Equity Bank is in talks to buy Spire Bank in a deal expected to lift the teacher-owned bank out of the financial crisis.
A source with direct knowledge of Thursday’s meeting to support the deal, known as Project Gamma, told Business Daily that the stake will be signed today (Monday).
“The Gama project was approved on Thursday after a very long meeting. Equity Bank is expected to sign the deal by Monday afternoon.
The deal will see Spire Bank owner Mwalimu Sacco pay an additional Sh1.7 billion to Equity to cover liabilities.
Insiders say Equity will trade in teachers’ deposits and have the muscle to recover Spire Bank’s bad books.
The top lender will consider only Sh900 million in assets and liabilities of Sh1.3 billion.
The difference of 1.5 billion shillings, staff costs, $1.1 billion in claims and litigation will be settled by Mwalimu Sacco.
Equity Bank has become the latest tier-one bank to acquire distressed lenders as they look for new growth opportunities, following KCB’s recent acquisition of National Bank of Kenya (NBK).
The Central Bank of Kenya (CBK) agreed to finance the deal to prevent the lender’s collapse and the banking crisis that saw three banks collapse five years ago.
CBK Governor Patrick Njoroge told MPs that he is not considering bailing out lenders and still hopes the bank will recover.
He said the takeover was a last resort and the teachers’ savings and credit cooperative society (SACCO) would be closed because it was deemed unprofitable and shareholders in the financial sector would not participate in the industry in the future.
However, the mayor may attract criticism for refusing a similar amount from Spire Bank through a long-term loan to process the transaction as a lender of last resort.
Spire Bank is unable to receive funds from peer banks due to financial difficulties.
The bank is seeking additional support from its majority shareholders, Mwalimu Sako and CBK, in order to generate cash to cover expenses and cover losses.
Mwalimu Sacco CEO Kenneth Odhiambo told MPs earlier this year that he was seeking funding from CBK to compensate Spire Bank for refusing long-term interest-free loans.
CBK provides short-term liquidity up to Sh1.3 billion through Reverse Repos (Repurchase Agreement), which is short-term and sufficient to revive the lender.
The teachers were restricted by the sacco law to limit their influence after sending billions of shillings to the bank over the years.
A parliamentary inquiry revealed that the Sacco Societies Regulatory Authority (Sasra) stopped making additional payments to banks after Mwalimu Sacco paid billions to the lender, which the late Naushad Merali bought for Sh2.4 billion in 2015.
Mwalimu Sacco backed up funds to Spire Bank, including converting Sh3.4 billion of teachers’ deposits into ordinary, after the lender recovered Sh9 billion in losses.
Sacco admitted to investing in banking and real estate and made a cash flow restriction that asked the regulator to take steps to prevent further bleeding.
If the capital deal falls through, Mwalimu Sako will have to return to the drawing board to deal with Spire Bank during the political transition.
Spire Bank has sought seven potential buyers, including a local bank that has confirmed interest in the lender’s good book and faculty membership, but the regulator has rejected several lawsuits over conflict of interest and trust issues.
Despite the uncertainty about its future, Spire Bank has been steadily operating with lower costs, paying down debt and changing equity investments.
The bank narrowed its half-year net loss by 21 percent to Ksh.4.04 million , due to lower capital and delayed resolution through the sale of the bank or finding strategic investors.
In June last year, it narrowed the loss by Sh512.8 million in cutting capital expenditure that reduced interest and operating expenses.
Investment costs fell to Sh85 million from Sh221 million to convert the Sh3.4 billion investment into shares, while operating costs fell by 7.0 per cent to Sh470 million.
Central Bank of Kenya was unable to lend due to capital levels which saw its loan book shrink from Sh2.3 billion to Sh1.7 billion.