The state of the banking industry is not rosy. Since the collapse of Chase Bank, Kenyans have been wondering if there is any bank left that is immune to collapse, and many experts including the Government have come out to assure Kenyans that the banking industry is not in shambles, and if in doubt, they should bank with the big banks which include Equity Bank, KCB, Barclays, Standard Chartered Bank, and a few others. To help shed more light on the banking industry, Citizen TV hosted four bank CEOs from Equity Bank, Barclays Bank, KCB, and NIC Bank, a forum which Equity Bank CEO Dr. James Mwangi took advantage of to lie to Kenyans about their policy regarding Insider Loans.
During the show, the four bank CEOs agreed that the mismanagement of Chase Bank especially the issuing of unsecured insider loans was the cause of collapse of Chase Bank, with each agreeing that insider loans should be treated with care. At this point Dr. James Mwangi took the chance to state that Equity Bank banned insider loans ten years ago.
Buyer Beware, the Facebook Group that warns buyers against fraudulent businesses, shared part of Equity Bank’s Financial Statement for the financial year ended 31st December 2015 to debunk Dr. James Mwangi and show that the fact is Equity Bank issues Insider Loans and did so one year ago (see this link and download the first pdf file at the bottom of the page – it is the Equity bans’s Financial Statement ended 31st December 2015). According to the Financial Statement, Insider Loans and Advances given to Directors in the year 2015 were about shs 1.73 billion and insider loans and advances given to employees were about 5.85 billion, which summed up to over shs 7.5 billion. For the Equity Group (Consolidated), the Insider Loans and Advances summed up to over shs 7.43 billion for the financial year ended 31st December 2014 and over shs 8 billion for the financial year ended 31st December 2015.
The decision by the Equity Bank CEO to lie to Kenyans in a show hosted by the most popular TV Station in Kenya that the bank does not issue Insider Loans is very disappointing. Equity Bank is the biggest bank in Kenya by customer base, and majority of the bank’s customers are the low and middle income earners in the country. Today, if something terrible happened to the bank, almost every Kenyan will be severely affected either directly or indirectly, and this may explain the pressure the bank has to assure Kenyans that the bank is stable and safe – but this should not include lying to Kenyans.
It is okay for Equity Bank CEO to do everything that he can do to assure us that Equity Bank is safe, that it has sealed almost every loophole Directors and Managers can use to bring the bank down, but it is very unethical to resort to blatant lies as an attempt to cement this assurity.
Right now as a customer of Equity Bank I am very worried. Over the last several years (I guess as far back as 2006), Equity Bank has been reporting increased profitability year in year out. In the recent years, revelations have emerged to the effect that companies have been cooking their books to either hide losses or report skyrocketing profitability while in the real sense they are operating at near break-even points. If Equity Bank CEO can tell a blatant lie in National TV that anyone who cares to debunk can do so within seconds, how can we trust that their Financial Statements are not doctored?
If the Financial Statements cannot be trusted, can we trust the surety that our monies are safe with Equity Bank? Equity Bank may be big, but is not too big to be immune from collapsing. In Wikipedia for example, we have a list of over 70 large US banks that collapsed between the years 1973 and 2015. At the time of collapse, those banks had assets worth between $ 1 billion and $307 billion. Again, according to several experts who have analyzed the collapse of Chase Bank, there is no bank large enough that can survive a bank run, and some of the things that may lead to bank runs include blatant lies like those uttered by Equity Bank CEO.
On another but related matter, Central Bank of Kenya should ban or strictly regulate Insider Loans. In the article The Banking woes in Kenya that were common during Moi era are back, I showed that the collapse of banks in Kenya have one thing in common:- Non-performing or bad loans, most of which being Insider Loans given to directors. The fall of Dubai Bank, Imperial Bank and Chase Bank were basically orchestrated by decisions by the bank directors to take money from the banks that they did not intend to repay.
It is thus very obvious that the loophole that allows bank Directors to siphon money from the banks is the existence of badly regulated Insider Loans. To seal this loophole therefore, CBK can come up with a Bill that if passed by Parliament will bar banks from issuing Insider Loans especially to Directors. That if a Bank Director wants to borrow money, he can only do so by borrowing from a competing bank that will subject him or her to credit scrutiny as any other customer is subjected to.
If banning Insider Loans through legislation is not plausible, then the legislation may simply put an upper limit that Directors can borrow up to e.g. 10x their gross salary for a period not exceeding 5 years and the loans must be secured by properties such as land.