Mwalimu National Sacco has soaked in losses of more than Sh2 billion from its 2015 acquisition of a majority stake in Equatorial Commercial Bank, in which business tycoon and founder Naushad Merali had a controlling interest.
The Sacco, owned by teachers, invested a total of Sh2.4 billion to take a 75 percent stake in the lender, which later rebranded to Spire Bank.
The bank has remained in losses that have whittled down its book value to Sh551.6 million as of September, placing the worth of Mwalimu’s stake at a mere Sh413.7 million.
This represents a loss of Sh2 billion or 83 percent on the investment made four years ago.
Spire Bank has inadequate capital and needs to raise more funds from shareholders to comply with the regulatory requirement of Sh1 billion minimum core capital.
The losses have over the years eaten up the bank’s core capital, which currently stands at negative Sh1.3 billion. The lender has never paid a dividend since Mwalimu became a shareholder, adding to the weight of losses that teachers have had to bear from the transaction.
The Central Bank of Kenya (CBK) has in recent years shut down other lenders such as Chase Bank for capital breaches.
Attempts to reach officials of the bank and the teachers’ Sacco for comment were unsuccessful.
CBK had also not responded to our queries by the time of going to press.
“We remain suspicious of some transactions that have occurred in this space as purchasers seem to struggle immensely to turn around the operations, although market conditions have worsened for the small lenders after the interest rate cap from 2016,” Standard Investment Bank (SIB) said in a research note this week.
“Mwalimu Sacco purchase of Equatorial Commercial Bank particularly comes to mind, with concern around the level of due diligence undertaken by the teachers’ union.”
The buyout of the bank raised eyebrows when it became public, with various government agencies halting the deal but later approving it. It emerged that Mwalimu had agreed to make the acquisition without conducting due diligence on the bank.
Former officials of Mwalimu were also accused of having conflict of interest, with ex-CEO Robert Shibutse having worked for 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, however, proved to be a sinkhole that has gotten larger on the back of the lender’s own inefficiencies and the introduction of more adverse policy and regulatory measures in the banking sector.
The lender and other small banks have suffered the most from the control of lending rates, which have demolished their business model of taking high-cost deposits and lending at even higher interest rates.
Spire has also been ranked as the least efficient among small banks. As at the third-quarter ended September, the lender was spending Sh2.62 for every Sh1 of income.
The bank has racked up nearly Sh3 billion in net losses from January 2015 through to September last year, eating into shareholder funds that are inadequate to meet the various minimum regulatory capital requirements.
The ratios, including those measuring liquidity and assets backing loans, fell short by a range of 6.5 percent to 17.3 percent.
The bank’s capital position fell short even after making favourable adjustments to the more conservative international accounting standards IFRS9, which require banks to provide for expected loan losses rather than those already incurred.
The deepening breach of capital ratios means the lender is constrained in terms of various core banking operations such as taking more deposits and expanding its loan book.
Mwalimu can hardly reverse its losses by selling its controlling stake in the lender. Small, loss-making banks have recently been acquired at steep discounts ranging from half of book value to Sh100 (in the case of SBM Holdings’s buyout of Fidelity Bank).