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Revealed! What Ailed Chase Bank And What It Means To Be Under Receivership.

More than 50,000 depositors with nearly Sh100 billion in Chase Bank and 1,400 employees were financially ruined on Thursday after the bank was brought down by fraudulent deals.

Chase Bank is said to have irregularly advanced Sh16.6 billion to various entities, with half of the irregular loans going to the bank’s insiders. For instance, one director lent himself Sh7.9 billion mostly without registered collateral and beyond regulatory limits. He gave himself more than the 25% of the total capital limit set in the Banking Act.

There are doubts as to whether additional Sh8.7 billion could be recovered, given that large segments of it were not being serviced or lacked documentation.

Bank chairman, Mr Zafrullah Khan, and Group Managing Director Duncan Kabui resigned on Wednesday after publication of the financial results showing the bank had not reported Sh8 billion insider loans.

The bank, ranked 11th of Kenya’s 42 lenders, failed to meet its obligations (such as clients’ instructions for payments) following the run, prompting the receivership call. It came down after the public withdrew Sh8 billion in one day, following reports that auditors had discovered problems with its accounting.

In the wake of disgruntled customers, the question many Kenyans are asking themselves is - what does being placed under receivership mean to the bank and its customers?

CBK stated that it had appointed Kenya Deposit Insurance Corporation (KDIC) to "manage, control and conduct the affairs and business of the institution". The financial regulator said that it had taken the measures to safeguard the interests of depositors, creditors and the public.

While under receivership, a financial institution remains closed until shareholders invest more capital to save it. KIDC - the receiver - can also opt to run a bank or sell it to repay depositors.

Section 35 of the Banking Act mandates the Central Bank of Kenya (CBK) to appoint Deposit Protection Fund Board (DPFB) as the sole liquidator of an institution that has become insolvent.

The liquidation of failed financial institutions is one of the measures undertaken by DPFB to resolve distress in the financial sector and protect depositors when other resolution options have failed. It is the orderly and painless winding up of the affairs of a financial institution, realization of its assets and settlement of claims against the financial institution. Liquidation has historically been an instrument of last resort when no other resolution option is possible.

After a bank is placed under receivership, initially depositors can only access up to a maximum of Sh100,000 of their deposits.

Depositors with balances in excess of the guaranteed sum of Kshs.100,000 are entitled to receive liquidation dividends based on the value of recoveries and proceeds from the sale of the institution's assets. However, liquidation dividends are only declared after payment of preferential liabilities as specified in the Companies Act and the Banking Act.

Other creditors are also entitled to payment of the liquidation dividends after proving their claims. Shareholders of the institution are entitled to payment of the residue after full payment to all depositors and creditors.
The final accounts have to be presented to the members of the Committee of Inspection, if any, for approval to resolve the winding up. Where there is no Committee of Inspection the Liquidator must give notice to the public in the local dailies of its intention to wind up the institution. The Liquidator must also give notice of intention to apply for release. Thereafter the liquidator applies to the court for the winding-up of the institution and disposal of the records of the institution. 

Central Bank Governor, Patrick Njoroge on Thursday told journalists that the bank's shareholders were committed to recapitalizing the lender, hence re-open the institution.

Njoroge added that, “Our expectation is that shareholders will put liquidity in the institution that will allow the bank to be re-opened.”

Chase Bank mostly marketed itself to youth, women and investment groups, making its collapse a devastating development for many families across Kenya.

20 years ago, what is now Chase Bank, was a small bank in Kisumu known as United Bank (Kenya) that was at the time under the receivership of the Central Bank of Kenya.

Several business people acquired a 60% stake in United Bank (Kenya) in 1995, after paying approximately US$1.23 million (KSh 95 million). Chase Bank was then incorporated and rebranded, with Mr. Khan becoming one of the founding directors.

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