The Auditor-General has flagged cash-strapped Consolidated Bank of Kenya for multiple management breaches, including faulty pricing of loans and reliance on an obsolete information system.
The State-owned bank's loan pricing model is reliant on data last updated five years ago, exposing the lender to inaccurate assessment of risk premium to charge when coming up with the final price of credit to borrowers, noted the Auditor-General in a review of the lender's financial statements for the year to December 2024.
This means the lender, which has posted losses for the last nine years, could be underpricing its loans and hurting its bottom-line, or overcharging customers and pushing them away.
“During the year under review, the bank’s risk-based pricing model utilised sectoral data that was last collated between March 2018 and December 2020,” said the Auditor-General Nancy Gathungu.
“In the circumstances, the bank’s risk-based pricing model presents a material risk of inaccurate risk assessment and potential financial loss,” she added.
Consolidated Bank had not responded to queries by the time of going to press, despite contacting its officials via calls and email since Tuesday.
One sector lending
The bank had a loan book of Sh8.2 billion as at the end of March this year, more than half of which was extended to the trade sector. During this period, the bank had Sh11.3 billion in customer deposits.
Concentrating the loan book in one sector of the economy exposed the lender to the turbulence unique to that industry. Banks can lend to 12 different sectors.
The State-owned bank, which has been in breach of minimum capital requirements for the last nine years, relied on the Central Bank of Kenya (CBK) for liquidity, with the regulator lending it Sh4.7 billion as at end of 2024.
Archaic system
Consolidated Bank was also cited for relying on an information system that became outdated ten years ago. The system reached its end of life on June 30, 2014, and no longer receives security updates or vendor support, as per the Auditor General’s report, exposing it to unauthorised access.
The bank had in June 2022 contracted a vendor, MFI Technology Solutions Limited, to upgrade its system at approximately Sh200 million, but terminated the contract a year later.
The termination followed discovery by the bank that the company awarded the upgrade contract was different from the provider of the system being upgraded.
“This raises doubt on the extent of due diligence performed by the bank,” said the Auditor General.
MFI Technology Solutions has taken Consolidated Bank to court for breach of contract.
The audit also raises concerns about the law firm selected by the bank to defend it in the court case, noting that the firm was not on the list of service providers prequalified by the institution under the legal services category.
The bank paid Sh4.2 million in legal fees to the law firm, half of the total amount billed.
The Auditor General also called out the bank for having top managers serve in acting capacity for longer than the legally permissible six months and implementing salary increases without approval from the Salaries and Remuneration Commission (SRC).
Last year, the bank paid Sh5.4 million in acting allowance to 11 employees who were holding forte in temporary terms for over six months, with some having done so for more than two years.
Albert Anjichi acted as the bank head of legal and company secretary in 2023 and 2024, as did Fred Ronoh as head of finance and administration, and Harrison Muthoka as head of risk and compliance.
Others serving in acting capacity include head of human resources Rose Mukoba, head of retail and SME Josephine Mutunga, and head of credit Jullie Odadi.
Acting allowance is pegged at 20 percent of one’s substantive basic salary and is not payable to an officer for more than six months.
The lack of substantive office holders leaves the lender exposed to losses resulting from inappropriate authority or experience.
The bank has previously blamed the lack of hiring of substantive heads on a recruitment freeze placed by the Treasury in 2019.
In November 2024, the bank implemented a general salary increase, which was challenged by the Auditor-General who noted that the bank had not sought the approval of the SRC for the adjustment.
Management increased staff salaries by six percent, citing an increase in the cost of living. The adjustment resulted in a monthly payroll increase of Sh2.1 million.
Consolidated Bank has been in the red for the last nine years, with losses wiping out its core capital to negative Sh731 million at the end of December 2024. Its accumulated losses totalled Sh4.4 billion.
The lack of substantive office holders leaves the lender exposed to losses resulting from inappropriate authority or experience.
The bank has previously blamed the lack of hiring of substantive heads on a recruitment freeze placed by the Treasury in 2019.
Unapproved pay increases
In November 2024, the bank implemented a general salary increase, which was challenged by the Auditor-General who noted that the bank had not sought the approval of the SRC for the adjustment.
Management increased staff salaries by six percent, citing an increase in the cost of living. The adjustment resulted in a monthly payroll increase of Sh2.1 million.
Consolidated Bank has been in the red for the last nine years, with losses wiping out its core capital to negative Sh731 million at the end of December 2024. Its accumulated losses totalled Sh4.4 billion.
The bank is non-compliant with in all capital parameters set by the CBK. The Treasury owns 93.4 percent of the bank, with minority shareholders holding the remaining shares. These include state-owned institutions such as the National Social Security Fund, Kenya National Assurance, Kenya Pipeline and the Kenya National Examination Council.
The Treasury's promises to support the lender through a rights issue have not materialised, and the Auditor General has raised doubts about the bank's ability to continue as a going concern due to its low capital levels.
“There existed a material uncertainty related to going concern. The bank did not meet key regulatory ratios for the year that ended,” said Ms Gathungu.
Consolidated Bank could lag behind further in capital requirements if it does not raise about Sh4 billion during the year as the CBK will require all banks to have a minimum capital of Sh3 billion by end of year.
