Kenya has resumed its search for strategic investors to take over troubled state-owned banks after South African consulting firm Genetics Analytics advised against the Cabinet’s merger proposal.
The private shareholders are expected to help turn around fortunes of the banks, protect the interest of the depositors and build their financial muscle to participate in financing of big infrastructure projects.
The EastAfrican has learnt that the consultants, who concluded their work last year, recommended that instead of merging National Bank, Development Bank of Kenya Ltd (DBKL ) and Consolidated Bank of Kenya Ltd, the government should make a complete exit from the ownership of these lenders, and surrender their operations to private investors.
“The consultants issued their report in July last year with recommendations for each bank, but the recommendations were not for merger,” said an industry source.
This comes as a host of government-owned businesses including sugar companies and Uchumi Supermarkets face criticism for low productivity while relying on the exchequer for funding.
In December 2014, the government injected Ksh500 million ($5 million) into Consolidated Bank in return for a 28 per cent shareholding.
In 2016, National Bank turned to its major shareholders — National Social Security Fund (NSSF) and National Treasury — for a loan of Ksh4.2 billion ($42 million) but only received Ksh2.9 billion ($29 million) from the pension scheme.
NSSF and National Treasury own 48.06 per cent and 22.5 per cent of NBK respectively.
The recommendation by the consultants to privatise the state-owned lenders immediately triggered a flurry of activity in the mergers and acquisition landscape, with KCB bidding for 22.05 per cent government stake in NBK.
The transaction is being handled by the National Treasury’s investment department and is keenly being watched by the competition authority, with fears that it would radically boost the market share of the region’s largest lender by assets and branch network.
CBKL and DBK have also become prime targets for takeover by both local and foreign banks.
CBKL, which is 78 per cent owned by the state, is in the process of ceding a majority stake to a strategic investor through a rights issue, which is scheduled to be completed in the first quarter of next year.
It has been agreed that the strategic investor takes over the bank after coming in as an underwriter to cover the cash call that has already been approved by the state.
Under this scheme, the National Treasury and another 21 minority shareholders of Consolidated Bank will not participate in the capital raising programme.
Their shares will be taken up by the underwriter, who will become the strategic investor with a controlling stake.
The only five minority shareholders expected to participate in the cash call are Local Authorities Pension Trust (LapTrust), Local Authorities Provident Fund), (LapFund), NSSF, Kenya Reinsurance Corporation and Co-operative Bank of Kenya.
Consolidated Bank is seeking to raise between Ksh1.8 billion ($18 million) and Ksh2.5 billion ($25 million) from the rights issue to shore up its balance sheet, enhance its presence in the digital space, finance branch network expansion and restructure its workforce. This could see an undisclosed number of employees lose jobs.
The bank’s chief executive, Thomas Kiyai said the National Treasury will not participate in the exercise because it is being edged out.
“When I asked the National Treasury if there is a merger I was told there is no merger and I should instead start the process of securing a strategic investor. In August 2016, we reached an agreement with the National Treasury to secure a strategic investor,” said Mr Kiyai.
Consolidated Bank is 78 per cent owned by the National Treasury, NSSF (five per cent) and other state corporations and agencies (17.1 per cent).
DBK which is 89.3 per cent owned by the government has also received approval to secure a strategic investor through a similar process.
The state-owned privatisation commission said discussions are ongoing for the proposed acquisition of NBK shares by KCB and that the other two banks have been given approval to raise capital through a rights issue.
“We have written a proposal to the Cabinet about the three banks and we are still waiting for direction. Meanwhile, a few things are happening. There are discussions on NBK and KCB going on, Development Bank has already been approved to do a rights issue and we are also restructuring a rights issue for Consolidated Bank,” said Solomon Kitungu, the commission’s executive director.
DBK chief executive Victor Kidiwa could not be reached for comment.
National Bank, CBKL and DBK had been lined up for privatisation as part of a broad parastatal reform programme intended to remove the state from ownership and management of non-strategic commercial enterprises.
But the National Treasury Cabinet Secretary Henry Rotich proposed to merge the three banks into a large entity capable of funding mega infrastructure projects and competing on equal footing with top lenders such as KCB, Equity and Co-operative Bank.
Mr Rotich blamed the presence of many lenders for the high interest rate regime.
“We expect mergers to happen and have a reasonable number of banks able to compete effectively and drive down interest rates,” he said.