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Banking 101: How Merali schooled teachers with crafty Spire Bank deal


The late Billionaire businessman Naushad Merali. [Courtesy]

Naushad Merali, the billionaire businessman who died last July, wanted to have his cake and eat it too. And he succeeded.

But in the process, Merali ended up eating the homework in the sale of Spire Bank, formerly known as Equatorial Commercial Bank (ECB), to Mwalimu Sacco, the eight-million-member-strong cooperative for the country’s teaching fraternity.

The businessman, who once quipped that he started doing buyouts long before the word “buyout” became fashionable, died having imprinted his name in diverse sectors - from telecommunications, manufacturing, agriculture and banking to real estate.

The story of how he pulled a fast one on the country’s teaching fraternity began on October 10, 2014 when he met officials of Mwalimu National Sacco and struck a deal to sell them a 51 per cent stake in ECB.

For a man who was not new to selling stakes, having profitably divested from firms such as Swift Global, Kenya Data Networks and Airtel Kenya (formerly KenCell), the teachers weren’t going to teach him anything new.

Seated on the other side of the negotiation table were teachers — masters at running a Sacco, but rookies in the banking business.

The teachers did not know what they were getting themselves into by agreeing to the deal, and after seven years of running the loss-making entity, they now want out of Spire Bank.

Their aspirations in Spire Bank have expired, strangled by the very man who sold them the bank. Mwalimu Sacco is looking to sell or liquidate the bank by March this year.

“There are times to make tough decisions. We cannot cry forever. We have to face the reality,” Kenneth Odhiambo, the acting CEO at Mwalimu Sacco, told Financial Standard in a recent interview.

“Words like ‘turnaround’ or ‘giving new lease of life’ are not in our vocabulary. We want to refocus our energy on running the Sacco business.”

And teachers have now vowed that they are not putting in even a single shilling to prop up the bank that has been on a loss-making streak for close to a decade now.

“If for instance, you invested about Sh500,000 five years ago, and it has not brought in any returns, then you need to think twice,” said Mr Odhiambo.


Naushad Merali met officials of Mwalimu National Sacco in 2014 and struck a deal to sell them a 51 per cent stake in ECB. [Courtesy]

For Mwalimu Sacco, that investment was over Sh2.7 billion. This money is long gone, and now they have to inject at least Sh4.42 billion into the lender to execute the assignment they set out to accomplish seven years ago.

When Merali agreed to sell Spire Bank, then trading as ECB, to Mwalimu Sacco, a valuation was done and the money was paid to him in December 2014.

Then Merali withdrew his Sh1.7 billion - at that time an equivalent of a fifth of all the Sh8.54 billion deposits in ECB - and everything else started crumbling like a house of cards. 

Merali’s move was akin to a bullet that penetrated the heart of Spire, but the bank and the Sacco chose to be silent about the lender’s true financial health until April last year when they were summoned by the Senate to discuss the state of the lender.

On hearing about Merali’s actions, the chairman of the Senate committee on finance and budget, Charles Kibiru, likened this to a person who was abandoning a sinking ship.

“Are you telling us Merali was taking a flight from a sinking ship? This is a person who first sells shares and all of a sudden withdraws deposits and then challenges set in,” said the Kirinyaga Senator.

The bank lost Sh2.2 billion in the three years following Merali’s decision, with the withdrawal of Sh1.79 billion or 81.3 per cent of the cash happening in under a year.

Merali’s decision to withdraw his deposits became the weak link in the teachers’ quest to sell a stake to other investors.

And his very presence in the lender’s shareholding, for long put off potential investors, according to Odhiambo.

“One of the impediments we were facing when some serious investors were coming around was the existence of Merali within the shareholding,” he said.

Merali, having been involved in many deals where he always came out with handsome profits, worried potential investors.

Like was the case when he sold East African Cables to TransCenury, Spire’s suitors’ biggest question would be: “What does he know that we don’t?”

The discomfort pushed Mwalimu Sacco to do the unthinkable in 2020. They opted to buy the remaining stake from Merali so as to take full control of the lender.

According to Odhiambo, the decision, despite Spire’s mounting losses, was to ensure Merali was out of the picture and the Sacco’s engagements with potential buyers were not hurt by the question: ‘who else owns the entity?’

“I remember some two investors who left the moment they heard that Merali was still there. Those were the kind of issues we were facing. A number of them were not willing to have Merali in the basket,” he said.

By the time they decided to buy the entire stake of the loss-making bank in breach of all Central Bank of Kenya (CBK) ratios on stability, Merali had no exposure in Spire.


Mwalimu Sacco is looking to sell or liquidate tSpire Bank by March this year. [Wilberforce Okwiri, Standard]

Mwalimu Sacco first agreed to acquire a 51 per cent stake. It would later acquire an additional 25 per cent before buying the remaining stake to take full control of the lender amid its worsening performance.

“The intention of buying the bank was pretty good. There was a very clear strategy with what Mwalimu wanted to do with the bank. But what transpired after the transaction cannot be ignored,” said Odhiambo.

Spire Bank closed last September with accumulated losses of Sh9.19 billion. Shareholders’ funds stood at -Sh2.6 billion, meaning that all the teachers’ investment had been wiped out.

The events leading to Mwalimu Sacco’s acquiring a stake in Spire were also controversial. The Co-operative Alliance of Kenya and Ernst and Young had raised some red flags but apparently not high enough to convince teachers to drop the idea.

Odhiambo was at that time working at Sacco Societies Regulatory Authority (SASRA), and he says he looked at the blueprint of the deal at that time and he found nothing worth stopping it.

“The assumptions that were in that strategy then were based on the figures at the time. But with Merali’s exit, it left a hole. The strategy was distorted. This is where the dovetail started to come off,” he said.

The transaction was sealed at a time when Mwalimu Sacco was being headed by Robert Shibutse, a former employee of Merali.

Whether Shibutse felt conflicted between being loyal to his former boss or his new employers may never be known.

What is known though, according to Odhiambo, is that there is a bushfire somewhere, and it should never be allowed to reach the Sacco.

“By the end of March, we want to get out of this situation that is now playing around like there are bush fires,” he says.

He likens Mwalimu’s transaction that time to going to the market to buy a bull and you have control about the size of the animal and the price but not much about the character of the owner.

Whenever the story of Spire Bank is told, that of Mwalimu Sacco follows. It is something the Sacco wants to end, and the officials reckon that the quickest way to do it is through disposing of the bank.

That element of annex, Odhiambo reckons, has been causing concern among the Sacco members.


Naushad Merali. [Courtesy]

But even in the absence of Merali, Mwalimu Sacco has found out that completing deals in the banking sector requires a lot of considerations.

The Sacco is currently talking to three investors while keeping the door open to other options as it looks to beat the self-imposed March deadline to dispose of the bank.

According to Odhiambo, their biggest takeaway from the deal is that running a Sacco and a bank are two different things. 

And while some investors have been coming forth, he said, CBK’s main concern in light of how things turned out for them has been: ‘do you have the capacity to run a bank?’

“In other words, they (CBK officials) don’t want us to offload this entity then it comes back to the same situation,” explained Odhiambo.

UK-based crypto lender BlockBank abandoned the deal after expressing initial interest in Spire in 2018. The firm failed to prove that it had the money needed to seal the agreement.

“One of the things CBK is saying is that it will be much better if a financial institution that understands the business of running a bank takes a stake,” said Odhiambo.

Spire Bank’s loss of deposits - a key source for lending to customers - has cut its loan book by over 67 per cent over the past four years to Sh2.12 billion, weakening its ability to grow revenues.

For Mwalimu, Spire’s chapter is one they wish they had never written. Now that they have, they are keen to erase it, but the scars will remain.

A deal that was supposed to offer the Sacco tailwinds and lessons to other Saccos seeking to diversify their revenue streams ran into headwinds.

“If all this didn’t happen and we took the Sh2.7 billion for onward lending to members over time, our asset base would now be somewhere near Sh100 billion and not Sh62 billion,” said Odhiambo wistfully.

All that Mwalimu now wants is a safe landing to go back to what it knows best since 1974 - running a Sacco.

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