National Bank of Kenya headquarters in Nairobi. Photo/FILE
By GEORGE NGIGI
In Summary
- A former risk manager with the bank says the management ignored his advice that it dispose of Treasury bonds in the bank’s possession and instead sacked him for offering a professional opinion.
- The claims are contained in court documents in a case in which John Kabiru has sued NBK for wrongful termination of employment.
- Last year NBK reported a 52.7 per cent drop in profits to Sh729 million from Sh1.54 billion a year earlier
The National Bank of Kenya
(NBK) has been drawn into fresh controversy following claims that the
massive drop in its profits last year was due to negligence by its
management.
A former risk manager with the bank says the
management ignored his advice that it dispose of Treasury bonds in the
bank’s possession and instead sacked him for offering a professional
opinion.
The claims are contained in court documents in a
case in which John Kabiru has sued NBK for wrongful termination of
employment by former chief executive Reuben Marambii.
Mr Kabiru says in his Sh14.6 million compensation
demand that the lender hid its overexposure in the bond market from the
Central Bank of Kenya
(CBK).
(CBK).
He claims that minutes of a meeting in which he
explained to the board how the bank stood to lose from its Sh10 billion
bond portfolio held with the purpose of trading in the secondary market
were altered before submission to CBK in order to avoid alarm.
Last year NBK, which is listed at the Nairobi
Securities Exchange (NSE), reported a 52.7 per cent drop in profits to
Sh729 million from Sh1.54 billion a year earlier and Sh2.02 billion in
2010 when it invested in the Treasury bonds.
“The managing director developed a negative
attitude towards the claimant and deliberately ignored the claimant’s
investment advice and recommendations on all aspects that involved risk
management,” Mr Kabiru says in a memorandum of claim.
“As a result, the respondent improperly made
irregular bond investments totalling a staggering Sh10 billion, a
decision that negatively affected profitability of the respondent and
raised serious questions as to the going concern basis of the respondent
as a banking institution. The respondent has to date not recovered from
the unwise and irregular investment,” the former NBK manager says.
Bonds have an inverse relationship with interest
rates — guided by the logic that when interest rates go up it means
current government securities holders are earning less than the rest of
the market and hence the securities lose value.
NBK, however, holds that the investment in the
bond market was the best option available to it at the time. The bank
had excess liquidity in mid 2010 after the first (Sh5 billion) tranche
of a Sh21 billion bond issued by the government to clear bad debts
guaranteed to its agencies matured.
NBK opted to put the money in bonds as its conversion to loan facilities would take time.
“The decision was informed by low earnings from
alternative investments at the time. Indeed, the investment in bonds
contributed Sh580 million in interest and Sh590 million in valuation
gains making a total of Sh1.17 billion for year 2010,” said the bank in
an earlier response to Mr Kabiru’s claims when he asked the CBK to
arbitrate in the case.
In an interview with the Business Daily
last year, Mr Marambii, the former managing director, dismissed the
claimant’s allegations, noting that the bank was not under obligation to
follow Mr Kabiru’s advice.
He added that the complainant was part of the 14-member committee that made the decision.
Mr Kabiru, however, holds that there were early
signs of the bank’s over-exposure because it was borrowing from other
banks and the CBK to fund the bond trading book.
“As at 23rd July, 2010 we had borrowed Sh3.6
billion and within the same month of July purchased Sh2.6 billion worth
of bonds,” Mr Kabiru says.
As 2010 came to a close interest rates started
rising – meaning that banks were exposed to revaluation losses for bonds
they held for trading.
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