State House official fled Chase Bank ownership days to closure

Chase Bank chief executive Paul Njaga caused payments to be made to State House official and Safaricom executive through an email sent to the bank’s head of finance. PHOTO | FILE | NATION MEDIA GROUP 

By BD Team

In Summary

• Accounting trail shows how senior Office of the President staff and a top Safaricom executive denounced their shares in troubled lender.
• Paul Njaga, the bank’s chief executive, caused the payments to be made through an email sent the same morning to his head of finance, Catherine Mugane.
• No explanation is given as to what caused Mr Njaga to act and whether it was a pure coincidence that the bank went into a crisis the following day and ultimately closed two days later.

A senior State House official and a Safaricom executive were two days before Chase Bank collapsed paid back money they had invested in the bank through a private placement late last year, raising questions as to whether they had prior knowledge of the looming shutdown. 

The two were among the select group of investors that Chase Bank had invited to participate in a Sh2.3 billion fundraiser, effectively making them shareholders in the company.

But in a move that has taken the banking fraternity by surprise and brought into question the integrity of Chase Bank’s operations before the Central Bank of Kenya (CBK) took over its management, the select group of shareholders were paid back money they had invested in the private placement (share capital) just two days before the shutdown.

The transfers amounting to about Sh40 million were made on April 5, two days before the April 7 closure.

There are questions as to how Chase Bank allowed incoming shareholders to liquidate their stakes, given that shares can only be transferred to another investor but not withdrawn in the form of cash.

The upshot of the mysterious Chase Bank equity-to-cash conversion is that depositors are higher up in the compensation hierarchy in the event of bank liquidation, unlike shareholders who are the last to be paid.

Paul Njaga, the bank’s chief executive, caused the payments to be made through an email sent the same morning to his head of finance, Catherine Mugane.

No explanation is given as to what caused Mr Njaga to act and whether it was a pure coincidence that the bank went into a crisis the following day and ultimately closed two days later.

“They never gave me a share certificate. I just received a note showing my account had been credited and the next thing was that the bank was closed so we didn’t have anyone to engage,” said the State House operative.

“This is very sad. My money is stuck there.”

The payments are marked “internal account transfer being payment for ordinary shares”, according to Chase Bank documents seen by Business Daily.

Chase Bank had 10 million issued and fully paid shares ahead of the private placement. These shares do not trade on any over-the-counter platform.

Mr Njaga declined to comment on this story.

“Now is not a good time to comment on anything about Chase Bank. All queries are to be directed to the CBK and the receiver manager, KDIC [Kenya Deposit Insurance Corporation],” said Mr Njaga.

The CBK last week unexpectedly placed Chase Bank under receivership citing liquidity problems arising from heavy withdrawals by panicked depositors

Chase Bank last year handpicked hundreds of high net worth investors to take part in its private placement that effectively placed them on the bank’s list of star-studded shareholders, including French PE firm Amethis Finance, German Investment Corporation (DEG), and Zurich-based asset management firm responsAbility.

The State House operative invested Sh19.32 million for 7,000 ordinary shares while the Safaricom executive put in Sh19.996 million for 7,245 new shares in the bank’s private placement, which closed in October last year.

Each share was priced at Sh2,760, meaning the offer price for the new investors was a premium given Chase Bank’s ordinary shares are valued at Sh1,000 apiece.

Chase Bank had said that proceeds of the private offer would be used to shore up the lender’s thinning capital ratios, grow the loan book and invest in technology.

“The total proceeds from the capital raising exercises will be used to further strengthen the bank’s capital base, support growth and onward lending activities, and fund branch expansion, investments in IT and other product development initiatives,” says a July 2015 credit rating report by Global Credit Rating (GCR).

The South African agency gave Chase Bank an initial long-term rating of A-, with a stable outlook based on the lender’s SME-focus.

“The profitable bottom line, increasing capitalisation and appropriate risk management systems were also factored into the ratings of the mid-sized bank,” the Sandton-based agency said.

GCR warned that the government was unlikely to bail out Chase Bank in the event the lender is stressed but pointed out that its deep-pocketed investors would support it.

“Although the Kenyan government has demonstrated its position as an interventionist, this must be viewed as a systemic protection mechanism only — no history of providing bailouts to distressed banks,” said GCR.

“Shareholders have, however, demonstrated support for the bank, underwriting all capital raising initiatives, evidencing the likelihood of shareholder support in case of need.”

It was this rosy outlook that attracted prospective indigenous capitalists to invest in Chase Bank.

“It looked attractive. But they never awarded me the shares. I’ve been having correspondence with them for about four months now,” said the Safaricom manager who bought the shares through a wholly-owned agricultural entity.

The ill-fated October 2015 private offer follows a series of Chase Bank’s capital raising strategies that included rights issues, bonus issues and private placements.

Chase Bank raised Sh1.6 billion through a rights issue in June 2015, adding to the Sh1.3 billion cash call a year earlier and Sh400 million in 2012 from existing shareholders.

In December 2014, Chase Bank capitalised through the issuance of an additional 1.7 million bonus shares priced at Sh1,000 each to existing shareholders after previous bonus issues of Sh1.01 billion the previous year, Sh1.3 billion in 2012, Sh876 million in 2011 and Sh200 million in 2010.

DEG converted Sh862.6 million debt to equity in 2013, while responsAbility injected additional Sh418.05 million in capital. A Sh200 million employee ownership scheme was also established in the year under review.

The closure of Chase Bank was preceded by the exit of chairman Zafrullah Khan and group managing director Duncan Kabui following revelations of massive irregular insider lending that precipitated a run on the bank.

The two senior executives left on the day Chase Bank restated its financials showing it had under-reported insider loans by a whopping Sh8 billion, putting into question the authenticity of the financial health of the lender — which also reported a surprise Sh743 million loss.

The Business Daily has established that sharp differences between senior managers of Chase Bank and auditing firm Deloitte on how to handle assets in the lender’s possession under the Islamic banking window triggered a rapid-fire series of events that led to the bank’s collapse.

Whilst CBK governor Patrick Njoroge last week said the Sh7.9 billion was irregularly lent to an unnamed Chase Bank director, the lender’s executives hold that the money belongs to Chase Iman.

Mr Kabui and Mr Njaga further reckoned that the disputed insider loans refer to Chase Iman’s joint ventures financed under Musharakah — a Sharia-compliant financing window used by Islamic banks where partners are entitled to a share of profits in a ratio mutually agreed upon.

There is no explanation as to why Deloitte made an about-turn in classifying assets from Chase Bank’s Islamic window, yet the firm has been auditing the lender for two decades.

Deloitte issued a qualified opinion on the bank’s accounts.
“I am very surprised that your audit opinion has completely ignored all the work teams from both Chase and Deloitte,” said Mr Njaga in an email dated March 29, 2016 addressed to Fredrick Aloo, a partner at Deloitte & Touche in charge of Chase Bank’s accounts.