Lessons for CBK from the Bank of Uganda

Saturday October 31 2015

Central Bank of Kenya (CBK) Governor Patrick Njoroge. PHOTO | FILE

A key question following revelations of massive fraud at Imperial Bank Kenya — where $350 million was irregularly lent out through parallel banking — is around the role of the Central Bank of Kenya in protecting depositors’ cash.

The Central Bank of Kenya Act mandates the institution to analyse financial reports and other returns from banking sector players to confirm compliance with regulations. The Act also authorises CBK’s officers to do both on- and offsite surveillance to examine business records to ensure compliance with the legal and regulatory requirements.

However, Imperial Bank’s fraudulent transactions raise questions over the quality of the Central Bank’s supervision. How, for example, was it possible for a legal firm hired to conduct a due diligence on Imperial Bank to smell a rat and advise its client accordingly, when the CBK that supervised Imperial for 13 years failed to expose and stop the fraud?

READ: How due diligence saved top Kenyan lender from Imperial Bank deal

CBK could take some lessons from Bank of Uganda (BoU), its counterpart in Uganda, which after witnessing several banks collapses, tightened its banking regulation and now has the best regulated banking sector in the region, according to a recent report by the Global Economic Index.

For example, BoU has already moved in on Imperial Bank Uganda, and is selling off the Kenyan unit’s stake. What did the Ugandan regulator know about the Kenyan subsidiary? What prompted the sale of shareholding even before the Kenya unit brought the fraud allegations? Weren’t there other options?


Christine Alupo, BoU’s director of communication, said that BoU’s interest is to see that shares held by Imperial Bank Kenya, the majority shareholder in Imperial Bank Uganda, are sold to a “deep-pocketed” solid financial institution.

“Once they new investor takes charge of the bank, they will be responsible for appointing a new board of directors that will take on the duty of controlling the affairs of the bank,” Ms Alupo said.

In 1999, Uganda witnessed the collapse of Greenland Bank, which saw majority of its depositors lose their money after the bank went into liquidation. Since then, BoU has tightened its banking regulations, operating a strict regulatory regime that is pro depositors.

After the collapse of Greenland Bank, Uganda introduced new banking rules, where banks were now required to maintain sufficient capital, while those that are under-capitalised were not to be bailed out.

It also requires now investors in the banking sector to have other investments outside the banking sector, which can be attached in case of liquidation.

In 2010, under gazette notice 43, Uganda revised the 2004 financial institution minimum capital requirements.

“Any person or institution carrying out business in the name of a bank in Uganda had to have a liquid investment of $1.25 million in other sectors approved by the Bank of Uganda,” the then Finance Minister Syda Bbumba said in the notice.

Under the revised minimum deposit requirements, all commercial banks are required to maintain at least a minimum balance of $750 million.

In 2012, for instance, the National Bank of Commerce (NBC) was placed under statutory management. BoU quickly transferred NBC’s deposits and some assets to Crane Bank, through a purchase of assets and assumption of liabilities. This was done to safeguard the depositor’s interests in the collapsed bank.

Unlike Kenya, BoU, which runs its bank supervision under the commercial banking department, is always looking out for potential risks and proactively advocating takeovers and liquidation whenever they feel depositors’ face exposure to a distressed financial mainly focuses on commercial banks health and strict adherence to regulations.

Imperial Bank’s fraudulent activities bring out the question of the quality of the supervision currently in place. Two months before its closure, the bank had floated a $20 million bond after receiving approvals from both the Central Bank and Kenya’s Capital Markets Authority.

CBK Governor Dr Patrick Njoroge admitted that bank supervision needs strengthening in order to avoid a repeat of the Imperial Bank case.

“We are going to do investigation into how this lapse happened. It will also focus on whether there was collusion between the bank and supervisory staff,” Dr Njoroge said.