Imperial Bank understated deposits to hide fraud scheme

Imperial Bank managers understated the lender’s deposits by S8 billion and squeezed its loan book to hide a massive fraud scheme that led to its closure last month, the Central Bank of Kenya said Tuesday.

Understating the size of its business also allowed the bank to operate with lower capital than it needed while keeping the regulators happy.

“We also discovered that Imperial Bank’s financial statements were not correct and were actually misleading. For instance, the deposits were understated by S8 billion and the lending by such order of magnitude, which was not shown in its accounts,” Central Bank of Kenya (CBK) governor Patrick Njoroge said during a hearing of the Senate’s Finance Committee.

Dr Njoroge said that the financial services sector regulator had sought the International Monetary Fund’s help to strengthen its supervisory abilities and sent memos to auditors of banks directing them to conduct a deeper scrutiny of the numbers presented to them during the next onsite audits.

Given the capital requirements of banks, the Business Daily estimates the lender was undercapitalised by at least Sh4.5 billion – having reported Sh50.2 billion deposits and a loan book of S6.2 billion requiring a capital position of Sh8 billion.

Owners of banks are required to invest at least a shilling for every Sh10 collected from the public as savings.

“We will be interrogating bank data not just look at the report. The plan is, for instance, to interrogate the loan by loan data in the system, not just the report. I will also be sending a letter to all auditors of banks asking them to do the same in their next cycle of audits,” said Dr Njoroge.

Questions have continued to linger over the regulator’s supervisory abilities given that it approved Imperial Bank’s sale of a Sh2 billion bond less than three months before its collapse.

Dr Njoroge said the regulator was hiring more experienced staff in the supervision department and had sought help from international partners to help shore up its capabilities.

Separately, the Central Bank Tuesday met Imperial Bank shareholders for a second time to push them to inject additional capital into the firm and speed up ongoing efforts to reopen it.

READ: Imperial Bank could re-open in November: CBK says

The CBK is also asking the lender’s top depositors to convert their savings to equity in support of the additional capital from the shareholders.

The regulator has indicated that it intends to reopen Imperial Bank before the end of the month if shareholders and large depositors accept the recapitalisation plan.

If reopened, the CBK said, small depositors would be allowed full access to their money while large savers will be limited to withdrawing specified amounts. The CBK has not disclosed its definition of small depositors, but the figure is expected to be higher than the insured Sh100,000.

Dr Njoroge admitted that some of the small lenders had experienced different degrees of deposit withdrawals following the closure of Imperial Bank forcing the CBK to lend them money using instruments commonly referred to as reverse repos.

“I have been talking to chief executives on how the week ended and last week the indication was that we have turned the corner with deposit outflows with those that were under the pressure of outflows now posting more inflows than outflows,” he said.

The CBK has also asked large banks to lend to their smaller rivals in order to redistribute liquidity across the industry. Kenya’s is a highly skewed market in which the four largest banks control more than half of the country’s total savings.

The regulator has hired an American based forensic auditor to help it retrace the cash lost at Imperial Bank. The bank’s depositors are estimated to have lost S4 billion over a 13- year period in a fraudulent scheme masterminded by its late chief executive, Abdulmalek Janmohammed.

READ: How Imperial Bank chief stole savers’ billions

One of the companies said to have benefited from the fraudulent lending, W. E. Tilley is said to be willing to repay Sh10 billion loaned to it. The CBK has attached properties of other persons said to have been beneficiaries of the scheme.