Bank directors and employees increase insider loans
Bank directors, shareholders, associates and employees lent themselves Sh11.2 billion in 12 months even as credit to private sector hit a 10-year low.
An analysis by Weekend Business on 40 banks actively involved in business last year, can authoritatively report that insider loans grew at nearly double pace of domestic credit.
The analysis was based on the banks’ own data filed with the industry regulator.
From Sh94.5 billion reflected in the books at end of 2015, the figure grew by 12 per cent to Sh105 billion at a time the economy was grappling with slower lending to the private sector, which is currently at levels last seen in 2010.
About 60 per cent of the banks increased loans to insiders while just 16, mostly in lower tier, saw a reduction. Tier One and Two banks hold most of the liquidity.
For some banks, not even a loss stopped directors from borrowing more.
Commercial banks’ liquidity ratio rose from 43.7 per cent in December 2015 to 45.8 per cent at the same time last year, which provided room for loans. Bank chief executives and their umbrella body, Kenya Bankers Association, have pointed fingers at the law that introduced a cap on interest rates in September last year.
“The solution is not to tweak the law, but to remove it and consider some proposals to make credit accessible,” KBA chief executive Habil Olaka said last month.
It now appears that banks are betting on their own staff and owners of the banks to benefit from the piling liquidity. Most banks offer staff loans at interest way below market rates.
Insider loans towards directors, shareholders and associates, Weekend Business analysis shows, jumped by 29.8 per cent to Sh31.45 billion by close of 2016. At this pace, their borrowing grew at a faster pace than lending to government.
According to the 2017 Economic Survey, credit to National Government grew by 12.9 per cent from Sh524 billion to Sh591 billion.
“Total domestic credit by the banking system grew by 6.4 per cent in December 2016 compared to a growth of 20.8 per cent in in December 2015,” says the survey
The increased appetite by bank insiders is contrary to 2015 when directors slowed their borrowing to Sh22.6 billion. This was 11.2 per cent lower than the Sh25.4 billion that was reflected in their books in 2014.
For employees in the banking halls, their loan book keeps ballooning. In the 12 months to December last year, their borrowing grew by Sh4.26 billion or 6.08 per cent to Sh74.3 billion.
Central Bank of Kenya (CBK) supervision report up to December 2015 put the number of bank staff at 36,212.This means that on average, every bank employee owes their employer Sh2.05 million.
This figure could be higher considering that Weekend Business did not factor in Chase Bank, Dubai Bank and Imperial Bank, which are under receivership. Banks that are under statutory management do not make their financial statements public.
CBK and the National Treasury are studying the cap on interest rates to see if it is behind the slowed lending to private sector. CBK Governor Dr Patrick Njoroge insists that it is too early to conclude that the law is behind the credit fall. National Treasury shares a similar view.
“Even before the law came, there was this decline in growth but at the same time the economy was growing. It is a paradox and we are trying to really find out,” Treasury Principal Secretary Kamau Thugge said last month.
But even as the two agencies study the decline, insider loans continue to outpace the rate at which private sector lending, which was averaging 20 per cent before November 2015, is moving.
By the time Chase Bank was put in receivership under Kenya Deposit Insurance Corporation in April last year, it reported insider loans at Sh13.62 billion. It had initially reported Sh5.72 billion before recalling the results.
Out of the 11 lenders listed at the Nairobi Securities Exchange (NSE), only National Bank of Kenya (NBK), Stanbic Bank and Barclays Bank of Kenya (BBK) reduced insider loans last year.
However, for BBK, with Sh13.06 billion in its books as insider loans, the figure is only second to that of Kenya Commercial Bank (KCB), the largest lender in the East African region by asset base.
It loaned its employees Sh13 billion by end of December, making it the lender with the highest employee insider loans.
Directors, associates and shareholders have borrowed Sh46.9 billion.
Shore up capital
Under-capitalised NBK reduced insider loans by 15.3 per cent to Sh4.2 billion. The bank needs Sh4.4 billion from its principal shareholders – National Treasury and National Social security Fund – as it seeks to shore up its capital.
Stanbic Bank reduced its insider loans by 15.4 per cent to Sh4.45 billion. Its directors, shareholders and associates reduced their loans by more than half to Sh740 million.
KCB, with a loan book of Sh353.9 billion, has advanced Sh17.56 billion to insiders. This is 42 per cent higher than in the previous year when the figure stood at Sh12.28 billion.
Amount lent to directors, shareholders and associates grew by more than seven times from Sh690 million to Sh4.8 billion in 12 months, while that to employees grew by Sh1.14 billion.
However, overall loans and advances to customers rose by 11.6 per cent to Sh386 billion.
Also in the club of billionaire insider loans is Equity Bank. They stood at Sh8 billion, a growth of 8.8 per cent from the previous year. This was even as the loan book growth recorded a negative drop in a year that customer deposits surged 11 per cent.
Cooperative Bank’s insider loans were up by 30.5 per cent. Its directors, shareholders and associates quadrupled their loans to Sh1.32 billion to push the total to Sh9 billion. Its overall loan book grew by 10.7 per cent to Sh237 billion in the same year.
Standard Chartered Bank grew insider loans by 5.1 per cent to Sh6.2 billion as its employees accounted for the bulk of the loans. Its loans and advances to customers grew at one percentage point above insider loans.
For NIC Bank, another Tier One bank, insider loans surged by 24.5 per cent to Sh2.55 billion. This was despite its overall loan and advances to customers recording a negative growth of 1.3 per cent.
Diamond Trust Bank awarded its directors and employees more money in loans to push the insider facility up by 4.8 per cent to Sh4.96 billion.
Commercial Bank of Africa, popular with institutional clients, saw insider loans build up to Sh7 billion, a growth of 4.3 per cent. Its loan book, though, recorded a negative growth of 1.13 per cent.
Family Bank, despite its profits dropping by more than three quarters (82 per cent), lent out Sh3.82 billion as insider loans.
This was a growth of 22.8 per cent in a year that directors increased their loans by 67 per cent to Sh2.1 billion. On the other hand, overall loans and advances to customers dropped by 10.2 per cent, Sh5.7 billion, to Sh50.7 billion.
Development Bank of Kenya and Consolidated Bank of Kenya, both in breach of at least one CBK statutory ratio due to low capital, also saw an increase in insider loans.
Development Bank grew insider credit by 37.2 per cent as the overall loan book grew by 8.6 per cent growth. Its profits dipped by half to Sh61.7 million. While CBK demands a minimum liquidity ratio of 20 per cent, the bank only has 1.7 per cent.
For Consolidated Bank, insider lending surged by 4.7 per cent despite a negative growth in the loan book that saw it lend out Sh8.7 billion in the entire year.
Ecobank, which posted a Sh2 billion loss, loaned out Sh1.36 billion to its employees. This is 52 per cent higher compared to Sh899 million by end of 2016. The bank did not lend to directors, shareholders and associates.
I&M bank saw insider loans hit Sh2.88 billion, 65 per cent higher than in 2015 while Gulf African Bank doubled its figures to Sh1.25 billion.
Victoria Commercial Bank, which boasts of close to a decade without any customer defaulting on loans, increased its insider loans by more than half (53.2 per cent) to Sh243 million. Oriental Commercial Bank insider loans hit Sh778 million after a growth of 62 per cent.
Many of the 16 banks which slowed their insider lending do not have the financial muscle to lend to private sector.
First Community Bank cut its insider loans by a third while Guardian Bank and Transnational Bank cut by less than 10 per cent.
Housing Finance, which posted a drop in profits, grew its loan book by Sh1.4 billion in a year that it relaxed insider loans by Sh34 million.
Others with a drop in insider loans were Habib Bank AG Zurich, Habib Bank, cash-strapped Jamii Bora Bank, Middle East Bank, Paramount Bank and Prime Bank. Sidian Bank, Spire bank and United Bank of Africa also went slow on insider loans.