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Merali’s Sh1.7bn withdrawal that sank teachers' Spire Bank

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Businessman Naushad Merali. FILE PHOTO | NMG

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Summary

  • The bank lost Sh2.2 billion in the three years following Mr Merali’s move, with the withdrawal of 81.3 percent of the cash or Sh1.79 billion happening in under a year.
  • Mwalimu, which is owned by teachers, first acquired a 75 per cent stake in the lender, which was then operating as Equatorial Commercial Bank, and was owned Mr Merali.
  • The bank is no longer lending, with a negative capital position.

Tycoon Naushad Merali withdrew Sh1.7 billion from Spire Bank days after selling the lender to Mwalimu National Sacco, triggering a chain reaction that has pushed the lender owned by teachers on the brink of collapse.

Mr Merali’s huge withdrawal in 2016— then an equivalent of a fifth of the bank’s Sh8.54 billion deposits— prompted other customers to remove cash from the bank, Spire Bank’s top officials revealed on Wednesday during a parliamentary probe.

This weakened the bank’s lending and pushed it deeper into losses that have wiped out its core capital and shareholder funds even as the bank lost billions of shillings in customer deposits.

The bank lost Sh2.2 billion in the three years following Mr Merali’s move, with the withdrawal of 81.3 percent of the cash or Sh1.79 billion happening in under a year.

Disclosure of the withdrawals by the tycoon, viewed as a vote of no confidence in the bank, will add to concerns that the businessman sold teachers a dead bank after pocketing Sh2.4 billion for ceding a 75 per cent stake.

"One thing we are aware of is that when Mr Merali was still part of the bank, he had huge deposits there to the tune of Sh1.7 billion which he, later on, withdrew in 2016," said Mwalimu National Sacco chairman Wellington Otiende when he appeared before the Senate committee on finance and budget.

"Coupled with what happened at Imperial Bank and Chase bank, there was some sort of panic and there were withdrawals by other customers. This weakened the financial base of the bank."

Spire Bank’s loss of deposits—a key source for lending to customers—has cut its loan book 66 percent over the past four years to Sh2.55 billion, weakening its ability to grow revenues.

The lender sank into a Sh1.2 billion loss for the year ended December 2020 from Sh472 million a year earlier.

This left it with a deeper negative asset base of Sh1.8 billion, putting Sh4.79 billion customer deposits at risk.

Mwalimu, which is owned by teachers, first acquired a 75 per cent stake in the lender, which was then operating as Equatorial Commercial Bank, and was owned Mr Merali.

Last year, it acquired the remaining 25 per cent, offering it full control of the loss-making bank.

Over the last couple of years, Spire Bank’s accumulated losses of up to Sh8.4 billion has wiped out shareholder funds, which now stand at negative Sh1.8 billion. This means that the teachers’ investment in bank has been wiped out.

The bank is no longer lending, with a negative capital position. Loans issued shrank from Sh3.3 billion in 2019 to Sh2.5 billion at the end of last year.

The chairman of the Senate committee on finance and budget, Charles Kibiru, said Mr Merali’s actions were akin to abandoning a sinking ship.

"Are you telling us Merali was taking a flight from a sinking ship? This is a person who first sells shares and all of a sudden withdraws deposits and then challenges set in," said Mr Kibiru.

Senator Moses Wetang’ula, a member of the committee, said: "So if within no time Merali goes and withdraws his money and leaves the bank as a shell, this is quasi-criminal."

The sacco’s buyout of the bank had raised eyebrows when it first became public, with various government agencies opposing the deal before later approving it. Mwalimu made the acquisition without conducting due diligence on the bank.

Former officials of the sacco were also accused of conflict of interest, with former CEO Robert Shibutse having worked for the then Equatorial Commercial Bank and other companies associated with Mr Merali.

Ahead of the transaction, the lender transferred its office building, Equatorial Fidelity Centre in Nairobi’s Westlands area, to its associate company Fidelity Shield Insurance, in which it held a minority stake at the time. Despite the lender’s historical losses, former officials of Mwalimu remained upbeat about the deal.

Mr Shibutse, for instance, argued that the transaction would save Mwalimu banking fees and stop its members from fleeing the sacco to mainstream lenders.

Spire Bank has breached all the other minimum capital thresholds and has been operating under the forbearance of the Central Bank of Kenya (CBK) as it seeks a buyer. The bank has struggled to get a strategic buyer to inject much-needed capital, with suitors walking out in the last minute.

Acting managing director at Spire Bank Brian Kilonzo said on Wednesday negotiations with potential investors had been difficult, with three having dropped off.

"The process of accepting any investor also requires to work closely with CBK to avoid getting fake investors. Occasionally, we get a fixed timeline from potential investors but for some reason they disappear in thin air," said Mr Kilonzo.

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