Kenya’s National Bank is turning to its major shareholders for a loan of Ksh4.2 billion ($40.63 million) to help it forestall regulatory sanctions over its weakening stress test indicators.

The recourse to a loan from the government ($12 million) and a statutory pension fund ($30 million) follows delays in raising money through a cash call on shareholders and uncertainty over a merger plan with two other state-owned banks.

The shareholders, however, are understood to be hesitant because the debt will be unsecured, meaning it will be among the last items to be settled should the business go bust. Secured creditors — debenture holders — are usually given priority in payments when a business is under receivership or in liquidation.

The EastAfrican has learnt that Kenya’s initial attempts to merge National Bank, Consolidated Bank and Development Bank of Kenya suffered a setback after the institutions balked at sharing critical business information with their rivals to help establish the basis of consolidation.

“Our current position is that we had done more work on how to privatise a few banks including National Bank. Then when it reached a stage where we wanted to give data to the consultant the previous NBK management was reluctant so we could not move.  We stopped there because NBK could not provide data to the consultant and you cannot privatise a bank until you know its status,” said the chairman of the Privatisation Commission, Henry Obwocha.

He added: “The Cabinet had said that instead of privatising these banks, merge them instead but it is at that point that NBK resisted. The government is now going to look at this issue afresh.”

Early this year, the National Treasury approved the management changes at the troubled National Bank, which saw the chief executive and five senior managers sacked on alleged violation of the lender’s internal credit rules, causing the bank to incur a loss of Ksh1.2 billion ($11.8 million).

NBK is now in discussions with the state-owned pension scheme — National Social Security Fund, which owns 48.06 per cent of the bank — for a loan of Ksh2.9 billion ($28.5 million) and a further Ksh1.3 billion ($12.8 million) from the National Treasury, which owns a 22.5 per cent stake. Together, the two anchor shareholders control 70.56 per cent of the bank.

“Discussions on this proposal are still ongoing,” the bank’s acting managing director Wilfred Musau said.

The bank, which is listed on the Nairobi Securities Exchange has seen its stock drop by more than 43 per cent in the past 12 months to as low as Ksh8.85 ($0.08) per share by Thursday last week.

NBK is in need of additional capital to comply with CBK’s statutory requirements as well as continue growing its loan book, following the coming into effect, in January last year, of the new capital adequacy requirements. But efforts to raise Ksh13 billion ($128 million) through a rights issue hit a dead end after the cash call was rejected by the government and the regulator Capital Markets Authority.

NBK’s core capital stood  at Ksh10.12 billion ($99.6 million) by March 31 this year, but CBK’s prudential guidelines stipulates that a bank cannot lend more than 25 per cent of its core capital to a single borrow, meaning the bank cannot lend more than 2.53 billion ($24.47 million) to a single borrower.

According to the NBK’s financial statements, the  bank’s core capital to total deposit liabilities deteriorated to 10.1 per cent during the three months to March 31, 2016 from 12.3 per cent in the same period last year  against the minimum statutory ratio of eight per cent.

Core capital to total risk weighted assets increased to 12.4 per cent from 11.9 per cent compared with the minimum statutory ratio of 10.5 per cent.

Total capital to total risk weighted assets improved to 13.1 per cent from 12.9 per cent but fell short of the minimum statutory ratio of 14.5 per cent. Liquidity ratio increased to 26.9 per cent from 21 per cent against the minimum statutory ratio of 20 per cent.