The reason the transaction between Equity Bank and the troubled Spire Bank makes sense to me is its structuring around protecting the heard-earned savings of the depositor — the teachers.
Depositors take hard-earned savings to a licensed bank believing that, because it is supervised by the Central Bank of Kenya (CBK), the money is safe.
Indeed, the main reason the CBK maintains a whole supervisions bureaucracy is to protect and serve the interests of depositors — especially the unsophisticated folks who don’t have the skills to read published accounts of banks.
But I ask: Is it possible that an ordinary teacher working in Keroka, for example, can tell that the bank where he has deposited his meagre savings is tottering to insolvency and merely surviving out of regulatory forbearance by the CBK? Yet this has been the situation with Spire Bank since 2016.
The bank has been over-dependent on liquidity support from the CBK, mainly roll-overs on reverse repos facilities. It has been permanently at the door of the regulator to request waivers and haircuts for securities used under the reverse repos.
Clearly, the bank was headed for trouble and the meagre and hard-earned savings of teachers were at risk.
Was the Equity Bank deal the best option for the interests of teachers? Many options were on the table, including the option of a strategic sale to an equity investor.
Indeed, every other vulture from Europe and the Middle East hungry for a banking licence and hankering for an entry into the banking sector in Kenya was in Nairobi carrying a conditional offer, promising to pump in money into the bank.
After the central bank brought in tough rules to vet big-talking fly-by- night types, including proof of funds, reputation risk, and proof of domain knowledge and experience in running a big well-capitalised and profitable bank, they all failed the test.
But what made the option of bringing in a local and healthy big brother to save the interests of teachers was the fact that a due diligence conducted by the consultants and transaction advisers showed that every other option on the table by prospective investors would require substantial liquidity support from the CBK to meet maturing deposit obligations.
This is a case where a big brother is stepping in to take over select assets and liabilities of a struggling brother because he is much stronger and has a balance sheet size capable of swallowing the small brother’s problems without a hitch.
Sample this: Equity Bank Kenya is acquiring approximately 20,000 deposit customers holding approximately Sh1.32 billion, representing approximately 0.25 percent of its customer deposits of Sh522.75 billion, or approximately 0.14 percent of Equity Group’s consolidated customer deposits of Sh970 billion, as reported in their unaudited half-year financial statements as at June 30, 2022.
On the loans side, Equity is likely to acquire approximately 3,700 loan customers that have outstanding balances reported at a net carrying value after statutory loan loss provisions of Sh945 million by Spire Bank in its un-audited half year financial statements as at June, 30, 2022.
This represents approximately 0.23 percent of Equity’s reported net loans and advances to customers of Sh417 billion or approximately 0.15 percent of Equity Group’s reported consolidated net loans and advances to customers at Sh650.5 billion as at June 30. A big brother indeed.
Methinks the current regulatory framework and institutional mechanisms for dealing with bank problems is ill-equipped to give adequate protection to depositors. In this transaction, the shareholders of Spire will bear a heavy burden.
In most jurisdictions, it is the shareholder, not the depositor, that bears the burden. Depositors remain insulated because the regulator steps in with a solution immediately to ensure they receive their insured deposits.
Kenya doesn’t have even a single case where a bank that went into administration under the Kenya Deposit Insurance Corporation (KDIC) was brought back to life.
And, we have had bad experiences with liquidation of banks. Whenever we tried to resolve a troubled bank’s problems by moving loans and deposits to KDIC, most of the underlying collaterals were either lost or disposed of in murky circumstances.
With this transaction, Spire Bank’s deposits and loan customers will enjoy uninterrupted access to their savings.
Big brothers must be made to play a developmental role in society.