Mwalimu Sacco’s plans to acquire Equatorial bank put on hold

Kenya’s largest savings society Mwalimu Sacco’s bid to acquire a majority stake in Equatorial Commercial Bank (ECB) has hit a bump after it was stopped pending a fresh audit of the deal.

The Industrialisation and Enterprise Development ministry, the State department that is in charge of cooperative societies, stopped the deal in the wake of emerging queries on its financial fitness.

The Sacco had made a Sh2.5 billion offer for a 51 per cent stake in the bank owned by billionaire businessman Naushad Merali.

READ: Mwalimu Sacco seeks 50pc of Merali bank

The Industrialisation ministry headed by career banker Adan Mohammed last week wrote to Mwalimu Sacco asking it to suspend the acquisition bid and immediately submit a due diligence report that informed the investment decision.

In its letter to the Sacco, the ministry has raised queries on the valuation, profitability and corporate governance at ECB, asking for a higher degree of clarity before the bid is allowed to proceed.

“You are required to furnish this office with the due diligence and feasibility study report on the said Equatorial Commercial Bank,” the ministry says in a letter signed by Patrick Musyimi, the Commissioner for Co-operative Development.

“In addition, you should not make any financial commitment on the investment before getting approval from this office and Sasra,” Mr Musyimi says in the letter dated September 25.

The Sacco Societies Regulatory Authority (Sasra) has also weighed in with a letter stopping the transaction and faulting Mwalimu for pursuing the deal without notifying it or seeking regulatory approval.

“You are advised not to engage in any of the proposed investment activities along the lines proposed to the delegates unless the Sacco society has sought and obtained an express approval from the authority in respect thereof,” Sasra says in a strongly-worded letter signed by its chief executive Carilus Ademba.

The directives, meant to protect the wealth of Mwalimu Sacco’s 57,277 members, pours cold water on the unprecedented takeover of a Kenyan bank by a savings and credit union.

Mwalimu Sacco draws its membership mostly from high school teachers and their spouses as well as education sector employees such as Teachers Service Commission (TSC) staff.

The society held a special shareholders meeting on September 13, 2014 where the proposal to purchase a 51 per cent stake in ECB was approved.

Industrialisation ministry officials are particularly concerned that Mwalimu Sacco chief executive Robert Shibutse, who was hired in June, previously served as a non-executive director at ECB.

READ: Mwalimu Sacco taps Equitorial Bank executive for CEO

Industrialisation PS Wilson Songa said the government was studying the deal and has scheduled a meeting with Sasra to address the matter.

Mwalimu – Kenya’s largest Sacco by assets valued at Sh24.5 billion – was set to finalise the purchase of a majority stake in ECB by the end of October, marking its entry into the lucrative banking industry.

The teachers’ Sacco has hired Ernst & Young as its accountants to offer transaction advisory services on the multi-billion shilling deal.

The Sh2.5 billion acquisition in return for a 51 per cent stake means ECB is worth Sh4.9 billion – a valuation top ministry officials dispute and want reviewed.

The ministry says the deal does not offer value for money for Mwalimu Sacco’s 57,277 members given the bank’s market share, branch network and reported earnings.

ECB is ranked 27th out of Kenya’s 44 banks, with 12,000 deposit accounts and about 6,000 loan accounts, giving the tier-three lender a cumulative market share of 0.73 per cent.

The bank’s loan book was worth Sh9.02 billion in December last year against an asset base of Sh15.5 billion.

With a loan book of Sh20.9 billion and deposits worth Sh18.5 Mwalimu Sacco would be ranked in position 23 behind GTBank in the listing of banks. The teachers’ Sacco has 11 branches countrywide while ECB has a network of 12 outlets in Kenya.

ECB has not paid shareholders any dividends in the past decade and has twice posted losses in the past six years – bucking consistent hyper profitability of Kenya’s banking industry.

The bank made a Sh68.1 million loss in 2010, which deepened to a record Sh481.9 million in 2012 before bouncing back to post a net profit of Sh55.6 million last year.

Mwalimu Sacco made a net surplus of 532.4 million in 2013 and declared a dividend of 12 per cent to members and a further 11 per cent interest rebate on members’ deposits.

Ministry officials further argue that the planned huge investment in ECB risks eroding Mwalimu’s working capital and affect its capital adequacy ratios.

“It is important to note such an investment requires a lot of capital and has serious implications to operations and workings of your Sacco,” the ministry says.

Sasra regulations set minimum regulatory capital for Saccos at Sh10 million and requires the credit unions to maintain a core capital to total assets ratio of 10 per cent.

Mwalimu’s ratio of core capital to total assets was 14.23 per cent by end of December last year, meaning that its core capital - equity capital and declared reserves – stood at Sh3.5 billion.