Kenya says financial sector crisis averted after Chase Bank collapse

Kenya has managed to stop a financial sector crisis from spreading to lending institutions after the sudden collapse of Chase Bank, a middle-level bank which lend to small and medium enterprises and corporate entities, Central Bank Governor Patrick Njoroge said on Friday.

"There was a strong growing storm about to hit the financial system," Njoroge told reporters exactly a week after the financial sector regulator ordered the Chase Bank into receivership for failing to meet the cash requirements of its depositors.

"The flood would have come through,"said Njoroge, explaining the rising demand for cash withdrawals from other cash depositors after the Chase Bank crisis.

The CBK Governor noted that there was still an imbalance in the distribution of money supply within the economy, which also posed some kind of risk to the financial sector.

Chase Bank, which had 170,000 account depositors and 721 million U.S. dollars worth of customer deposits, was forced into receivership after failing to meet the demands of its customers.

Njoroge said the Central Bank moved against Chase Bank after the bank's management failed to answer questions raised by auditors regarding billions of shillings worth of loans to directors and staff.

Chase Bank provided insider loans to its directors and staff, but these were not backed by any credible repayment plans, pointing to a risk of financial contagion should the debtors fail to service the loans.

"We had no choice but to put the bank in isolation. It is a body blow to the financial system, but we are now past the tipping point and approaching a new normal. The point is there is need for transparency. The insider lending to the bank directors called into question the bank's corporate governance," Njoroge said.

According to the governor, auditors were required to inform the bank of any issues arising from an audit of the commercial banks.

The management of the bank appeared unsettled by the queries raised by the auditors and ended up publishing a report without the approval of the auditors.