Mwalimu Sacco will pay Equity Group up to Sh510 million for taking over the troubled Spire Bank in a deal that will see the teachers-backed lender lay off all its workers.
The deal backed by the Central Bank of Kenya (CBK) is modelled as an asset purchase transaction. Equity will take over the assets and liabilities of Spire Bank rather than inject money into the acquisition.
Equity will be paid for the difference between the assets and liabilities, meaning that Spire Bank has zero value and teachers have lost billions of shillings after buying a majority stake in the bank from late tycoon Naushad Merali in 2014.
Mwalimu Sacco CEO Kenneth Odhiambo told the Business Daily that Sh510.7 million has been kept in an escrow account that will be used to pay Equity.
He reckons that the payout to Equity could be lower at the time of concluding the deal, which is in line with the CBK’s preferred mode of letting big banks acquire smaller and struggling ones instead of letting them collapse.
There are 38 banks competing in Kenya’s banking sector, which has seen several mergers and acquisitions since 2016, sparked by the failure of three mid-sized and small lenders, as well as a cap on commercial lending rates.Spire bank
The rates cap was removed in 2019.
For Spire Bank, the takeover was initiated under the insolvency rule, where a quick acquisition was sought before bankruptcy and collapse.
“On an annual basis, the bank makes losses of approximately Sh1.1 billion. Its entire capital would be wiped out within the next two years hence a more painful loss should the liquidation process stall,” said Mr Odhiambo.
“The key prudence consideration is stopping this bleeding, which affects the sacco bottom line and denies its members the rightful return on their savings, once and for all.”
Mwalimu Sacco has lost billions of shillings at Spire Bank, prompting teachers to call for offloading the lender and withdrawing their letter of support to the credit union.
Spire Bank has been unable to access cash from peer banks due to its financial challenges.
The bank has been begging for additional support from its majority shareholders, Mwalimu Sacco, and the CBK to allow it to earn money to meet expenses and recover losses.
The CBK has been providing short-term liquidity of up to Sh1.3 billion through Reverse Repo (repurchase agreements), which is short-term and not enough to revive the lender.
The teachers have also been constrained by sacco laws to limit their exposure after they pumped billions of shillings into the bank over the years.
A parliamentary probe revealed that the Sacco Societies Regulatory Authority (Sasra) stopped Mwalimu Sacco from pumping additional money into the bank after they sank billions into the lender.
Mwalimu Sacco has been supporting Spire Bank with funds after the lender accumulated losses of nearly Sh10 billion, including a Sh3.4 billion conversion of teachers’ deposits into equity.
Spire Bank had attracted over seven potential buyers, including a local bank that confirmed interest in the lender’s good books and teachers’ membership, but the regulator turned down most of the suitors on conflict of interest and credibility issues.
Despite uncertainties about its future, Spire Bank has pursued a turnaround on lower costs, loan recoveries and conversion of shareholder deposits into equity.
The bank cut its half-year net loss by 21 percent to Sh403 million despite constrained lending due to low capital and delayed resolution through the sale or finding a strategic investor.
It reduced losses from Sh512.8 million in June last year on drastic cost-cutting measures that reduced interest and operational expenditure.
Interest expense declined from Sh221 million to Sh85 million on the conversion of Sh3.4 billion deposits to equity while operating expenses declined 7.0 percent to Sh470 million.
The teachers’ bank has been unable to lend due to low capital ratios that have seen its loan book shrink from Sh2.3 billion to Sh1.7 billion.
The bank whose capital ratios are below the mandatory CBK requirements has, however, seen an improvement in its core capital from negative Sh4.1 billion in June last year to negative Sh1.7 billion currently due to the deposit to equity conversion.
Equity becomes the latest tier-one bank to buy a struggling lender in search of new growth opportunities after KCB, which recently acquired the National Bank of Kenya (NBK). Co-operative Bank of Kenya also bought struggling microlender Jamii Bora Bank.
Spire Bank’s non-performing loans stood at Sh2.63 billion, signalling that part of Equity’s immediate task will be to step up collections and recoveries.
Equity has bargained for a deal that will see Mwalimu Sacco, which has been the sole shareholder in Spire Bank, settle all the redundancy costs of over 100 employees who will lose jobs following the deal.
CBK governor Patrick Njoroge said Friday through a Kenya Gazette notice that the Spire Bank’s acquisition takes effect Tuesday.