Is Family Bank on the verge of a bank run?

All is not well at Family Bank. According to information received from inside sources, a number of institutional customers have closed their accounts at the bank in fear that it could soon face a bank run like the one witnessed in Chase Bank in April 2016.

Well-placed sources within the bank tell the story of an institution living on borrowed time. A series of poor financial decisions, coupled with massive corruption, are feared to boomerang on the bank in the near future, hence the closure of the accounts by big clients worried about the bank’s management.

For starters, readers will remember that Family Bank was implicated in the Sh791 million National Youth Service scandal. It was the main conduit used by the masterminds of the scam in siphoning money from NYS in total contravention of banking laws.

The bank was prosecuted for criminal negligence and had to settle a big fine with the Central Bank of Kenya. It also fired senior managers involved in the transactions in December, claiming it was acting in strict compliance with national laws against corruption.

“It is a stance that is tough but necessary to ensure strict compliance with our fiduciary duties to all our stakeholders,” the bank said in the statement announcing the sackings of the officials then being probed by the Director of Public Prosecutions for facilitating, aiding or abetting the theft of the NYS money.

But with new information coming to light, that was just the tip of the iceberg. The bank has been found to fail in compliance with banking and anti-money laundering regulations. A recent investigation by the police, the Financial Reporting Centre and CBK ordered after the NYS scandal found that Family Bank did not report several transactions, each involving millions of shillings, to CBK.

The retirement of the bank’s former CEO after the NYS scandal helped expose a Ponzi scheme that had been running at the institution which saw corruptly acquired wealth from several public corporations pass through Family Bank. It seems it was not only NYS but many other institutions including the Youth Fund, whose former chief executive officer passed away under mysterious circumstances at her home in Kileleshwa last Wednesday.

The use of the bank as a front for corrupt transactions has caused tensions between a number of long serving managers at the institution who believe in gradual growth of the former building society and get-rich-quick newcomers out to transform the bank into a major player in the local banking market through unorthodox means.

Since the beginning of the year, the bank has lost or fired four senior staff members in the finance and operations departments with the net effect that the main committees are now at the hands of a cartel working around the CEO.

The centralization of functions in the hands of proxies means that the committee system of credit, operations and supervision makes little sense. The bank is in the hands of a tight cartel. Moreover, the bank is understood to have withheld crucial information to CBK during this year’s review on the integrity of top management staff.

But unknown to the management, the report of a limited audit undertaken for the board in 2016 has leaked to external players who have laid their hands of evidence of massive corruption and bad decision-making by the management.

Key of these decisions is the opening and closure of several bank branches including on River Road and Kenyatta University before they even commenced business. It is evident that bank managers, in a bid to make money through contracting, gave the go-ahead for the acquisition and refurbishment of several properties in Nairobi and Central Kenya for new branches.

Given that the bank pays rent long in advance, the managers made a big cut for themselves in deals with property owners and service providers for other contracts to refurbish and make the branches ready. After the bank had spent millions of shillings, the branches were not opened after the board found they would be unviable.

Interestingly, some staff in business development were scorned for the decision but not the top management that sanctioned the branches. The same case applies to some contractual engagements the bank has had to review over the last year on instructions from the board.

The management crisis in the bank is compounded by a feeling of resentment between long term staff members of the bank and recent hires. Most of these senior staff hired from other institutions came in at exorbitant salaries, seeing the bank's operating expenses of staff to rise from under Sh3 billion 2015 to more than Sh4 billion currently, despite the massive staff rationalization of 2016.

But whenever Instead of addressing these issues, the management resorted to an ambitious staff intimidation project that has seen several managers asked to leave the institution.