How to tell if your bank is headed for collapse

The banking industry has been hit by panic and loss of confidence from the public after three banks went down in a period of less than a year.

It started with Dubai Bank, which the Central Bank of Kenya put under receivership on 2015 following liquidity problems.

Less than six months later towards the end of 2015, the CBK put Imperial Bank under statutory management after discovering wide-spread irregularities and suspect dealing being conducted by the bank

The most recent bank to be put under receivership followed in less than four months.

Chase Bank was put under receivership following a spate of panic withdrawals after messages on social media alleged that the bank was faced with liquidity problems and was headed for collapse.

While the banks collapsed, millions of shillings belonging to chamas, SMEs, common working class people and sacco contributions were held up in the banks, with their depositors being turned from rich man to pauper within a day.

The crisis in the banking industry left Kenyans wondering if it could be avoided, and how then can they tell if a bank is headed for collapse?

We spoke to Elizabeth Nkukuu, a Partner and Chief Investment Officer at Cytonn Investments Management Ltd about the red flags that consumers can pay attention to when they decide to invest in a particular bank.

Know the people behind your bank

Speaking to the PowerBreakfast show on Citizen TV recently, Ms Nkukuu said an institution is as good as the people behind it adding that if you understand the people at the helm of the institution, you can predict how the institution will do.

“Know who is behind the bank and how the bank is governed. Institutions are people so understand what drives the people behind your institution. Are they professional?” she posed.

Another key indication of how healthy an institution is, is how long its leaders have been in management, said Ms Nkukuu.

“You must understand processes behind the bank. Imperial Bank management had been at the helm for close to 20 years, if a person has been the head of an institution for long, they know all the processes and can manipulate the system,” she said.

How long have the leaders been at the helm of the bank?

She added that the length of time an institution has been in existence is not as important as the people leading it.

“The institution could be in existence for long, but it is important to know the people running it,” she said.

Asked whether Chase Bank handled the situation best, Ms Nkukuu said if the situation had been handled earlier it would have turned out differently.

“With hindsight, Chase bank could have handled the situation better. The bank should have handled the issue over time since it did not happen overnight,” she opined.

What other investments can people buy into, aside from banks?

“Best short term investments to buy into are unit trust and treasury bills. Treasury bills are the most secure because they are issued by the government,” she said.

According to Elizabeth, long-term investments include property and stocks.

“When investing in stocks speak to an expert because you might think that a company is doing well but there’s something you don’t understand. Its good to know what you’re investing in,” she advised

Speaking about Kenya’s banking industry, Elizabeth said that as a country Kenya is overbanked with 42 banks to serve 42 million people.

“For the banking sector to do well the banks must consolidate. Merging will increase service delivery and competition with diversified products,” she said.