RECENT BANK RESOLUTION EXPERIENCE in KENYA-The national bank case Presented by: M. A. MOHAMUD

1. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 RECENT BANK RESOLUTION EXPERIENCE in KENYA-The national bank case Presented by: M. A. MOHAMUD Asst. Director Deposit Protection Fund Board, Kenya 12th May 2011

2. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 AGENDA: Introduction Causes of problems experienced by National Bank of Kenya [NBK] Forbearance Resolution Mechanism Current position of NBK Future outlook for NBK Conclusion

3. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • NATIONAL BANK OF KENYA – RESTRUCTURING PROCESS • INTRODUCTION • National Bank of Kenya [NBK] was incorporated on 19th June 1968 with the prime objective of assisting Kenyans gain access to credit and control their economy. It was incepted as an indigenous bank whose image it prides to date. The Bank attracted loyal local clientele including the Quasi Government accounts thus emerging amongst the top 5 commercial banks in the country, maximizing on its operation and profitability. • The initial authorized core capital was KShs. 20 M [USD 238,000] which grew progressively to KShs. 9 B [USD 107.14 M] by 2003.

4. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • A. INTRODUCTION [Contd.] • NBK has 2 [two] subsidiaries, Nathank Trustees and Investments Services Limited which were established to manage the retirement benefit schemes. It is also licensed by Capitals Market Authority and Retirement Benefit Authority to act as custodian and depository for retirement benefits. The Bank also pioneered the introduction of the Local Visa Credit Card in 1993 not to mention being one of the first to offer online banking services in Kenya. • Additional feather to the Bank’s services was the provision of tax collection services to Kenya Revenue Authority.

5. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • B. CAUSES OF PROBLEMS EXPERIENCED BY NBK • The Bank started showing signs of distress in 1998 resulting in huge losses posted during the year and three [3] subsequent years. These were attributed to: • Poor and weak Corporate Governance structure- Resulted in high credit risk where loans were granted without adequate securities and/or documentation. • Poor Asset Quality- resulted in accumulation of a large portfolio of NPA’s which stood at KShs. 36B [USD 428.5M] while Deposits shrunk from KShs. 25B [USD 297.6M] to KShs. 14B [USD 166.7M] following a near run and government Directive to parastatals not to deposit monies in under-capitalized banks.

6. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • B. CAUSES OF PROBLEMS EXPERIENCED BY NBK [Contd.] • Systemic risk - The Banking Industry witnessed closure of a number of Banks that undermined public confidence in the financial sector. • Political risk - Being an election period, financial discipline was compromised leading to expansionary money supply to serve political interests and hence distorted the economic variables of high inflation, interest and exchange rates. • Moral Hazards - Credit risk management principles were relegated and compromised to serve personal and political interests.

7. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 C. FORBEARANCE RESOLUTION MECHANISM To restore its image and shed off problems faced, NBK embarked on the following: Reconstitution of the Board and creation of the post of Managing Director [MD] and Chairman of the Board. The Bank was previously under an Executive Chairman a position that was found untenable. The MD was seconded from CBK to oversee the recovery plan. This in essence went a long way to strengthen Corporate Governance and in line with International Best Practices. The two [2] major shareholders - GOK and NSSF were prevailed to convert deposits to long term loans and eventually to Equity. Development of an effective 5 year strategic plan to enable the Bank attain profitability, employee and customer satisfaction to regain the considerable market share it once possessed The Board was further reconstituted to include qualified and experienced members of high integrity and work ethics who would add value to the institution and rebuild public confidence.

8. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 C. FORBEARANCE RESOLUTION MECHANISM [Contd.] Extension of liquidity support by the Government. NSSF and GOK injected KShs 1.175 [USD13.9M] and 4.5 [USD 53.5M] billion respectively to shore up liquidity and capital ratios. Freezing of credit growth for 2 [two] years in order to embark on a massive restructuring of its operations. Operational restructuring- included realignment of day to day functions, boost liquidity and rationalize cost through trimming branch network and staff compliment. 15 branches were closed and staff reduced from 1500 to 900. Aggressive Marketing Campaign - Resulted in exponential growth of deposit accounts.

9. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • D. CURRENT POSITION OF NBK • By 2003, NBK had amazingly turned around and returned to profitability. This has resulted in the following: • Maintenance and growth of deposits which had been eroded from KShs. 25B [USD 297.6M]to KShs. 14B. Bank today boasts of a solid deposit base of KShs. 50 B [USD 595.3M] • Investment in new retail banking products-Internet Banking, shariah- compliant products, personal loans and mortgages. • Re-establishment of links with international banks • Financial restructuring where GOK arranged for a long term Bond of KShs. 20B [USD 238M] in 2006 ranging from 2 - 15 years maturities to redeem guarantees given to Parastatals that had heavily borrowed from the Bank.

10. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • D. CURRENT POSITION OF NBK[Contd.] • Return to profitability-Benefits shareholders and makes the stocks attractive to potential investors • Profits driven mainly by increased lending that saw net loans and advances rise by KShs. 7.7B [USD 91.6 M]to KShs 20.8B [USD 247.6] reflecting a growth of 58% compared to the industries average of 20.4% for the year 2009 - 2010. Analysts reckon that the Bank has the lowest Loan-Deposit ratio in the industry and thus has potential for further growth.

11. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • E. FUTURE OUTLOOK FOR NBK • NBK is gearing towards regaining its past glory and playing its significant role in developing of the nation. • Continued growth of deposit accounts and active participation in the financial intermediation process. • Redemption of lost image – Negative publicity still dogs the bank. • Gearing towards restarting its growth pattern by investing in Branch network and Agency Banking to deepen financial access and regain market share. • Privatization process is underway to give the Bank a fresh impetus to favorably compete in the domestic and international markets • .

12. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 • F. CONCLUSION • NBK is a test case to show that where resolution mechanisms are properly identified, formulated and effectively managed, together with commitment from the regulator, shareholders, management and staff, such resolutions will go a long way in enhancing public confidence and contribute to financial stability.

13. “ AFRICA REGIONAL WORKSHOP ON THE RESOLUTION OF PROBLEM BANKS ” IN ABUJA, NIGERIA 9TH MAY TO 13TH MAY 2011 THANK YOU