Dubai Bank was a time bomb waiting to explode

By James Muliro

On August 24, the Central Bank of Kenya ordered the closure of Dubai Bank of Kenya less than ten days after the regulator had put the lender under receivership, marking the end of an era for a bank that has in the past three years been in news for failing to pay its debtors and crediting the accounts of its clients  for payments made.

The fate that befell Dubai Bank of Kenya Limited was a ticking time bomb that was bound to explode. Questions have now emerged on the potential negligence on the part of the Central Bank of Kenya (CBK) prior to the appointment of the current governor Dr Patrick Njoroge, over the warning signs of a bank that was headed down the precipice.

In just about two months of his appointment, Dr Njoroge appears to have quickly read the signs of the small bank on the brink of collapse and put the lender under receivership to prevent it from going under with the funds of depositors and its creditors.

Less than a week after the lender was put under the administration of the Kenya Deposit Insurance Corporation (KDIC), local investor and director of Cortec Mining Kenya, Mr Jacob Juma claimed he had blown the whistle long ago over suspected mismanagement at the lender in which he was a customer and depositor.

He had also through his lawyers, asked the Central Bank to indeed confirm whether Dubai Bank was actually licensed in a due manner.

And just mid last month, he wrote on his Facebook page lamenting how the bank he had raised several red flags against, went down with his money totaling Ksh247 million.

“I always speak and write honest truth. This is a classic example (of) where I wrote to CBK, five months ago about Dubai Bank. They ignored my warning and it came to pass last week (Friday 14). The bank has collapsed with my two accounts in excess of Sh197 million and Sh50 million totaling Ksh247 million,” he wrote.

In June this year, Mr Hassan Zubedi, a principal shareholder said the bank was unable to pay Sh197 million to Kwanza Estate associated with Mr Juma as it lacked sufficient cash flow to execute the payment. Kwanza Estate had deposited Sh167 million at the small lender as a pre-condition it would get a loan but this is yet to happen. The Sh197 million constituted interest accrued since 2013 from Sh167 million deposit.

In May this year, its managing director, Mr Binay Dutta fled the country when the CBK was undertaking investigations into his role in a questionable share sale guarantee scheme which, it emerged, had all the potential signs of bringing down Dubai Bank. CBK was scrutinising the legality of the guarantee that Mr Dutta issued for a share sale involving Tunasco Insaat, a Turkish firm whose co-owner, Sevket Tunc was demanding that it be wound up for declining to pay him Sh54.9 million from the share sale transaction. Later, Dubai Bank filed the suit against Mr Dutta on May 20, 2015 a day after the ultimatum for settlement of Mr Tunc’s debt lapsed. The CBK joined the suit as an interested party.

The lender has, since the allegations came to the limelight, seen customers flee with their deposits. Before the cracks began to emerge at the lender, it held about Sh2 billion in customer deposits. By the end of 2014, only Shh4 million was left in its accounts as customer deposits. Questions regarding Mr Zubeid’s nationality had also emerged with allegations that he was Yemeni and not Kenyan. He was unable to dispute this. It was alleged he had acquired Kenyan nationality through fraudulent means.

It appears now that the CBK ignored the warning signs about an unhealthy bank for about three years now. The most apparent warning signs emerged in the public domain in November 2012 when former managing director Nereah Said was fired from the position by her chairman and principal shareholder, Mr Zubeidi after she accused him of abetting fraudulent practices at the lender.

Since then, the bank has been in the limelight on accusations of failing to honour its debt obligations and falling out with top managers that also saw a managing director who succeeded Ms Said, Mr Dutta flee from the country. In 2012, Ms Said had made shocking revelations on a sequence of irregular transactions at the bank that put nearly Sh2 billion in customer deposits at stake.

Ms Said alleged that weak governance structures abetted by the lender’s chairman and principal shareholder (Mr Zubeidi) exposed the lender to massive fraud and funds theft. Mr Zubeidi, she alleged had also assumed executive powers at the bank, sidestepping the MD’s decisions, awarding highly risky loans to friends and acquaintances. This move exposed the already vulnerable lender that was suffering from serious cash flow challenges, to high levels of bad debts. After she was sacked, Ms Said moved to court seeking compensation for wrongful dismissal. CBK, then under Prof Njuguna Ndung’u as governor indicated that it would carry out independent investigations and take appropriate legal action should the allegations be established to be true. This never happened during Prof Ndung’u’s tenure, not until his successor took action about two months after taking over as governor.

But, on August 14, the CBK put Dubai Bank under receivership to prevent it from collapsing with depositors and creditors funds. CBK said the bank had desecrated banking regulations by keeping inadequate capital and was facing looming collapse after it had failed to honour financial commitments.

Besides defaulting on Bank of Africa’s Sh48.18 million, the lender had also fallen behind in its payment of the daily cash reserve ratio (CRR) to the CBK as enshrined in the banking Act. Each bank in Kenya is by law required to keep 5.25% of its deposits with the CBK every month as the minimum CRR.

Section 43(2) of the Kenya Deposit Insurance Act, 2012 requires the Central Bank of Kenya to appoint the KDIC as a receiver of a bank, if, among other things, an unsafe or unsound condition to transact exists, a bank is likely to fail to meet its financial obligations, a bank has substantially insufficient capital or if there is a violation of any law or regulation.

The CBK said it had considered and determined that Dubai Bank’s violations of banking laws and regulations, including failure to maintain adequate capital and liquidity ratios as well as provisions for non-performing loans (NPL) and weak corporate governance structures were detrimental to the interests of its depositors, creditors and the public. It said it had been closely monitoring the lender’s daily CRR from July 14, 2015 when the bank began breaching its daily CRR requirements. An attempt to get Dubai Bank to correct the situation failed. Instead, its CRR continued to deteriorate.

“The non-compliance with the cash reserve ratios has to date attracted a total penalty of Sh5,395,721.03. Owing to the consistently deteriorating cash reserve ratio position of Dubai Bank and its failure to honour financial obligations, including Sh48.18 million due to Bank of Africa Kenya Limited, the CBK is of the considered opinion that the bank will most likely fail to meet its financial obligations in the normal course of business,” the CBK said when it put the lender under receivership on August 14.

Later, on August 24, the KDIC recommended that the bank be liquidated. “Considering the magnitude of the weaknesses of hte Dubai Bank Kenya Limited, liquidation is the only feasible option.

“At this point, all ensured deposits shall be paid by KDIC up to a maximum of Sh100, 000 per depositor. Any balances above this amount shall equitably be as and when the liquidator accumulates enough funds from sale of assets of the Bank and recoveries from outstanding loans and debts,” KDIC’s acting chief executive officer said.

The bank was awarded a banking license in April 2000 and is the second lender in a decade to be put under receivership. Charterhouse Bank was put under receivership in 2006 on accusations of supporting money laundering.

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