Mwalimu Sacco failed to provide a valuation report on the purchase of a majority stake in Equatorial Commercial Bank (ECB) from billionaire businessman Naushad Merali.
This prompted the State to stop the Sh1.6 billion deal and to open investigations into the transaction.
The fate of the deal will now have to await the outcome of an inquiry ordered by the Commissioner for Co-operative Development, Patrick Musyimi who asked the team to address queries on valuation, profitability and corporate governance issues at ECB.
Mwalimu National Sacco’s failure to provide a valuation report on Equatorial Commercial Bank (ECB) prompted the Government to halt a Sh1.6 billion deal to purchase of a majority stake from billionaire businessman Naushad Merali.
The State on Monday appointed a three-man team to investigate why the country’s largest savings and credit union by assets concluded the purchase of a 51 per cent stake in ECB despite a September directive to freeze the deal until a due diligence report was made available to the authorities.
Mwalimu Sacco, with assets valued at Sh24.5 billion, had a membership of 57,521 as at March 2014, mainly drawn from public high school teachers and their spouses as well as employees from education sector agencies such as the Teachers Service Commission (TSC).
The fate of the deal will now have to await the outcome of an inquiry ordered by the Commissioner for Co-operative Development, Patrick Musyimi who asked the team to address queries on valuation, profitability and corporate governance issues at ECB.
Industrialisation principal secretary Wilson Songa also expressed shock that regulators had cleared the Mwalimu-ECB deal and said the government will put the Sacco Societies Regulatory Authority (Sasra) to task on the rationale it used to clear the purchase.
“It is a surprise to us because the issues raised in the earlier letter were not addressed,” said Dr Songa in an interview with Business Daily. Mr Musyimi gave the inquiry team 15 days to audit the feasibility of Mwalimu buying the tier-three lender.
“We will put Sasra to task to explain to us what is happening and how they arrived at the decision,” said Dr Songa.
Sasra, the regulator of deposit-taking saccos, said it issued Mwalimu a conditional approval to acquire ECB and that queries regarding the financial health of the bank could only be dealt with by the Central Bank of Kenya (CBK).
The agency said it lacked powers to address other issues raised about the Mwalimu-ECB deal because they do not fall under the purview of Sasra.
“I issued a cautionary Letter of No Objection to Mwalimu saying they must continue complying with our regulations,” said Sasra chief executive Carilus Ademba.
“The question of governance and valuation of the bank was for the CBK to look at. We only looked at compliance to laws and regulations relating to saccos and Sasra.”
ECB is ranked 27th by size out of Kenya’s 44 banks, with 12,000 deposit accounts and about 6,000 loan accounts, giving it a cumulative market share of 0.73 per cent.
On Tuesday, CBK Governor Njuguna Ndung’u declined to comment on how the bank sanctioned Mwalimu’s purchase of ECB.
ECB has not paid shareholders any dividends since it commenced operations as a fully-fledged commercial bank in 1995 despite Kenya’s banking industry consistently recording double digit growth.
Records show that it was in the red to the tune of Sh68.1 million in 2010 and made a record loss of Sh481.9 million in 2012 before bouncing back to post a net profit of Sh55.6 million in 2013.
ECB’s net profit in the nine months to September last year halved to Sh49.01 million from Sh100.9 million a year earlier.
On the other hand, Mwalimu made a net surplus of 532.4 million in the period to December 2013 and declared a dividend of 12 per cent to members and a further 11 per cent interest rebate on members’ deposits.
A petition by Co-operative Alliance of Kenya, a co-operative movement lobby, dated January 21, 2015 alleges that the due diligence report prepared by Ernst & Young highlighted serious concerns about ECB’s financial status.
The Industrialisation ministry, through the commissioner for co-operative development, had in September last year directed the giant teachers’ sacco to suspend the acquisition of ECB and immediately produce the due diligence report which informed the investment decision.
The government was jolted into action after Mwalimu announced on Friday last week that it had finalised buying a majority stake at ECB following approvals by the CBK, the Competition Authority of Kenya (CAK) and Sasra.
Mr Musyimi invoked the Co-operative Societies Act — which gives him powers to order an inquiry into the workings of any credit union — possibly setting off turf wars with Sasra which had already cleared the Mwalimu-ECB deal.
“I have on my own accord, decided that an inquiry be held into the by-laws, working and financial conditions of Mwalimu National Sacco Society Ltd,” said Mr Musyimi in an order dated January 26, 2015.
“Taking this move subjects the matter to a rigorous process that will ensure that any pertinent issues are addressed before the deal can be allowed to proceed.”
The fresh government directive to re-examine the Mwalimu-ECB deal pours cold water on the unprecedented takeover of a Kenyan bank by a savings and credit union.
The inquiry comes in the wake of plans by Mwalimu to acquire an additional 24 per cent stake in ECB to push its interest in the bank to 75 per cent. This would have brought Mwalimu’s entire investment to Sh2.5 billion.
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