Interfin was reduced to Ponzi scheme –– report

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INTERFIN Banking Corporation (Interfin) had been reduced to a Ponzi scheme as the bank had resorted to paying old depositors with proceeds from new deposits, a recent forensic audit report by KPMG, an international audit firm, reveals.

Report by Staff Writer

According to the report, which chronicles in detail the events leading to the demise of Interfin, that collapsed under severe liquidity strain suffered as a result of a huge position in non-performing insider loans and a thin capital base, the bank had resorted to taking in expensive new deposits to fund its maturing obligations to old customers.

“It became general practice at Interfin from around the middle of 2011 that deposit maturities were settled with proceeds of new deposits, due to the liquidity strain,” reads part of the report.
According to the report, the practice had become pervasive and “consistently a part of the bank’s Asset and Liability Committee (ALCO) and board agendas.”

The report cites several instances of this practice. In one example, at a board meeting held on May 15, 2011, Interfin finance director James Shumbanhete advised board members that as the ZETREF and PTA facilities were to mature in June 2011, clients’ deposits would be used to settle payments due to those facilities.

At another board meeting held on October 19, 2011, it was reported to  the board the bank was not trading, lending had been stopped and liquidity had been used to pay for maturities.

Taking deposits and lending the proceeds of such deposits are the essential business of a bank. This forms a bank’s core business and source of profits as the lending rates are normally higher than the deposits rates, with the bank keeping a “spread”, the difference between the deposit rates and its lending rates.

However, the model breaks down when deposits’ proceeds are used to repay other deposits on maturity. It becomes doubtful if the business of the bank is still being conducted profitably as there is no interest rate differential in the transaction in favour of the bank from which to derive profit, mitigate expenses and organically grow capital.

According to KPMG, the prejudice to Interfin in principle caused by this practice, impacted negatively on profitability and the real capital position of the bank.

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