How teachers’ sacco lost Sh2.4bn by buying a ‘dead’ bank

October 10, 2014. A public holiday. Previously Moi Day, and now Huduma Day.

On one side of the table sat executives from giant teachers sacco Mwalimu National Savings and Credit Co-operative Society, the buyers of a bank. On the other side sat Mr Naushad Noorali Merali, a billionaire who has made his money buying and selling off struggling companies.

Mr Merali had come to the limelight 10 years earlier, when he bought shares in Airtel, known as Kencell at the time, and sold them two hours later, walking away with a cool Sh2 billion profit.

In what became one of the quickest billions ever made in corporate Kenya, Mr Merali was in one room negotiating with Vivendi, a French firm that owned 60 per cent in Kencell, while the new buyer, Celtel, was in the next room, waiting for him. The Sameer headquarters was on Nairobi’s Riverside Drive then. 

After Mr Merali closed the buyout at around 7pm on a Monday night in March 2004, he simply crossed over to the next room, sold all the shares he had just bought from the French firm, and bounced out of the room at around 9pm the same night.

This was the man teachers now wanted to buy a bank from. At the time, Mr Merali was the owner of Equatorial Commercial Bank, which has since been renamed Spire Bank. 

Mwalimu Sacco was determined to make history as the first sacco in East Africa to own a commercial bank. And they wanted to buy it from Mr Merali, at all costs. As he walked into the room, the tycoon, who describes himself as an astute businessman, knew he had allies in the giant Mwalimu Sacco team. 

When the deal was sealed, the CEO of Mwalimu Sacco was Mr Robert Shibutse, a former employee of Mr Merali. Mr Shibutse, as CEO, had taken over the role of marketing the transaction to thousands of teachers, who had entrusted him with billions of their savings. Mr Shibutse did not need too much time convincing teachers to buy Mr Merali’s bank.

Blinded by ambition, top executives at the giant sacco ignored all the red flags that called for proper due diligence. In such a sale, a prudent buyer usually pays 50 per cent of the negotiated price, and then launches a detailed page-by-page, loan-by-loan audit of the books. The balance is only paid after the audit of the books is complete and the buyer is convinced they are not buying a dead bank. 

'Dead' bank

But Mwalimu Sacco executives, either naïve in such acquisitions, or driven by self-interest pushed on with the deal, ignored all red flags and bought 75 per cent of the bank in one fell swoop. It cost Sh2.4 billion.

The Co-operative Alliance of Kenya, an umbrella of more than 14 million members of the cooperative movement, was among the first agencies to flag the transaction on grounds that due process was not followed. 

That was before audit firm Ernst and Young, in a probe commissioned by Mwalimu Sacco itself ahead of the acquisition, also raised its own reservations on the deal. But the Shibutse team had made up their minds.

It was not until the end of the year, on December 31, 2014, that Mr Merali laughed all the way to the bank after the sacco made the payment for his bank.

The deal has now come to haunt teachers, as the reality of what they paid for hits. Various attempts to find a buyer for the struggling lender have come a cropper. 

This is why.  Borrowers have defaulted by a record 96 per cent, a shocking feat, which means that nearly everyone who has borrowed from the bank has defaulted. Its latest financial results released last week show that its total non-performing loans rose to Sh2.4 billion, against net loans and advances to customers of Sh2.5 billion, having shrank from Sh3.3 billion. No bank in Kenya has sunk to this level of defaults.

After six years of losses, the bank did not have any money left to give to new borrowers. Insiders say it lent less than Sh90 million, the whole year, compared to more than Sh4 billion it lent in 2016. 

Its balance sheet contracted by 25 per cent to Sh5.1 billion year-on-year, primarily due to loan attritions, maturities in government securities and accumulated losses. Its net loans and advances declined by 23 per cent, or Sh756 million, to Sh2.5 billion between 2019 and 2020.  

The Tier Three bank has also been replacing its CEOs every year, in what has made the lender a graveyard of the careers for banking executives, who have to deal with immense turnaround pressure from teachers on one hand, and meet the stringent Central Bank regulations on the other hand. 

Deep-pocketed sponsor

Mr Tim Gitonga, who oversaw the transition in 2016, was replaced by Mr Norman Ambunya in 2018. Mr Onesmus Muia would replace Mr Ambunya in 2019, before the current acting managing director Brian Kilonzo took over.

The bank’s capital and liquidity ratios, among other performance indicators, are dangerously blinking red. Its liquidity ratio has further contracted to 7.6 per cent in the year ended December 2020, against the minimum statutory ratio of 20 per cent. 

All commercial banks must maintain a statutory minimum core capital of Sh1 billion to be allowed to operate. But Spire Bank’s core capital currently stands at negative Sh2.63 billion. This means that it needs a cash injection of Sh3.6 billion to be compliant. 

If it did not have a deep-pocketed sponsor in Mwalimu Sacco through its 104,000 members, the Central Bank of Kenya (CBK) would already have pulled the rug from under its feet. 

“The going concern uncertainty was mitigated by a letter of comfort from the shareholder,” the bank said.

Going concern refers to the ability of a company to survive another year in operation. Whenever an auditor realises that a company may not pay its creditors when they come calling, then the company is said not to be a going concern. 

To mitigate this, if a company has a moneyed parent company, then an auditor requires the parent to issue a written letter of comfort to ascertain that the parent will be ready to inject new capital to keep a company alive, when need arises.  

“The bank is undertaking several funding initiatives of which a clean audit opinion is key to the various prospective partners,” the presentation notes. But this is not all the trouble Spire bank is in.

To get back on its feet, the lender will need more funding to be able to start lending, money that it is struggling to find. Should it not find a strategic investor, then it will have to turn to the giant sacco to prevent it from going into a financial ICU. 

Huge losses

By the end of 2020, the bank had accumulated losses of more than Sh8.4 billion. This wiped out all the shareholder funds to negative Sh1.8 billion. To compound the teachers’ pain, in February 2020, the sacco chairman, Mr Wellington Otiendo, put up a spirited fight to convince members to buy what was left of the bank from Mr Merali. 

He said some prospective investors would like to only engage if the sacco is able to sell them 100 per cent shareholding in Spire Bank. To boost the sacco’s chances of finding a buyer, it was resolved that it acquires the remaining 25 per cent shareholding in Equatorial Commercial Holdings Ltd from Sameer Group’s natural and corporate affiliates.

At the AGM, it was resolved that the sacco finds a buyer and sells all the shares held by it in the bank through Mwalimu National Holdings. The minutes show that the sale was to be solely for divesting Spire Bank from Mwalimu Sacco.

Spire Bank Insurance Brokerage was to be retained by Mwalimu Sacco under Mwalimu Holdings Ltd. 

The AGM empowered the board to undertake all requisite actions to procure a buyer. But one year later, the bank is yet to find a buyer. 

The frustration played out during last week’s annual delegates meeting at the Bomas of Kenya, which saw the media kicked out as tempers flared.  

After he sold the bank, Mr Merali has built a corporate empire around his Sameer Group, which is named after his only son.

Our attempts to get Mr Merali to comment on this story were futile. We wanted him to respond to allegations that he sold Kenyan teachers a dead bank. His son, who now runs the family empire, also declined to respond.

“I’m sorry I can’t help you. Talk to them,” he said and hung up the phone.

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