Heavy losses wiped out Spire Bank’s capital in the year ended December 2018, making it the sole lender in the country operating with a negative asset base of Sh1 billion and exposing Sh6.6 billion worth of customer deposits to risk.
The bank, in which Mwalimu National Sacco owns a controlling 75 percent stake, is now caught in an urgent quest for new capital because its losses have seen it breach all the minimum capital adequacy ratios by large margins.
The Sacco bought majority shares in the institution in 2015, when the lender was known as Equatorial Commercial Bank.
Besides teachers who are members of Mwalimu Sacco, the other shareholder is businessman Naushad Merali, who is also the bank’s founder.
As a rule, all banks must maintain a statutory minimum of Sh1 billion as core capital.
However, Spire Bank’s core capital stands at negative Sh1.6 billion.
Additionally, only a small fraction of the bank’s deposits is insured as per the maximum deposit guarantee of Sh100,000 per customer -- exposing the bulk of Spire Bank’s deposits to risk from the capital depletion.
Spire Bank said it is in the process of arranging to raise fresh capital from an unnamed strategic investor who is set to acquire a stake in the lender.
The bank’s current shareholders are also ready to provide new capital should the deal with the strategic investor be completed.
The company further claimed that the Central Bank of Kenya (CBK) — which has in the past shut down lenders such as Dubai Bank and Chase Bank on the basis of liquidity crises - is well briefed about its plans to raise additional capital.
“The shareholders are fast-tracking an ongoing recapitalisation programme with a strategic investor already identified and the transaction is at an advanced stage,” Spire Bank managing director Norman Ambunya said.
“This process is subject to regulatory approval and is also subject to non-disclosure and confidentiality agreements in force. CBK is aware of ongoing recapitalisation initiatives and is currently reviewing the strategic investor transaction for approval.”
Central Bank did not respond to the Business Daily’s queries on Spire Bank’s financial position.
The fact that the institution continues to operate despite its lack of compliance has raised queries about the CBK’s inconsistency in its regulation of banks.
Analysts say the regulator’s tolerance in the case of Spire Bank should be seen from the context of the lender’s constituency and the recent bank failures.
“Spire Bank is owned by teachers through Mwalimu National Sacco and shutting it down will have political consequences. Closing another bank will also further shake confidence in the sector,” said a banking sector analyst who sought anonymity to speak candidly.
A substantial portion of the bank’s deposits ultimately represent teachers’ savings.
It is not clear how much the general public has deposited in Spire Bank.
The lender’s deteriorating performance underlines the losses that Mwalimu Sacco is booking from its controversial acquisition of the institution in 2015.
The sacco invested a total of Sh2.4 billion to take a 75 per cent stake in the lender in a transaction that also included buying shares from Mr Merali.
Spire Bank has, however, remained in losses that have whittled down its book value to negative Sh1 billion in the year ended December, erasing all of Mwalimu’s investment.
The bank’s net losses doubled to Sh2.2 billion in the review period compared with Sh1.1 billion the year before.
The bank has never paid a dividend since Mwalimu became a shareholder, adding to the weight of the losses suffered by teachers.
The buyout of the bank raised eyebrows when the information became public, with various government agencies suspending the deal before later approving it.
It emerged later that Mwalimu Sacco had agreed to make the acquisition without conducting a due diligence on the bank.
Former officials of the sacco were also accused of 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 from 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 Sacco remained upbeat about the deal.
Mr Shibutse, for instance, argued that the transaction would save Mwalimu banking fees and stop its members from ditching the sacco for mainstream lenders.