Kenya Cracks Down on Banks' Bad Lending

The Central Bank of Kenya is cracking down on commercial banks accused of illegal lending practices. Police issued arrest warrants Friday for eight bankers for alleged unethical conduct.

Since becoming governor at Kenya’s Central Bank, Patrick Njoroge has led a charge against improper lending practices in the commercial banking sector.

In the past year, the Central Bank has put three commercial institutions under receivership, which means that a government-appointed agency takes over the running of the bank.

The most recent bank targeted was Chase Bank last week. The news caused a run on the bank as people frantically tried to withdraw their money. Chase Bank is currently closed.

The central bank governor sought to reassure Kenyans late Sunday. Njoroge said the Central Bank would provide credit to financial institutions to meet their obligations.

“We will avail a facility to any bank or any microfinance institution that comes under liquidity pressures arising from no fault of their own. We will avail this facility for as long as necessary to return stability and confidence to the Kenyan financial sector,” said Njoroge.

He said withdrawals from those banks would be limited to $1,000.

In the case of Chase, industry experts say they expect outside investors to buy up shares and bail the bank out.

Businesswoman Caroline Nyokabi is one of the bank’s more than 55,000 depositers.

“Currently we are not able to access it neither are we even able to get it from any other visa ATM machine. It has really affected [me] because seriously we have just gotten our pay and right now we have to depend on other people to get the day going,” she said.

Police have issued arrest warrants for two Chase Bank executives and six others from the National Bank of Kenya.

The Central Bank says Chase executives irregularly advanced $200 million to various entities without proper security and beyond the set regulatory limit. Half of this amount went to bank insiders.

Aly-Khan Satchu of the consulting firm Rich Management said the Central Bank will likely come after more banks.

“Essentially it’s going to happen around the tier-three banks because they’ve resisted capital increases for many, many years. They’ve basically built banking businesses on wafer-thin capital. Everyone is now focused and they just don’t feel comfortable with the types of numbers some of these banks are telling us are the real numbers,” said Satchu.

Satchu said the solution is consolidation. There are currently 42 different commercial banks operating in Kenya.