Merali, teachers sacco in talks to exit Spire Bank

Businessman Naushad Merali and Mwalimu National Sacco plan to sell their stake in Spire Bank after the lender issued a notice seeking endorsement to engage potential suitors seeking to buy a 100 per cent stake in the bank.

The struggling lender has been looking for a strategic buyer to inject much-needed capital after six years of losses wiped out its core capital and shareholder funds even as the bank lost billions of shillings in customer deposits.

The lender has invited its shareholders to an extraordinary general meeting at Mwalimu Towers in Nairobi’s Upperhill today (Friday) to approve the proposed transaction.

The meeting is scheduled to be held despite the government ban on public gatherings to contain the spread of the novel coronavirus. On Wednesday, the bank advised its shareholders who are unable to attend to appoint a proxy by Wednesday evening.

Spire Bank said that the proposed deal will only be concluded on terms that are acceptable to it and after it has been supplied with all the relevant information.

“That upon the recommendation of the Directors of the company that entering into and performance of a share purchase agreement and any other ancillary agreements by which a suitable purchaser shall legally acquire shares representing 100 per cent of the authorised and issued share capital of the company,” reads part of the special resolution that the bank is seeking from its shareholders.

This is the second time that the lender is making attempts to sell its shares. UK-based crypto lender BlockBank walked out of a deal after expressing initial interest in 2018.

BlockBank had approached the teachers’ bank but failed to prove it had the money needed to seal the deal, going quiet after announcing the proposal.

Mwalimu, which is owned by teachers, spent Sh2.4 billion in 2015 to acquire a 75 percent stake in the lender, which was then operating as Equatorial Commercial Bank, and which was owned Mr Merali. Mr Merali retained a 25 percent interest in the institution. The sacco now carries the investment in its books at Sh1.2 billion or half its original capital despite the bank reporting negative equity of Sh291.9 million in the nine months ended September 2019.

Spire Bank made a net loss of Sh212 million in the review period, narrowing it from Sh636.1 million the year before. It had a negative core capital of Sh1 billion, meaning it needs Sh2 billion to meet the minimum statutory requirement. It has also breached all the other minimum capital thresholds and has been operating under the forbearance of the Central Bank of Kenya as it seeks a buyer.

The capital crisis has persisted despite the bank converting Sh950 million of deposits from Mwalimu into capital, signalling that the sacco’s losses could rise beyond the Sh2.4 billion it initially invested in the lender.

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 Sacco made the acquisition without conducting a 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.

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Spire Bank has, however, proved to be a sinkhole that has got larger on the back of the lender’s own inefficiencies and the introduction of more adverse policy and regulatory measures in the banking sector.

For instance, the bank’s ability to lend has been constrained, leading to a Sh1 billion decline in outstanding loans to Sh3.4 billion in the nine months ended September 2019, compared to Sh4.4 billion a year earlier.

This, in turn, resulted in interest income dropping to Sh421 million from Sh662 million. Spire Bank’s deposits also declined from Sh6.8 billion to Sh4.5 billion, but this also reduced interest expenses from Sh532 million to Sh359 million.

With a decline in lending, negative capital position and thinning cash reserves, the lender desperately needs rescue cash from a strategic investor. This has been on the bank’s agenda for a while now as it seeks to cut losses.