Kenyan teachers to inject $3.75m more into ECB

Kenyan teachers are set to increase their exposure in Equatorial Commercial Bank, which they controversially acquired last year, through a cash call meant to help the bank comply with Central Bank regulations and lay a foundation for growth.

The bank has issued a notice to its shareholders, asking them to approve the injection of Ksh500 million ($5 million) in new capital after accumulated losses wiped off more than 60 per cent of its capital last year.

The teachers, through Mwalimu National Holdings, the investment arm of Mwalimu National Sacco, will now be required to contribute Ks75 million ($3.75 million) to defend their 75 per cent interest in the bank. There are indications that more capital will be required next year and that tangible returns by way of dividends will take a while to materialise.

Mwalimu National Holdings (MNH) is set to complete the acquisition of the 75 per cent stake in the bank for Ksh2.7 billion ($27 million) ahead of schedule. The transaction had a deadline of December 31, 2015.

“That transaction is for all intents and purposes complete. We will be injecting more money together with other shareholders to comply with capital requirements and to create a solid foundation for growth,” Mwalimu National Sacco chief executive officer Robert Shibutse said.

The bank issued a notice last week inviting shareholders to a special general meeting on December 9, 2015 where resolutions to increase the bank’s authorised share capital from Ks.325 billion ($33.25 million) to Ks.825 billion ($38.25 million) and the allocation of the new shares will be floated.

“The subscription price is Ksh5 (five US cents) per share and shares will be allotted in proportion to a members’ shareholding,” Sheba Mohamed, the company secretary, said.

The resolutions are expected to carry the day and the meeting is seen as a mere formality given that Equatorial Commercial Holdings — the entity that owns the bank and Equatorial Commercial Insurance Brokers — is controlled 96 per cent by MNH and SIV.

Through the bank, the shareholders also own 20 per cent of Equatorial Investment Bank and 23.86 per cent of Fidelity Shield Insurance Company, according to the bank’s annual report and accounts for the year ended December 2014. The allotment criteria will require SIV to raise Ksh105 million ($1.05 million) for its 21 per cent stake in the bank and minority shareholders Ksh20 million ($200,000) for their four per cent interest.

“Any member who wishes to aptly for the shares should notify the company secretary by writing not later than 1,400 hours on December 7, 2015,” Ms Mohamed said.

Should the minority shareholders opt not to defend their stake, it would give MNH and SIV, which now owns 21 per cent of the vehicle, an opportunity to increase their shareholding. The minorities would most likely base their negotiations on the Ksh145 per share that MNH paid to acquire its stake in the bank. Mr Shibutse, however, said MNH would not exercise its first right of refusal now given that the principal shareholders intend to inject more capital into the bank next year.

“We have another round of shareholder input in 2016 after which we will consider tier-two capital such as bonds,” Mr Shibutse said.

That would leave SIV as the likely underwriter of any new shares that will not be taken up or, in the alternative, the shares will be left floating depending on the wishes of the principal owners. MNH acquired its controlling stake in the bank at price of Ksh145 ($1.3) per share, valuing the bank at about Ks.6 billion ($36 million).

The increase in authorised share capital will involve the creation of 100 million new shares, with a book value of Ksh5 (five US cents). Although the bank had a paid-up share capital of Ksh2.4 billion ($24 million) at the end of last year, it was eroded by accumulated losses that wiped off Ksh1.49 billion ($14.9 million).

That pushed the bank below the Central Bank of Kenya’s core capital requirement of Ksh1 billion ($10 million). However, this position was corrected in January this year when proceeds from the MNH share subscription were ploughed into reserves increasing the capital to Ksh1.5 billion ($15 million).

The current cash call is expected to take the core capital mark to Ksh2 billion ($20 million). Uncertainty surrounds a proposal in this year’s budget to increase the core capital requirement to Ksh5 billion ($50 million) after Central Bank Governor Patrick Njoroge said on taking office in July that he preferred a risk-based approach to ensuring banking stability.

Under such a regime, the capitalisation of each bank is based on the nature and size of business and lowering the barrier to entry for smaller specialized financial institutions — niche banks.

ECB chairman Dan Amayo said the bank’s capital-raising efforts were motivated by practical rather than regulatory considerations.

“The new capital will give us more headroom to do business,” Mr Amayo said.  

Teachers, however, will take longer to get a decent return on capital until a huge stock of dud loans that continue to undermine the bank’s performance, plunging it into losses, are cleared.