Chase Bank: The Truth that Limps and the Falsehood that Flies

Chase Bank: The Truth that Limps and the Falsehood that Flies


Photo credits: Nation Media


The Falsehood that Flies

Had our paths crossed on April 6th 2016, and had you told me then that Chase Bank was just a single nostril above the water, I would have told you then that until I reached hither my finger, and beheld the hands where the nails had gone through, and reached hither my hand, and thrust it into the side where the blood and water had gushed, I would rather be of little faith.

For as Kenyan banks go, Chase had earned its stripes as one of the most stable, mid-tier banks. Heavy on the affairs of those at the bottom of the pyramid, and high on the hit parade of the SME, its net profit had topped 2.6bn shillings by March 2016, 300m bucks over and above its top line the previous December.

It was Jonathan Swift who, in a moment of sudden realisation, famously remarked that “Falsehood flies, and the Truth comes limping after it.” In April 2016, what had begun as a touch of rumour on some WhatsApp groups – that the bank had dug itself into some spot of trouble – erupted on Twitter; and thereafter spread, within days, like a bad case of measles in a country school. Falsehood flew.

To understand the bank’s narrative at the time, one had to understand what a special purpose vehicle (SPV) is.  This is an orphan company, formed for purposes of raising limited or non-recourse finance for a specific project. With a separate legal entity, the SPV owns assets and liabilities. The project finance is an off-balance sheet transaction, and the entity is regarded as insolvency remote. Therefore, SPVs may be formed for risk isolation purposes.

But to “begin from the beginning”, Chase Bank had earlier on – through the Chase Iman –  diversified into Islamic banking. Islam thumbs up a nose at conventional bonds. One, because they charge interest. Two, because they may be used to finance activities which Sharia law expressly forbids.

To skirt around these two realities, Islam proposes its own version of the conventional bond – the Sukuk. Unlike the conventional bond, the Sukuk’s pay-out to investors assumes the form of profits rather than interest, the profit itself being derived from a tangible asset.

Like a sheet anchor, the SPV sits at the nub and core of the Sukuk. The originator forms an SPV, which then issues a Sukuk. Funds raised through the Sukuk are used to purchase a tangible asset from the originator. Given its bankruptcy remoteness, the SPV shields these assets from creditors should the originator experience distress. The SPV leases those assets back to the originator, who in turn passes the income obtained from the lease to the holders of the Sukuk. At the point of maturity, the originator purchases the assets from the SPV at its nominal price.

But Chase’s diversification into Islamic banking appears to have been more of the beginning of its end, rather than the beginning of the beginning. 2016, which appears to have been the end of its beginning, its auditors demanded that the bank charges its Islamic banking assets. Up to that point, and with the approval and validation of its auditors, the bank had categorised its Islamic banking assets under the ‘other assets and interest receivable’ entry in the balance sheet. In 2015, the assets under this entry were valued at 7.9bn shillings.

The bank protested that doing so would turn them into loans, necessitating an increase in loan provisions. Charging the assets would also incur monthly interest costs, in violation of Islamic banking principles.

Nevertheless, the auditors’ position, which also mirrored that of the CBK, prevailed. Forced to restate its financial statements, the bank’s loan impairment costs rose from 757m to 2.1bn. This had the effect of transforming its earlier reported profit into a Sh743 million loss. In a capsule, the narrative that leaked out on the social graph is that the bank had underreported insider loans of up to 7.9bn shillings, resulting into a weak financial position, as manifested  by an actual loss of Sh743 million.

This triggered panic withdrawals by its customers, leading to a massive bank run. With no reserves to sustain the panic withdrawals, the bank turned to the CBK for emergency liquidity of up to 10bn shillings, but the CBK turned up its nose at that request, and placed it under the care of the Kenya Deposit Insurance Corporation. In doing so, the CBK put out a statement that “Chase Bank Limited experienced liquidity difficulties, following inaccurate social media reports…”


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