(From left) Spire Bank board chairman William Rahedi, Mwalimu National Sacco Chairman Joel Gachari, Equity Group PLC Managing Director and CEO Dr James Mwangi during the official handover of certain assets and liabilities of Spire Bank Limited (Spire Bank), to Equity Bank on February 1, 2023. PHOTO | DIANA NGILA | NMG
If the Central Bank of Kenya (CBK) had placed troubled Spire Bank under statutory management, like it did Chase Bank, Dubai Bank, Imperial Bank and a host of others before, we would right now be having a stream of depositors queuing and yelling at Spire Bank’s 10 branches without recourse.
And they wouldn’t be able to access their money for a couple of years, if at all.
The script has changed, thanks to the transaction between Equity Bank and Mwalimu National SACCO (75 percent owners of Spire Bank), which saw Equity acquire some loan assets and deposit liabilities of the bank, saving thousands of depositors financial damage and heartaches.
By midnight of 1st February 2023, after the deal was sealed, all deposit accounts and loan accounts had been domiciled on the Equity Bank platform and the new customers were able to withdraw all their money if they wanted.
Instead, by midday of the same day, some of them had deposited a total of Sh9 million in their accounts. This reflects the confidence that those depositors have in this transaction.
According to details of the rescue deal revealed by Dr James Mwangi, Group CEO of Equity Group at their joint press briefing last Wednesday, Equity has taken over a liability of Sh1.32 billion in deposits and assets worth Sh945 million in loans to some 3,700 accounts.
To match the liabilities and assets, Mwalimu then put Sh510 million in an escrow account that would be paid to Equity for the difference, in a funding arrangement with the bank.
“We have solved a national problem. This is the orderly way of exiting the financial sector without causing panic,” said Mwangi.
What would have been a tumultuous journey for customers seeking their money has now ended less torturously with a myriad of lessons to be drawn from this acquisition.
First, the unique nature of this transaction is an innovative piece of financial engineering and legal brilliance that should be replicated in similar situations in the future.
Six years ago, Mauritian lender SBM paid Sh1.2 billion in goodwill when it acquired troubled Fidelity Bank only to write it off its books upon realising they have overvalued the prospects.
A year later in August 2018, they acquired some assets and liabilities of Chase Bank then under liquidation for a song, paying Sh471,335.
Only four months later, they booked a bargain purchase gain of Sh3.82 billion, meaning they were given the bank almost for free.
Imperial Bank, Dubai Bank and all other prior banks facing trouble were either simply liquidated or amalgamated into one entity such as Consolidated Bank and Equatorial Commercial Bank (which was renamed Spire Bank).
It suffices to say that depositors have previously suffered greatly in their quest to recover their money from failed banks.
This is the first time in Kenya that all customers' deposits have been salvaged in total in this manner. It is fair to say that the regulator was a lot more generous to Spire Bank and accommodated it more than he did other previous similar cases, but by not placing the troubled bank under statutory management (in spite of the dictates of the CBK Act and the prudential guidelines) the CBK avoided a run on deposits that would have had catastrophic contagion effects on the entire banking sector.
Spire Bank Chairman, William Rahedi was grateful for the deal.
“We have avoided a forced liquidation and a run on deposits. The process has been orderly and dignifying for our depositors and staff. Our staff will walk away with their packages in dignity,” he said.
Equity Group’s Executive Director Mary Wamae said the transaction was done under Section 9 of the Banking Act which regulates the acquisition and transfer of a bank’s assets and liabilities.
Legal advisors Rosa Mutero, Managing Partner at Anjarwalla & Khanna (ALN Kenya) and transaction advisers, Deepa Doshi of Stanbic Bank Kenya hailed the process citing the speed at which it was approved by the CBK, SASRA (SACCO Societies Regulatory Authority) and CAK (Competition Authority of Kenya).
Ms Rosa felt it is desirable that the regulator deals with cases of delinquency in the banking sector early enough to avoid the erosion of institutional capital which occurs when such cases take so long to be dealt with.
Ms Rosa said the laws on voluntary liquidation need to be relooked.
“Buying assets of an insolvent entity posed several challenges. For example, what happens to employees in such a situation should be straightforward so that they don’t have to resort to the courts,” she said. This is what delayed this transaction.
Secondly, this deal speaks volumes about the business acumen of the management of both Equity Bank and Mwalimu National SAACO.
Equity Bank has seized a huge business opportunity. Most likely, not all the 20,000 plus new accounts from Spire Bank will remain at Equity, neither will all the Sh945 million in loans be recovered.
Equity has agreed to renegotiate the terms of the loans to accommodate borrowers so that they can repay easily.
Under forced liquidation, these loans would simply have been recalled at the peril of the borrowers.
“Whatever we don’t recover will be our loss,” Dr Mwangi was quick to add. He welcomed the new ‘members’ promising to give them good service and listen to their specific needs.
On their side, Mwalimu National Sacco has successfully stopped the haemorrhaging that was orchestrated as they strove to keep the bank running against all odds for the last 4 years.
Aside from the Sh2.4 billion that Mwalimu paid to acquire 75 percent of the bank in 2014, the giant Sacco has had to pump in an estimated Sh10 billion in the last four years to keep it afloat.
Mwalimu’s decision to self-liquidate Spire Bank has given it a better chance to negotiate and realise the full value of its remaining assets and pay off other debts.
The staff of the troubled bank are also going to exit in a more dignified manner with their full packages as specified in their contracts or as agreed with the owners.
It was Mwalimu that first approached Equity to do this deal. By choosing Equity to buy its assets, the giant sacco has also negotiated a bailout plan to cushion it from the financial stress of completing the liquidation process.
They put up a transition team in September last year with a clear mandate to manage the process to completion.
The door is open to them to seek out Equity for negotiated funding so as to conclude the process as quickly as possible without depleting its capital which would severely affect its ability to meet its main obligations of lending to its members.
For Equity, this has the potential of opening up, directly and indirectly, a huge client base comprising teachers. As they say, all is well that ends well.
Ochieng Oloo is an independent banking analyst.
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