Former owners of Fidelity Bank are seeking Sh2.5 billion from the Central Bank of Kenya (CBK) and Mauritian bank group SBM Holdings amid claims that the banking regulator bullied the investors at night to sell the troubled lender for Sh1.
Sultan Khimji, one of the shareholders representing the owners, has petitioned the High Court to declare the 2017 forced buyout null and void, arguing that the CBK forced the directors to dispose of the bank for a song under threats of criminal charges, regulatory sanctions and closure.
The shareholders say the central bank forced them to accept a negative valuation of Fidelity Bank, alleging that SBM inflated operational costs and provisions for bad loans.
The Mauritian bank group acquired Fidelity Bank in a deal shepherded by the CBK after the Kenyan lender ran into financial crisis under a regulatory blueprint that sought to rescue rather than close troubled banks.
In 2007, SBM said the deal was valued at Sh100 and indicated it would inject Sh1.45 billion to turn around Fidelity Bank, which risked being the fourth lender to collapse in a span of months.
Mr Khimji and his partners have also accused SBM of reneging on a promise of a deferred payment of Sh600 million and goodwill of a similar amount.
In the suit, the CBK has been accused of bullying and intimidation, including summoning the directors in the middle of the night to force the sale of Fidelity Bank.
“The plaintiff (Mr Khimji) prays for judgment against the defendants (CBK and SBM), for a declaration that the share purchase agreement between the plaintiff and first defendant dated March 28, 2017, is invalid, null and void and of no legal effect and that the shareholders of the former Fidelity Bank are entitled to compensation for the full value of the said bank,” the suit papers say.
The suit prays for Sh2.5 billion compensation, being the full market value of Fidelity Bank as at December 2016.
Alternatively, they say the court should compel SBM to comply with the share purchase agreement that set out Sh1 initial consideration, Sh600 million deferred payment, an additional Sh1.3 billion for undervaluation of the lender plus Sh600 million goodwill.
Mr Khimji has also asked for restitution of profits earned from the sale as well as damages compounded at an annual interest of 12 percent from January 2017.
The Indian Ocean Island banker bought Fidelity Bank, a tier-three bank with 14 branches and ranked 31 out of 41 Kenyan banks in 2017.
SBM later bought Chase Bank, another failed lender, in a deal that helped propel the combined bank to a tier-two bank in months, increasing its assets from Sh11.7 billion to Sh75.3 billion.
SBM Bank Kenya now has assets of Sh84.2 billion and posted profits of Sh186.8 million in the six months to June.
Fidelity Bank owners claim that the CBK gave SBM Sh4 billion to fund their deal and pay exiting shareholders but the money was diverted and used to purchase Chase Bank’s good books.
Mr Khimji said the CBK had initially pledged to inject Sh1.4 billion into the bank but later increased it to Sh4 billion as liquidity support, claiming SBM funds were blocked elsewhere.
“SBM failed to pay the Bank shareholders and instead leveraged the funds to facilitate purchase of another bank namely Chase Bank, which was in liquidation, thus profiting from the purported agreement and the collusion with the second defendant,” the suit papers say.
The CBK is yet to respond to the suit. The Mauritian bank group urged the court to drop the suit, arguing that a clause in the deal provided for disputes following the buyout to be handled through arbitration.
Fidelity Bank owners say their bank was forced into the deal after it sought a bailout from the CBK after running into financial difficulties.
The bank blamed its financial woes on the contagion of the closure of Chase Bank, followed by the shutdown of another mid-sized lender, Imperial Bank, and smaller lender Dubai Bank Kenya.
The string of closures knocked confidence in Kenya’s banking sector, especially in small banks.
The CBK then linked Fidelity Bank to a senior partner of an accounting firm that was acting as a broker for SBM to arrange a merger that would have seen the Mauritian lender acquire 70 percent of Fidelity Bank and buy the remaining stake in three years.
The SBM valued the tier-three lender at Sh1.3 billion but the Mauritian lender was hesitant about Fidelity’s size, stating it wanted to make an entry via a bigger bank.
Mr Khimji said the CBK reached out to its peer, the central bank in Mauritius, and offered to sell Fidelity for $1, which was equivalent to Sh101.3 at the time to entice SBM back to the table and close a quick deal to give confidence to the Kenyan banking sector.
According to Fidelity, SBM gave new valuations of negative Sh411 million as a result of delays in finalising the deal and altered the lender’s financial statements, inflating operational expenses and provisions for bad debts.
SBM also allegedly changed terms of the deal to kick out the bank management on taking over as opposed to the initial offer to keep them for six months.
Fidelity would also be required to bear the cost of the bad loans so that the new owner would not be required to borrow funds to operate.
The bank's owners claim the CBK influenced the preparation of an initial agreement and kicked out the bank’s directors immediately after the Heads of Terms [document] was signed.