This is how Central Bank will deal with Imperial Bank

Kenya‘s central bank will have a clearer picture by March about how to deal with Imperial Bank, which was placed in receivership in October when fraud was uncovered, the central bank governor said on Tuesday.

Patrick Njoroge also told Reuters he was strengthening supervision in the wake of the Imperial Bank case and said mergers would help create resilient institutions from the “one-trick ponies” found in parts of the banking sector.

The Imperial Bank incident, which came two months after the liquidation of a smaller bank, rattled confidence in a financial community where more than 40 foreign and local banks operate.

Those with up to 1 million shillings ($9,800) at Imperial Bank, accounting for almost 90 percent of depositors, have started receiving their money back in full. But larger depositors must wait for a full examination of the books before they receive additional cash.

“We expect that this work will be done and completed by the end of March next year, and at that point we can decide on a way forward,” Njoroge said. Paying small depositors first “allowed us a bit of time” to examine and verify all the loans and deposits at the bank, he added.

“All options remain on the table,” he said of Imperial Bank, saying these included liquidation, acquisition by another bank or a capital injection by shareholders to restart operations.

Until now, he said, the private shareholders had “not been forthcoming” with the extra capital that the central bank and the state-owned receiver had said would be needed to reopen Imperial Bank, which was shuttered on Oct. 13.

“What was going on in this bank was fraudulent misrepresentation,” Njoroge said. But he acknowledged that supervisors “did not interrogate in a fundamental way the data” at the bank, which used its IT system to disguise its activities.

Court papers filed by the receiver in October showed the bank has a hole of more than $335 million caused by siphoning of funds by top managers in the 13 years since 2002.

“We do realise that we missed what was going on,” he said, saying the bank was responding by improving skills and ensuring supervisors included someone who was “IT savvy” on team.

Kenya announced a moratorium on a planned new banking licence last month, a step Njoroge said was partly to give the central bank “time to strengthen our own internal supervision processes.”

He also said the moratorium gave commercial banks a chance to examine their business models and improve “resilience”.

“If they consolidate, … you would have two institutions that would help each other from their strengths,” he said.

“The models that they have are very one-trick ponies. They are good, but if you shake the models a little they may fall apart,” he said, in a reference to stress testing.