Mwalimu Sacco’s plan to buy bank hits bumpy road

A decision to scuttle a deal by Mwalimu Sacco to acquire a majority stake in Equatorial Commercial Bank is raising a storm in the Sacco movement.

Co-operative Alliance of Kenya, the apex umbrella body for the co-operative movement, has come at the centre of the row that touches on billionaire businessman Naushad Merali.

In turn, the Co-operative Alliance has roped in Co-operative Bank of Kenya, whose top officials sit in key positions in the alliance.

The Sh1.6 billion deal that has seen Kenya’s largest savings society almost clinch a 51 per cent stake in Equatorial Commercial Bank (ECB) has since sucked in government officials. And now Sacco Societies Regulatory Authority (Sasra) and Kenya Union of Savings and Credit Co-operatives (Kuscco) say vested interests are behind Mwalimu’s woes.

On Tuesday, last week, Industrialisation and Enterprise Development ministry reversed approvals for the deal granted by Central Bank, Competition Authority and Sasra saying an inquiry should be conducted into the deal.

Mwalimu society held a special shareholders meeting on September 13, 2014 where the proposal to purchase a 51 per cent stake in ECB was approved.

NO OBJECTION

But in a statement sent to media houses, Commissioner of Co-operatives, Mr Patrick Musyimi, stopped the transaction and opened an inquiry into the matter. This, Mr Musyimi said, was as a result of protest by the Co-operative Alliance on the manner in which the transaction was handled.

“While investment is potentially a good thing, we are afraid that the manner in which this investment is being conducted puts members’ funds at risk and exposes the society to financial loss,” said Co-operative Alliance chief executive, Mr Daniel Marube.

He argued that Mwalimu Sacco did not present due diligence report on Equatorial Commercial Bank by Ernst and Young at its annual general meeting to enable members approve the deal from an informed position.

However, Sarsa and Kuscco oppose the reasons given for stopping the deal. The two blame what they term as “an invisible” hand, conflict of interest and fear of competition saying there are forces out to frustrate Mwalimu Sacco’s expansion into banking.

Industry insiders point an accusing finger at the Co-operative Bank as the “invisible hand”. They claim the bank fears competition and loss of business from a major client.

“This is purely an issue of competition… Co-operative Bank is behind all this considering they share a chairman with Co-operative Alliance of Kenya,” Sasra chief executive Carilus Ademba told Smart Company.

Mr Ademba, who issued a cautionary “letter of no objection” to Mwalimu while approving the deal, said Sasra saw no legal or financial reason to stop a transaction that had already been cleared by Central Bank and the Competition Authority.

Data from Sacco Societies Regulatory Authority ranks Mwalimu as Kenya’s largest Sacco by assets that are worth Sh24.5 billion in the year ended December 2013.

Mwalimu’s current membership is 57,521 comprising mostly secondary school teachers, college tutors and their spouses as well as employees of organisations such as the Teachers Service Commission.

The Sacco’s 2013 financial statement shows that its loan book grew to Sh20.96 billion up from Sh18.96 billion in December 2013 driven by increased appetite for loans by its members.

BANKING SERVICES

With 11 branches countrywide, Mwalimu marshalled additional deposits worth Sh1.9 billion in 2013 taking members’ deposits to Sh18.5 billion over the same period.

Holding a stake in a bank would enable Mwalimu Sacco collect deposits from beyond its membership, access funds at lower interest rates, venture into trade finance and offer its members ATM services.

Previously restricted to banking with Co-operative Bank, Saccos were allowed to bank with institutions of their choice after the liberalisation of the co-operatives market in 1994.

However, Co-op Bank, which is Kenya’s third largest lender, has managed to retain 95 per cent market share of Sacco’s business to which it offers all the banking services including lending and ATM services.

“A lot of business that we are now giving to banks, where we have no shareholding, can now be moved to Equatorial Commercial Bank,” Mwalimu Sacco chief executive Robert Shibutse said in an earlier interview.

Besides losing business with one of the country’s largest Sacco, Co-op Bank may see its market share of Sacco business substantially eaten into by Mwalimu which has the experience and network to compete in back-end service and in offering loans through the acquisition of ECB.

Co-op Bank, however, denies being behind Mwalimu’s woes or having an interest in the business.

“Kenya is a vibrant and growing economy that has sufficient opportunities for expansion of banking; there is space for all of us. We take great exception to anyone dragging the name of the bank into such an issue,” Co-op Bank managing director Gideon Muriuki said in an email interview.

The fallout has also brought in Kuscco, which accuses Co-operative Alliance of scuttling Mwalimu Sacco-ECB deal for no valid reasons.

“Your attack on the Sacco is likely to degenerate into a confidence crisis and subsequent run on the Sacco’s deposits…in such a case, you will stand accused of collusion with invisible hands to scuttle a business transaction which has been authorised by the Sacco’s AGM,” Kuscco managing director George Ototo said in the letter to Co-operative Alliance of Kenya.

LEADERSHIP STRUCTURES

The letter seen by Smart Company also notes that Mr Marube’s  attack on the transaction has placed the credibility of the competition agency on the line given that it is an apex umbrella body “whose sole mandate is advocacy”.

“As the Kenyan Sacco representatives, we see a move bordering on conflict of interest…we have always believed that you stand for the co-operative movement but as events unfold, we doubt,” Mr Ototo went on in the letter.

Kuscco and Sasra say the accusations of conflict of interest are well grounded.

Three of the Co-operative Alliance board members are all linked to Co-op Bank. Co-op Bank chairman Stanley Muchiri doubles up as Co-operative Alliance chairman while CIC Insurance chairman, Mr  Japheth Magomere, is the alliance vice-chairman.

Co-op Bank holds 25 per cent stake in CIC Insurance.

CAK’s chief executive, Mr Marube, remains an employee of Co-op Bank.

“When you look at that leadership structure at the alliance, it’s obvious who the invisible hand in all this transaction is,” Mr Ototo told Smart Company in an interview.

Kuscco is the umbrella union for all urban Saccos in Kenya and Mwalimu Sacco falls squarely under it.

“We have evaluated the transaction and to the best of our knowledge, due process was followed. There was no legal requirement for Mwalimu Sacco to consult CAK,” said Mr Ototo.

Co-operative Alliance had claimed that Mwalimu Sacco refused to furnish it with details of the transaction.

For Mwalimu Sacco, the deal should be allowed to proceed immediately. This would give it an easier route into banking since forming a new bank from scratch takes time to be licensed let alone break even.

Equatorial Commercial Bank on the other hand will benefit from additional capital injection since the lender has been operating on thin capital ratios that have affected profitability in a market where it is almost a taboo for banks not to declare huge profits.

The bank made a Sh68.1 million loss in 2010. Its performance deteriorated in 2012, making Sh481.9 loss. The bank, however, bounced back last year to post Sh55.6 million net profit.

TIMELINES: How Mwalimu-ECB deal unfolded

•  August 2014: Mr Robert Shibutse, a former executive director at Equitorial Commercial Bank (ECB) joins Mwalimu Sacco as new chief executive.

•  August 2014: ECB disclose that the two entities were in talks for Mwalimu to acquire a majority stake in the lender.

•  September 2014: Industrialisation ministry orders the transaction be stopped pending fresh audit.

•  October 2014: Sacco Societies Regulatory Authority orders Mwalimu Sacco against proceeding with the deal before it scrutinises it. 

•  December 4, 2014: Sasra chief executive Carilus Ademba says the regulator does not have any reason to block the deal.

•  January 23, 2015: Mwalimu Sacco announces completion of the Sh1.6 billion deal, signed on December 31.

•  January 28, 2015: Commissioner for Co-operatives Development orders the deal stopped pending an inquest into issues raised by Co-operative Alliance and demands due diligence report on ECB.

ANALYSIS: Conflict of interests 

• Three of Cooperative Alliance board members are all linked to Co-op Bank.

• Co-op Bank chairman Stanley Muchiri also doubles up as Co-operative Alliance chairman while CIC Insurance chairman Japheth Magomere is the alliance vice-chairman. Co-op Bank holds 25 per cent stake in CIC Insurance.

• CAK’s chief executive, Mr Daniel Marube, remains an employee of Co-op Bank  to date, implying that he is on the lender’s payroll.