Central Bank of Kenya to liquidate bank after ‘severe violations’

The Central Bank of Kenya has triggered the liquidation of a commercial lender after uncovering what it called “severe violations” of banking regulations.

The central bank appointed the Kenya Deposit Insurance Corporation (KDIC) to liquidate Charterhouse Bank’s assets. The action comes around a month after the CBK asked the KDIC to liquidate the remaining assets of Chase Bank, signalling the end of a multi-year resolution process.

A report into Charterhouse by managers appointed to take over the ailing lender described liquidation as the “only feasible option”. In a statement, the CBK said it agreed liquidation would be the best way to protect depositors and ensure an orderly resolution.

Charterhouse is a relatively small bank and has been in trouble for over a decade. The CBK first stepped in to put the bank under “statutory management” in June 2006 in a bid to protect the firm’s depositors and creditors. The CBK said as of 2006 Charterhouse ranked 30 out of 41 Kenyan banks by asset size, with a market share of 0.55%.

The bank was found to have committed several violations of banking regulations, “relating to lending, accuracy of returns submitted to CBK, and failure to obtain account opening documentation”.

In April, the CBK similarly directed the KDIC to liquidate the remains of Chase Bank, a larger lender that was taken over by a second Kenyan bank, KCB, in 2016, after Chase came close to collapse. In 2018, 75% of Chase’s assets were sold off and the remainder reverted to the control of the KDIC.

Earlier this year, the KDIC reported that the “weak state” of Chase’s remaining assets implied liquidation was the only feasible option. The CBK agreed and triggered the liquidation process on April 16.

Today (May 12), the KDIC invited depositors to apply to retrieve any remaining funds from Chase Bank. The insured limit is 500,000 Kenyan shillings ($4,700) – beyond this level, depositors will only be paid their share of Chase’s remaining assets.

The CBK’s most recent financial stability report, published in October 2020, said the broader Kenyan banking sector was “resilient”, though it added that government-imposed interest rate caps were holding the industry back. The central bank has warned on several occasions that the caps, designed to cut the cost of credit, risked undermining the supply of credit and could harm banks’ health.

The Covid-19 pandemic eroded the quality of banks’ assets, the central bank said, pushing gross non-performing loans up 15% in the first half of 2020. However, the CBK said capital levels had risen in recent years, and liquidity remained abundant.

“The banking industry’s outlook is expected to remain stable and resilient,” the central bank said. “This however, depends on the intensity and duration of the pandemic, which remains uncertain. Overall, the banking industry has sufficient capital buffers to withstand the Covid-19 pandemic shock.”