The Central Bank of Kenya (CBK) was last Friday left exposed after the High Court ruled that any commercial bank customer with evidence that the regulator failed to act on reported irregularities in a financial institution leading to loss can sue for compensation.
Justice George Odunga made the decision in a case where five customers of Imperial Bank had accused the CBK of negligence prior to placing the troubled lender in receivership.
“I have no doubt in my mind that that if prior to October 13, 2015, the CBK was made aware of the irregularities and the illegalities that were taking place within the bank and did not take any remedial action in good time or at all, then the CBK would be guilty of the failure to undertake its constitutional and statutory obligations and any person sustaining loss or injury as a result thereof would be entitled to seek compensation for the same from CBK,” Justice Odunga said.
He, however, dismissed the petitioners’ claims against the CBK noting that there was no evidence that any malpractices were brought to the attention of the CBK prior to October 13, 2015 when Imperial Bank went into receivership. Any person making such allegations must offer proof, the judge said, noting that mere pleadings are not enough.
Five Imperial Bank customers, Kimani Waweru, Dhiren Shah, Suryakant Shah, Meera Shah and Mayuri Shah, had sued the CBK and the Kenya Deposit Insurance Corporation for negligence in March 2017.
Among the orders they sought was a declaration that the decision to place the bank under receivership was illegal and infringed on their rights.
But Justice Odunga found that there was no evidence that the rights of the petitioners were infringed or that they suffered any loss. The court noted that the CBK had made progress in reviving the bank through engagement with stakeholders and investors.
The court further disagreed with the CBK’s argument that it relies fully on information provided by the bank’s management and the board of directors in its dealings with banks.
Justice Odunga stated that the role of the CBK goes beyond ensuring compliance with the regulatory guidelines, noting that the regulator is not simply a conduit for transmission of decisions made by financial institutions.
“The CBK’s position amounts to the abdication of duty. For the CBK to contend that it cannot always prevent the failure of financial institutions amounts to the abdication of duty,” the judge ruled.
The petitioners had argued that having granted Imperial Bank an operating licence, the CBK misled the public, who kept their money at the bank on the basis of that licence.
They argued that upon granting the licence and clearing its senior executives as fit to serve, the CBK is deemed to have satisfied itself with the integrity of those entrusted with the running of Imperial Bank.
The litigants further argued that at the time Imperial Bank was placed under receivership, the CBK had no board of directors, making the governor’s actions illegal.
But the judge found that the absence of the board of directors cannot stop the governor from making delicate decisions like putting a distressed financial institution under receivership.
He, however, noted that since governor’s decisions are ratified and supervised by the board, those charged with appointing the directors should ensure that board vacancies are always promptly filled.