Money Markets
A Chase Bank branch along Moi Avenue in Mombasa. FILE PHOTO | KEVIN ODIT
By DAVID HERBLING, hdavid@ke.nationmedia.com
In Summary
The Central Bank of Kenya (CBK) allowed audit firm
Deloitte to alter and publish Chase Bank’s 2014 financial results as
part of Deloitte’s cover-up of the reporting mess it created in the
classification of the lender’s controversial Islamic assets, it has
emerged.
Documents that Chase Bank directors submitted to Parliament
last week show that Deloitte – with the backing of the CBK – not only
moved the controversial assets in the bank’s balance sheet from the
Other Assets line to Loans and Advances for 2015, but also restated the
previous year’s report a year after they were published with the
regulator’s approval.
Chase Bank directors told the National Assembly’s
finance committee that Deloitte made the changes with the aim of
covering up its sudden U-turn on classification of the bank’s Islamic
assets that kicked up a storm and caused the lender’s collapse two
months ago.
Deloitte, who were Chase Bank’s external auditors
for more than 20 years, in March made a surprise about-turn to classify
disputed Islamic banking assets as insider borrowing and slapped the
mid-sized lender with a qualified audit opinion that caused panic among
depositors, leading to its closure.
The changes and restatement of the results were
even more intriguing because they were made barely a week after the CBK
director of bank supervision, Gerald Nyaoma, wrote to Chase Bank
confirming that the lender’s financial statement had conformed to the
regulatory rules and authorised their publication on March 30 as
required by law.
“We note that the annual returns on the audited
financial statements and disclosures for the period ended December 31,
2015 as presented by Chase Bank Kenya conform to the format prescribed
by CBK prudential guideline,” said Mr Nyaoma in a letter dated March 30,
2016.
Chase Bank directors, however, submitted to
Parliament documents showing that Mr Nyaoma five days later fired
another letter to the lender, insisting that it had not made full
financial disclosures.
“The errors noted were that there was no mention of
the bank’s auditors and whether the auditors issued a qualified or
unqualified opinion on the financials,” said Mr Nyaoma in another letter
dated April 4, 2016.
Chase Bank’s restated figures showed it had
under-reported insider loans by a whopping Sh7.9 billion and ultimately
ended up with a surprise Sh743 million full-year loss as opposed to the
Sh849 million loss it had declared earlier.
The bank had reported a net profit of Sh2.3 billion for the year ended December 2014.
The documents submitted to Parliament also show
that Deloitte’s covert meddling with the 2014 financial statements saw
Chase Bank’s loan book for the period to December 2014 rise to Sh64.4
billion from the Sh53.8 billion in statements published a week earlier –
a difference of Sh10.6 billion.
The increase was made possible by the movement of
what had been classified in the balance sheet as “other assets” worth
Sh11.9 billion but was later restated as Sh3.4 billion – the rest of the
cash having been moved to directors’ loans and advances.
Accounting professionals said it is illegal for
auditors to change the contents of financial statements that had been
approved by regulatory authorities and published one year earlier
without offering an explanation.
Why the CBK allowed Deloitte to push through such an
accounting move and authorise its publication is the question Chase Bank
directors are now asking Parliament to investigate.
The Chase Bank directors argue the disputed assets were
joint ventures financed under Musharakah – a Sharia-compliant financing
used by Islamic banks where partners are entitled to a share of profits
in a ratio mutually agreed upon.
The lender’s Islamic banking window, Chase Iman,
was established in May 2009 and offers a bouquet of Islamic banking
products. This was the first time Deloitte was raising concerns
regarding Chase Bank’s so-called Islamic joint ventures.
The Business Daily has analysed Chase
Bank’s financial reports dating back to 2009 and established that
Deloitte had since 2012 included Sharia-compliant assets in the balance
sheet as “other assets,”.
Deloitte is yet to disclose the reason for the
sudden change in asset classification which torpedoed the bank into
sudden collapse.
Kenya’s banking sector regulator is yet to outline
how other commercial banks with Sharia-compliant windows treat loans and
deposits from the Islamic facility.
Kenya has two fully-fledged Islamic banks, Gulf
African Bank and First Community Bank, with more than a dozen lenders
operating Shariah-compliant windows, including Barclays’ La-Riba,
National Bank Amanah, KCB Sahl, and Standard Chartered Saadiq.
The documents submitted to Parliament also show
that Chase Bank had in a letter dated July 26 2012, and written by its
finance manager Makarios Agumbi, sought CBK approval to revise its
financials to accommodate Islamic products.
“We formally request you to consider… a separate
off balance sheet line item for Islamic banking,” said Mr Agumbi in the
letter addressed to Daniel Muguima, the CBK manager in charge of bank
supervision.
“With the growth of Islamic banking business, the
amounts have become material to us, hence the materiality principle of
accounting necessitate that we present or disclose it separately as
attached.”
The Chase Iman window, valued at Sh6 billion,
accounted for 11 per cent of the bank’s balance sheet as at December
2012, according to suspended group managing director Duncan Kabui.
Deloitte in May told the team of lawmakers that
ousted chairman Zafrullah Khan and Mr Kabui connived to use Chase Bank’s
Islamic window to conceal their plan to siphon cash from the lender to
entities they co-owned.
“These companies are owned by the chairman, over 90
per cent of the ownership of those companies was the chairman and 10
per cent was the group MD,” said Fredrick Aloo, a partner at Deloitte
& Touche in charge of auditing Chase Bank’s accounts.
The CBK forcefully seized the Sh7.9 billion
so-called Islamic joint ventures – primarily real estate – from Mr Khan
and Mr Kabui and charged them to the bank, which allowed the re-opening
of Chase Bank on April 27, 2016 after a three-week closure.
The prime assets confiscated include the Watermark
Business Park in Karen, Nairobi a car park at Chase Bank’s headquarters
located at Riverside Drive, 240 acres of land on Mombasa Road, a
three-acre plot next to the German Embassy on Riverside Drive, and a
number of high-end properties in Dubai.
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