Equity's acquisition of troubled Spire Bank is worth emulating

Spire Bank branch at Chester House, Nairobi. [Wilberforce Okwiri, Standard]

If the Central Bank of Kenya (CBK) had placed troubled Spire Bank under statutory management, like it did with Chase Bank, Dubai Bank, Imperial Bank and a host of others before, we would right now be having a stream of more than 20,000 depositors queuing and yelling at Spire Bank's 10 branches without recourse. And they wouldn't be able to access those deposits for a couple of years, if at all.

But the script has changed, thanks to the ingenious transaction between Equity Bank and Mwalimu National Sacco, the 75 per cent owners of Spire Bank, that saw Equity acquire some loan assets and deposit liabilities of the bank, saving the depositors financial damage and heartaches.

By midnight of February 1, 2023, after the deal was sealed, all the deposit accounts and loan accounts had been domiciled on the Equity Bank platform and the new customers were able to withdraw the amount of their money they wanted. In addition, by midday the same day, some of them had deposited a total of Sh9 million in their accounts. This reflects the confidence these customers have in this transaction.

According to details of the rescue deal revealed by James Mwangi, Group CEO of Equity Group at a press briefing last Wednesday, Equity Bank has taken over a liability of Sh1.32 billion in deposits and assets worth Sh945 million in loans to some 3,700 accounts.

To match the liabilities and assets, Mwalimu National Sacco then put Sh510 million in an escrow account that would be paid to Equity for the difference, in a funding arrangement with the bank. "We have solved a national problem. This is the orderly way of exiting the financial sector without causing panic," an elated Dr Mwangi said.

While what would have been a tumultuous journey for the customers' seeking their money has now ended less tortuously, there are a myriad lessons to be drawn from this acquisition.

First, the unique nature of this transaction is an innovative piece of financial engineering and legal brilliance that should be replicated in similar situations in the future.

Six years ago, Mauritian lender SBM paid Sh1.2 billion in goodwill when it acquired trouble Fidelity Bank only to write it off its books upon realising they had overvalued the prospects.

A year later in August 2018, they acquired some assets and liabilities of Chase Bank, then under liquidation for a song, paying only Sh471,335. Only four months later, they booked a bargain purchase gain of Sh3.82 billion, meaning they were given the bank almost for free.

Imperial Bank, Dubai Bank and all other prior banks facing trouble were either simply liquidated or amalgamated into one entity like Consolidated Bank and Equatorial Commercial Bank (which was renamed Spire Bank). It suffices to say that depositors have previously suffered greatly in their quest to recover their money from failed banks.

This is the first time in Kenya that all customers' deposits have been salvaged in total in this manner. It is fair to say that the regulator was a lot more generous to Spire Bank and accommodated it more than he did other previous similar cases, but by not placing the troubled bank under statutory management, in spite of the dictates of the CBK Act and the prudential guidelines, the CBK avoided a run on the deposits that would have had catastrophic contagion effects on the entire banking sector.

Spire Bank Chairman William Rahedi was grateful for the deal. "We have avoided a forced liquidation and a run on deposits. The process has been orderly and dignifying for our depositors and staff. Our staff will walk away with their packages in dignity," he said.

Equity Group's Executive Director Mary Wamae said the transaction was done under section 9 of the Banking Act which regulates the acquisition and transfer of a bank's assets and liabilities. Legal advisors Rosa Mutero, Managing Partner at Anjarwalla & Khanna (ALN Kenya) and transaction advisers, Deepa Doshi of Stanbic Bank Kenya hailed the process citing the speed at which it was approved by the CBK, Sacco Societies Regulatory Authority) and Competition Authority of Kenya.

Equity Bank has seized a huge business opportunity. Most likely, not all the 20,000-plus new accounts from Spire Bank will remain at Equity, neither will all the Sh945 million in loans be recovered. Equity has agreed to renegotiate the terms of the loans to accommodate the borrowers so that they can repay easily. Under forced liquidation, these loans would simply have been recalled at the peril of the borrowers.

On their side, Mwalimu National Sacco have successfully stopped the haemorrhaging that was orchestrated as they strove by to keep the bank running against all odds for the last four years. Aside from the Sh2.4 billion that Mwalimu paid to acquire 75 per cent of the bank in 2014, the giant Sacco has had to pump in an estimated Sh10 billion in the last four years to keep it afloat.

Mwalimu's decision to self-liquidate Spire Bank has given it a better chance to negotiate and realise full value of their remaining assets and pay-off other debts.

The staff of the troubled bank are also going exit in a more dignified manner with their full packages as specified in their contracts or as agreed with the owners.