Indecision only pushes National Bank deeper into financial doldrums

What you need to know:

  • Why the government wants to sell national assets through the back door is puzzling.
  • Why are we retaining expensive private consultants to duplicate work already done by both the Privatisation Commission and the Presidential Task Force on Parastatal reforms?

Let’s face it, the government still does not know what to do with the National Bank of Kenya.

We are yet to see a clear path of either restructuring, recapitalising or even selling the bank to a strategic investor.

The National Treasury—the largest shareholder with 22.5 per cent ordinary shares and 79 per cent preference shares—seems to think it can just muddle through the bank’s problems. Worse still, the management and board of the bank have also been fumbling all over the place proposing one unworkable capital-raising strategy after another.

For instance, I have recently come across an information memorandum prepared by the management and board, where the bank is inviting the National Treasury to subscribe to a corporate bond issue amounting to Sh1.3 billion.

In May, the bank’s board and management put out yet another proposal to issue a corporate bond structured as a single lender loan from its other major shareholder—the NSSF—amounting to Sh3 billion.

Still, the information memorandum for the Sh1.3 billion to the Treasury is what I found puzzling. In the first place, it is too sketchily put together. The details of the offer are a matter of a few paragraphs.

Worse, the bond offer has no tenor. It is unclear from the document when and whether it is redeemable.

Presumably, the only path to redemption of the proposed bond is the point it is converted into ordinary shares.

We all know that when you introduce a new class of shareholding, you push the bank deep into the very same trap it has been in as a result of the existence of non-cumulative preference shares in its capital structure.

The board and management of the bank—on the one hand, National Treasury, the Capital Markets and the Privatisation Commission- on the other—have not been able to reach a consensus on how to eliminate the complex shareholding structure, the biggest difference between the protagonists being the correct formula for converting the preference shares to ordinary shares.

This dispute is what killed the proposed rights issue the bank had planned in 2013, and consequently prevented the bank from raising much needed capital from the market.

Indeed, the botched rights issue is one of the reasons the bank now finds itself in dire straits, it does not have adequate capital to support its current business, is unable to meet Central Bank of Kenya’s prudential capital limits, consequently finding itself in a situation where its banking licence is at risk.

If this latest plan by the management and board of raising capital through a privately-placed corporate bond from the National Treasury and the NSSF succeeds, the bank will end up with an even more complex capital structure. Attracting a strategic partner or raising money from the capital markets will be more difficult.

In my view, any long term solution for addressing the bank’s problems must start from recognising the following irrefutable facts.

First, the bank needs more capital. Secondly, the complex shareholding structure is a major hindrance to the bank’s growth and progress.

Third, if the situation deteriorates, the taxpayer’s pockets will have to be raided. Mark you, this is a bank that collects and processes more than 60 per cent of government revenue.

It also collects important licence revenues, including port, airport and civil aviation fees, placing it among the few banks that must operate on a 24-hour basis.

For a long term solution, the government must go back to the proposal by the Abdikadir Mohammed-led Presidential Task Force on Parastatal Reforms, which proposed consolidation of state-owned banks by merging National Bank with four others to create a second national banking champion after the Kenya Commercial Bank.

According to the proposal by the task force, the four entities to be merged with National Bank included Kenya Post Office Savings Bank, Development Bank of Kenya and Consolidated Bank of Kenya.

The problem is implementation of the consolidation solution has been mishandled by the National Treasury, in that decision-making on this critical policy initiative has been more or less ‘out-sourced’ to cowboy policy advisers.

Curiously, the consultants have expanded the terms of reference to include advice on how to sell the banks to third parties. Why the government wants to sell these national assets through the back door is among the puzzling asides of the saga.

Why are we retaining these expensive private consultants to duplicate work already done by both the Privatisation Commission and the Presidential Task Force on Parastatal reforms?