Kenyan lawmakers have opened an investigation into the controversial sale of the troubled Spire Bank to Mwalimu National Sacco (MNS) in a deal estimated at over Ksh3 billion ($28 million).
The sacco board blamed the poor performance of the lender on business tycoon Naushad Merali who withdrew all of his deposits amounting to Ksh1.7 billion ($15.74 million) immediately after selling his shares in the bank.
The Senate Committee on Finance and Budget is investigating the transaction that has raised eyebrows in investment circles and is demanding an explanation from Central Bank on how teachers appeared to have been duped into putting money in an investment that has failed to generate profit in the last six years.
The Committee, headed by Kirinyaga Senator Charles Kibiru, on Wednesday called for the tabling of the due diligence reports for the transaction from CBK, Ernst&Young (financial advisors) and the lawyers who drafted the agreement for the transaction.
Also required is the latest audited financial statements of Mwalimu Sacco to determine the financial health of a society owned by over 75,000 teachers.
The reports are expected by May 4, when senators will question parties in a closed-door session.
“It is a surprise that all of a sudden after Mr Merali has sold his shares we have a situation where as a bank you are looking for a strategic partner. Does it mean that the due diligence was never done properly before Mwalimu Sacco got into this mess? Because it looks like a mess,” said Senator Kibiru, the committee’s chairman.
The senators also learnt that the transaction (Mwalimu Sacco/Merali share sale) is yet to be approved by the Registrar of Companies and that the financial advisors, Ernst&Young, who gave a clean bill of health to the transaction were later appointed auditors of the bank after the acquisition.
The Sacco attributed the bank’s woes to massive deposit withdrawal by Mr Merali and the panic in the banking industry that led to customers withdrawing deposits from small banks.
“One thing as an investor representing Mwalimu National Sacco, which we are aware of, is that when Mr Merali was still part of the bank he had huge deposits there which he later on withdrew in 2016 to the tune of Ksh1.7 billion ($15.74 million) and coupled with what happened at Imperial Bank and Chase Bank there was some sort of panic and there were also withdrawals by the customers so I think this weakened the financial base of the bank,” sacco chairman Wellington Otiende told the committee.
The financial advisors, Ernst&Young, are on the spot for failing to consider as a ‘risk’ the fact that Spire Bank, which was a subject of share sale, was being held together by a single individual with the highest amount of deposits.
The Mwalimu Sacco/Spire Bank share sale deal been opposed by various agencies before they all changed their minds in 2014 to give approvals.
For instance, the Co-operative Alliance of Kenya— the umbrella body of about 15 million-member co-operative movement—raised the red flag over the credibility of the entire transaction, arguing that due process was not followed.
But even with the opposition, the deal was sanctioned by CBK, the Competition Authority of Kenya and Sacco Societies Regulatory Authority (Sasra).
In 2015, the sacco took ownership of Spire Bank (formerly Equatorial Commercial Bank), by acquiring 75 percent shareholding from the billionaire businessman Mr Merali at a price of Ksh2.4 billion ($22 million).
And in November last year, the sacco acquired 100 percent ownership of the bank by buying out the remaining 25 percent shareholding held by Mr Merali.