The collapse of Dubai Bank could be the reason CBK stopped licensing new Commercial Banks

The Central Bank of Kenya, in a statement to the press, put on hold licensing of new commercial banks until further notice. “The Central Bank of Kenya has, with immediate effect, placed a moratorium on the licensing of new commercial banks until further notice”, the statement read in part.

Although CBK did not give reasons for the moratorium, it could be speculated that this is a move to audit the operations of commercial banks at a time when Imperial Bank is under receivership just two months after Dubai Bank was also placed under receivership for a year.

Dubai Bank is an interesting case in regards to the moratorium notice issued by CBK. The bank applied for a license to operate in Kenya just over a year ago as was reported by Business Daily on May 19, 2014; and hardly a year into operations, Dubai Bank was sent into receivership for a year.

The placement of Imperial and Dubai Banks sent shivers across the banking industry, with many questioning the health of the sector. The activities that led to the collapse of both banks didn’t however impact the performance of the banking sector as Equity Bank and Chase Bank reported increased profits for the half and full financial year respectively.

The reason for the receivership of Dubai Bank was reported by Business Daily as follows:

Dubai Bank Kenya has been experiencing liquidity and capital deficiencies which raised concerns that it will most likely not be able to meet its financial obligations as and when they fall due.

In a statement explaining its move to place Dubai Bank under receivership, CBK said that it had “closely monitored Dubai Bank’s daily cash reserve ratio from July 14, 2015 when the bank began breaching its daily cash reserve ratio requirements” and concluded that the bank would not be able to meet its financial obligations when they fall due.

Thus, the fact that Dubai Bank was issued a license slightly over a year before it was placed under receivership raises serious questions on the license issuing process. If due diligence was properly conducted before the license was issued, then CBK could not have granted Dubai Bank a license to practice.

If the licensing process is the issue, it therefore means that all banks that were issued licenses under similar circumstances as Duba Bank need to be thoroughly audited – or Kenyan could wake up to daily news of several collapsed banks in Kenya.