irregular loans. The bank was forced to write-off 10% of its loan portfolio in addition to making provision for doubtful debt (state bad debt) amounting to 15% of the loan portfolio. Following the closure Post Bank Credit and adverse reports in the media on NBK’s performance, the bank suffered a run. The government had to bail out NBK with Kshs 0.5 billion in equity and Kshs 1.5 billion loan.
(3) Export Bank Africa
Another madness. On 4th March, 1994 a major customer of Export Bank Africa Ltd drew a cheque in favour of CBK for Kshs. 100 million which attracted some negative publicity. Following this, there was a run on the bank which the management tried unsuccessfully to ward off . They denying in the Press any ownership connection between them and the said customer.
Noticing that their position was getting worse, the management resorted to irregular transactions in the clearing house and over-borrowing in the inter-bank market at exorbitant interest rates in order to meet their obligation.The irregular transaction was detected and reported to the police by the CBK, which led to the arrest of its two senior managers and they appeared in court. On 12th April, 1994, the CBK placed Export Bank of Africa under statutory management.
(4) Central Bank of Kenya
Central Bank of Kenya had to swing in action to save the economy from collapse. A major set of monetary policies were put in action in 1995. If you collected currency notes printed in 1995 you’d realize there are two printing dates – January 1, 1995 and July 1, 1995. Currency printing was done twice within the year to inject more cash into the market. The CBK licensed the first batch of 19 forex bureau. Prior to 1995, only the CBK transacted in the FX market (anyone traveling out of the country obtained dollars from the CBK and subsequently deposit them on re-entry to the country). Herein are the Bureau De Change licensed in 1995:
This was followed by a free floating exchange rate of the Kenya shilling – the value of the Kenyan shilling thereafter determined by its supply and demand in international money market. Prior to the reform, the Kenyan government followed a fixed-exchange regime in which the shilling was pegged to the US dollar at a specific rate, subject to alteration only to rectify substantial distortion.
The total domestic credit was pushed to 52% of GDP – most of the economy was funded through debt. Another monster arose, the inflation was at a staggering 55% percent in the preceding years. This meant the country got into a negative interest rate period – this meant the interest rate offered on savings was lower than the inflation rate leading to loss.
The negative interest rates led to an over investment in the real estate market to guarantee positive results. This might as well be the genesis of the over-priced apartment prices in upmarket Nairobi. The Kenya National Bureau of Statistic (KNBS) Statistical Abstract shows a sharp rise in contribution of real estate in to GDP. In the year between 1994 – 1995, real estate contributed to 12.5% of the GDP, a rise from 1.7% in the preceding year.
The Third Banking Crisis
Just when the economy was picking up, a third banking crisis hit the country. It begins with problems at NSSF. The inflation preceding 1998 had erode most of the investments made by the NSSF and they were unable to pay retiring workers. A new strategy was put in place – to come to the rescue of ailing banks. The bank had just transferred Kshs. 256 million to Euro Bank and the next day collapsed. When all these banks unfolded, the NSSF had a KShs. 7.9 billion loss.
The collapse of Euro Bank had many casualties including; Kenyatta National hospital, Kenya Post Office Saving Bank, Kenya Pipeline, Kenya Tourism Development Corporation, NHIF, Kenya Sugar Authority, Pyrethrum Board of Kenya and Postal Corporation of Kenya. The greatest casualties must have been Pyrethrum farmers who had deposited Kshs. 159 million in the bank. In total Kshs. 3 billion was lost through Euro Bank.
A thrilling case in this period involved the National Merchant Bank of Kenya (NMBK) which was one of the largest local bank. A high ranking government official had stole $600 million from the bank and it collapsed the following week. In 1998, 6 banks collapsed due to lack of liquidity, fraud and insider loans.
The largest of the failures was Trust Bank, Kenya’s fifth largest bank. The bank, led by Asian Ajay Shah, was alleged to have operated an off-book banking system, with funds from the Asian community passing through a parallel chopdi system that was not recorded on the main bank computers (presumably to avoid paying tax). Relatives had extracted at least $33 million in non-performing loans before its collapse but depositors lost more than Kshs. 13 billion. Shah fled the country.
Reliance Bank followed Trust Bank to the grave. The managing director of the bank was the architect of the collapse. He sold the bank’s assets thereby deleveraging deposits. The bank also becomes the haven for cheque kiting, money laundering and tax evasion. Many more banks followed suit and the GDP took a nose dive.
There’s nothing new under the sun when it comes to schemes for collapsing banks in Kenya. A good reminder is that the collapses heavy erode the economy. Will Imperial Bank and Chase Bank collapse usher another wave?