Why Dubai Bank was denied clean bill of health

Prof Njuguna Ndung’u: Central Bank of Kenya governor (left) and Mr Hassan Zubeidi, Dubai Bank chairman. File 

By WASHINGTON GIKUNJU

In Summary

• Deloitte warns that Dubai Bank’s customers and shareholders risk losing more than Sh1 billion to an unreliable accounting and IT system that has weakened the lender’s financial base.
• The firm says that the bank’s financial statements had failed to capture numerous liabilities that if accounted for could significantly alter its balance sheet.
• Dubai Bank is the only lender that has yet to reach the Sh1 billion minimum capital requirement set at the end of last year.

Consultancy firm Deloitte has sparked a major audit row with Dubai Bank after it offered a qualified opinion on the lender’s finances, citing incompleteness of records.

At the centre of the row is the audit firm’s warning that the bank’s customers and shareholders risk losing more than Sh1 billion to an unreliable accounting and IT system that has weakened the lender’s financial base, leaving its position in doubt.

In a detailed report to the lender’s management, Deloitte says that Dubai Bank’s financial statements had failed to capture numerous liabilities that if accounted for could significantly alter its balance sheet.

The audit firm’s concerns echo an inspection report authored by industry regulator Central Bank of Kenya (CBK) in October last year that warned of Dubai Bank’s “precarious” liquidity position.

Dubai Bank is also the only lender that has yet to reach the Sh1 billion minimum capital requirement set at the end of last year.

The bank has consequently not been awarded an operating licence for 2013, more than four months after expiry of the 2012 permit. CBK has, however, allowed it to continue operating, having acknowledged receipt of its application for renewal and the required fee.

“In our opinion, because of the significance of the matters discussed in the basis for disclaimer of opinion, we have not obtained sufficient appropriate evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements,” says Deloitte in the report seen by the Business Daily.

Dubai Bank says it is surprised by the auditor’s opinion, insisting that it had addressed all the concerns raised in the report.

Dubai Bank reported a net loss of Sh23 million in the year to December compared to a net profit of Sh14.1 million in 2011, making it one of the three lenders that reported losses in a year when the banking sector’s pre-tax profit rose 20 per cent to Sh107 billion.

Deloitte made the detailed report to Dubai Bank’s management following its audit of the lender’s books in the financial year ended December 2012.

(Read: Deloitte queries Dubai Bank’s earnings report)

Top on the list of Deloitte’s concerns is the fact that the bank’s accounts as captured in the general ledger had failed to balance, leaving the auditors “unable to verify the completeness and validity of transactions or entries made in the year”.

Deloitte also found the bank’s system for processing and approving letters of credit inadequate, concluding that it exposed the lender to huge liabilities that were not provided for in its financial statements.

Dubai Bank objects to the inclusion of this matter in the audit report, saying it had demonstrated to the auditors that the anomalies were caused by the migration to a different IT platform T24 that left some of the data invisible.

“Deloitte knew about the ledger imbalance that arose during the system upgrade since December 2011. Why they are using this as a basis for qualifying our accounts now I do not know,” said Binay Dutta, the managing director.
 

Mr Dutta showed the Business Daily letters dated February 2013 inviting both Deloitte and CBK for a re-inspection of the system indicating that all the records were then available and up to date.

CBK said it was aware of Dubai Bank’s information system weaknesses, ledger imbalances and the inadequate capital position, which formed the basis of Deloitte’s qualified audit opinion.

“You may appreciate that any new system must initially experience challenges,” said CBK in a statement, adding that the bank had applied for renewal of its licence “and the application is being processed.”

Dubai Bank’s shaky financial position was first exposed last year after a bitter fall-out between the chairman Hassan Zubeidi and former managing director Nerea Said went to court.

(Read: Former MD accuses Dubai Bank owners of mega theft)

Ms Said, who is demanding compensation from the bank for irregular termination of her employment contract, accused the bank chairman of siphoning funds from customers’ accounts and engaging in irregular lending of the bank’s money to friends, exposing it to huge losses.

Mr Zubeidi and Mr Dutta denied that the bank is in financial difficulty, and accused Deloitte of having “ulterior motives” for giving a qualified audit opinion over matters that have been pending for two years.

Mr Zubeidi said he was confident the bank would raise its capitalisation, which currently stands at Sh917 million, to CBK’s minimum requirement and get a renewal of its operating licence.

“Our shareholders are not that weak, we will comply with Central Bank’s requirement,” said Mr Zubeidi.

Kenya’s banking system has been fairly stable since the tumultuous 1990s when lenders collapsed in quick succession under the weight of non-performing loans advanced to politically connected individuals and outright theft by management. No commercial bank has collapsed since the appointment of current governor Njuguna Ndung’u in 2007.

The emerging concerns about Dubai Bank’s financial position have attracted the attention of the regulator, who two months ago fined Mr Dutta Sh100,000 for “issuing letters of credit before all the weaknesses identified in the bank were addressed” as per a letter dated February 26.

CBK, in the inspection report dated October 24, had also noted Dubai Bank’s irregular issuance of letters of credit (LCs), stating that some records were not captured in the lender’s books, which amounted to operating a parallel bank.

“One of the aggrieved clients (Universal Coating Company Limited) is seeking a claim of about Sh1 billion from the bank in respect of supplies made to a Jordanian factory for steel in the Republic of Sudan,” notes the CBK report.

Dubai Bank says it could not honour the LC because there was a dispute between the two parties involved in the transaction who have since agreed to settle the matter.

The CBK report also says that a loan to Kuza Farms and Allied Group under influence and approval of the chairman had left Dubai Bank exposed to the tune of Sh428 million, equivalent to more than half of the lender’s core capital as at October 24.

Losses

Dubai Bank had total assets of Sh2.6 billion at end of December 2012, total customer deposits of Sh1.4 billion and outstanding loans of Sh1.8 billion.



The bank’s annual statements show its operating expenses nearly doubled to Sh581.4 million from Sh297 million during the same period.

Its interest income more than doubled to Sh411.7 million from Sh205 million but were wiped out by higher costs, including loan loss provision that jumped to Sh177.6 million from Sh81.6 million.

Court papers filed by Ms Said, however, allege that Mr Zubeidi claims he enjoys the protection of senior CBK and police officials, which the chairman denied during the interview.

In a preliminary audit report which was, however, edited from the final annual statement for this year, Deloitte questions Dubai Bank’s provisioning for losses, saying some non-performing, unsecured loans were not captured in the accounts.

Some assets “for which no adequate documentation was provided to support their validity and recoverability” were also included in the bank’s books.

 

A controversial purchase of a plot for Sh132 million for building the bank’s headquarters had also been included in the lender’s books as part of shareholders’ funds, which Deloitte said violated accounting rules.

“We agreed to set aside the amount until the plot is transferred into the bank’s name,” said Mr Zubeidi during the interview.

CBK had raised concerns over the bank’s weak corporate governance and failure to adhere to set accounting standards in its October report.

 

The CBK inspection report also detailed Mr Zubeidi’s alleged interference with management decisions contrary to good corporate governance practice.



The chairman is also accused of taking out large loans for himself and his associates in a risky lending model among other malpractices, according to an affidavit filed in court by Ms Said.

Mr Zubeidi has, however, denied all the claims made by the former MD, alleging that they were motivated by revenge and malice following her sacking from the bank.

He claimed Ms Said was running a campaign against the bank, causing customers to withdraw about Sh900 million out of panic in a move that threatened its liquidity position.