Why National Bank may stop giving loans

National Bank Managing Director Munir Sheikh Ahmed.

Mr Munir Sheikh Ahmed is fairly content with the progress he has made in the about one-and-a-half years he has been at the helm of National Bank.

He says he has encountered challenges, many of them anticipated and some a surprise, but feels that the bank is on track to getting back to its glory days. Within three years, he expects it to be on the list of the top five banks in the country.

This would be a major improvement from an unenviable position 13 in 2012.

But he has been thrown a curve ball that might see the bank hit a snag in its transformational journey — it is probably temporary, but it might have a major impact on the bank, at least over the coming months if not the year.

It might, in fact, see the bank unable to advance loans to its clients.

Cash call

The State-owned institution has been banking on the success of a planned Sh10 billion cash call from its existing shareholders to boost its business and remain afloat in the competitive banking industry.

The rights issue, through which it will sell an additional 1.12 billion shares, was announced in May last year, but has now been delayed for more than a year due to a mix of factors.

The bank now says it will not have money to lend past August this year, as that would mean going over the legal limit.

According to Central Bank regulations, a bank can only lend up to a certain proportion of its core capital, beyond which it has to raise new capital.

“The capital we have now will run out in the course of this year ... by end of July and at best early August. We will not have additional capital to write one more loan ... we will stagnate at the level where were are at the moment,” says Mr Ahmed.

“The additional capital is supposed to ensure the business does not stop at the end of July, early August. If we fail to do it before then, we will just be staying afloat rather than moving forward.”

He said 85 per cent of the proceeds will be used to grow the balance sheet, which will enable it be within legal lending limits and grow its loan book.

The remainder will be used in expansion activities, with plans to have a branch in every county, as well as venture outside Kenya.

The bank is waiting for approval from the Capital Markets Authority and says the regulator is taking rather long to give it an answer.

“Our application has been sitting with the CMA. They have kept it longer than they ought to. CMA regulations say they should have a maximum of two weeks; our information memorandum has been with them for close to two months,” says Ahmed.

“We have moved as fast as we could, but regulatory approvals have held us back. There is nothing we know that is pending from our end.”

Ahmed said both Treasury and the National Social Security Fund had given the bank their word that they would participate in the rights issue. The two are key shareholders, with a combined 60.5 per cent stake — NSSF at 48 per cent, Treasury at 22.5 per cent.

But though it has given its word it would participate in the rights issue, Treasury has also partly played a role in stalling the cash call.

This much Ahmed concedes, noting that while he has not seen the hand of Government in running the bank in the time he has been there, the rights issue has suffered Government bureaucracy.

Government ownership

“The only time when Government ownership becomes relevant is when we are making capital or structural-related decisions. They require the shareholders to come in and will take a bit longer to get a decision,” he says.

“For instance, regarding the rights issue, I think we announced our rights issue before everybody else, but ours is taking a little longer because it requires budgetary allocations. But it’s the only aspect where you feel the bureaucracy, but these are decisions that are only needed once in a while.

“In terms of operational and business autonomy, there is no adverse effect at all ... it is not like the bad old days of getting a call and being told to give so-and-so a loan. In terms of execution of the rest of strategy, there is zero impact. In fact, we have an advantage and a leg up when it comes to Government business.”

National Bank has been a laggard of sorts in terms of footprint, and up until recently, it did not have a presence in more than half the counties and is yet to open a branch outside the country.

With the cash call, it is now eyeing regional countries, including South Sudan, Ethiopia, Uganda and Somalia. Other than in South Sudan, it plans to get into the countries through acquiring local banks.

It is, however, venturing into these markets somewhat late, given that many of its peers already have operations throughout the region and some have broken even.

“Primarily, we will first look at inorganic growth, meaning the acquisition of something. Only where we can’t get assets to acquire will we go organic. Inorganic is a better way to get to these markets because it takes a long gestation period and is too disruptive to build a business in a foreign country from the ground up,” said Ahmed.

He added the bank is waiting for “the guns to go silent” in the South Sudan clashes before it makes its foray.

“Our first market of expansion was South Sudan. Our plan was to go there this year. This is still in our plans and as soon as things normalise, we will be there within a very short time.

“That is the only place we will go organic because there are no banks we can acquire.”

In getting National Bank back to what Ahmed calls its glory days, he is not taking any chances. He has adopted a very hands-on leadership style.

In an era when every other chief executive is taking a hands-off approach to managing multi-billion-shilling enterprises, Ahmed is unapologetic about giving his managers little or no space to breathe.

However, he says this would not be his preferred style of management and that the approach has been necessitated by the situation he found the bank in when he came on board.

Close monitoring

But perhaps his close monitoring of the bank’s human resources is paying off, given profits grew 57 per cent in 2013 — the first full year since Ahmed took the reins — to Sh1.81 billion, attributed to a rise in net interest income.

“Close monitoring. Hands-on stewardship. We meet monthly, weekly and in some areas a lot more frequently,” he says. “Because we are in the transformational stage, we meet frequently. It is something that we need to do in the next two years of the transformational process.”

He says the bank had been underperforming because of a “very dysfunctional structure that was not responsive to the market and did not have strategy ownership at the right level because none of the general managers had accountability or responsibility for any business”.

He hopes the bank will now write a new legacy, away from poor debt recovery, failure to pay dividends to shareholders, dipping market share and declining profitability.

The bank’s former MD, the late Reuben Marambii, is credited with pulling the institution from the brink of collapse and resolving some of its issues.

Ahmed has his eyes set on effectively dealing with the issue of toxic debts.

“By 2017, the aim is to be a top-tier bank ... become a member of that exclusive club of five banks. The bank should also be an aspirational place to work for, staff say it with pride and people in the industry want to work in it,” he says.

“By then, National Bank will be a sizeable player in the economy, funding infrastructure and doing big private sector investments. The bank was not in 23 counties 1.5 years ago — by the end of this year, we will be in 16. By end of next year, we will be in all counties.”

Staff layoffs

The bank recently sent home 200 employees through a voluntary retirement programme, reducing the total number of employees to 1,650.

This might not be over and more could be headed home as the bank makes attempts to bring down costs. It currently has a cost to income ratio of 75 per cent, which Ahmed said is not healthy; he aims to bring it down to 50 per cent.

“Currently, we have too many people producing too little. The two ways of tackling this is to increase productivity and the other is to reduce costs — we are doing both.

“Reduction of headcount is an imperative, not a question of what do we do to keep people. The bank offers banking services in competition with 42 other banks, and one criteria we are rated on is profits, so we can’t have a cost structure that is not required by the business size that you have.”

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