In 2015 when only five people out of every 100 disappeared with your money after loaning them, banks and microfinance institutions could afford to dish out cash knowing that good borrowers would cover the difference.
But now it is a different ball game as loan defaults have almost tripled, where 12 out of every 100 borrowers are likely to vanish.
And banks, which cannot get borrowers to pay back are running into financial problems that are threatening their very existence.
Take for example Real People, a South African start-up that went on a lending spree and lost almost Sh1.7 billion over the last four years over defaulters it cannot trace.
During the good days, the firm raised money in the bond market confident it had selected the right people to give the cash to.
Over five years the company had seen considerable changes in the market as the use of financial services among adults grew from 41.3 percent in 2009 to 66.7 percent in 2013, while those relying on informal ways of getting cash declined from 27.2 percent to 7.8 percent.
Real People say that a segment of Kenya had limited access to credit because they were perceived as risky and went for them.
“Most non-deposit taking MFIs are mostly focused on lower-end ‘informal’ microenterprises using group lending model hence untapped potential in the target segment, and few direct competitors in this niche segment,” Real People Information Memorandum seeking Sh5 billion bond programme in 2015, read.
As bad loans turned sour, Real People businesses were teetering towards a precipice as the Sh1.2 billion bond was about to mature.
“In that bad book, people have died, people have moved on, people took us for a ride so it would be wrong to say that there is some magic wand to fix that. Some of those guys can’t even be traced for example,” Real People chief executive Charl Kocks told Smart Company.
The business went into financial difficulty, auditors dismissed it as a going concern and its creditors were soon at their doors.
Real People turned to that invincible almost godly hope of getting a strategic investor.
They are not the only one who has turned to this fabled rescuer of a distressed business. Consolidated Bank, Spire Bank, Jamii Bora and Middle East Bank are all said to be shopping for a strategic buyer.
Outside Banking, Uchumi, Nakumatt, Deacons, and Athi River Mining (ARM) Cement are all said to have been looking for this deep-pocketed partner but are yet to land their hands on one.
Naaman Ambunya who was a chief finance officer at Real People had taken over the reins of Teachers lender Spire Bank which he quit recently having waited for a rescue investor in vain.
Mwalimu Sacco bought Equatorial Commercial Bank from Naushad Merali and rebranded to Spire Bank which has come to be viewed as a bad deal with concern around the level of due diligence undertaken by the teachers union.
Spire Bank has been in losses that have eaten into its core capital forcing its new owners to pump in more money in a bid to meet statutory minimum requirements.
Falling interest income from dwindling lending, advancing to shrinking margins, and a likely increase in losses has led to capital erosion.
The bank has a core capital of negative Sh1.6 billion. The minimum statutory capital is meant to be Sh1 billion.
“With these trends, the bank has few options since shareholder funding is no longer tenable. Either implement the sacco model by asking saccos to buy in as-is or offer the bank for sale either through the Central Bank of Kenya (CBK) or private advertising the Consolidated Bank way,” Ambunya said in a letter to the bank chairperson.
Walked out of the deal
UK crypto lender, BlockBank walked out of a deal to buy Mwalimu Sacco’s Spire Bank after expressing interest.
According to Spire Bank, BlockBank had approached the teachers’ bank but failed to prove it had money to seal the deal, going quiet after the announcement of the proposal.
The bank then said Mwalimu Holdings was to buy off additional stake from Naushad Merali and front load it to a strategic investor.
“The shareholders are fast-tracking an ongoing recapitalization programme with a strategic investor already identified and the transaction is at an advanced stage,” said chairperson Ms. Teresa Mutegi.
“As part of the programme Mwalimu National Holdings Limited is in the process of buying out the minority shareholder. The board remains optimistic for a return to profitability and a continuation of the business’ internal capital generating ability going forward,” Ms. Mutegi said.
Nothing has come off the wait for an investor even as the lender’s books deteriorate even further.
Ambunya curiously mentions Consolidated Bank, which put out an advertisement seeking a strategic investor to pump in Sh3.5 billion and is yet to announce whether it has received interest.
The bank is a test of the government’s privatization project that seeks to offload up to 23 firms.
No better shape
The privatization commission has already appointed a transaction advisor for sale of the lender which is in no better shape than the nine failing banks that were lumped together in 1989 to form it.
The nine included Jimba Credit Corporation, Union Bank of Kenya, Kenya Savings and Mortgages, Estate Finance Company of Kenya, Estate Building Society, Business Finance Company, Citizen Building Society, Nationwide Finance Company and Home Savings and Mortgages.
Even though last year, the National Treasury the majority shareholder with 85.8 percent stake threw in a Sh500 million shareholder loan to keep the lender afloat, the bank has gone back to Treasury seeking rescue cash after its Sh1.6 billion bond matured in July.
The lender’s shareholders approved the creation of new 175 million redeemable cumulative preference shares valued at Sh3.5 billion and are in search of an investor to take them by March this year.
Since then they are still waiting.
“We are confident that by the end of this first quarter we will have somebody on board. We look forward to identifying someone who will be willing to commit themselves to that course,” said chief executive Thomas Kiyai in January.
Although Jamii Bora has been linked to a deal with Commercial Bank of Africa it is yet to make a public concrete engagement that would rescue it from poor results veiled in financial results that have not been released since the first quarter of 2018. Middle East Bank is quietly seeking its own investor shaking off the politically exposed tag from association with a former powerful politician.
Real People said they would have an investor by August this year buying the confidence of its creditors when it could not meet payments last year.
When part of the money was due last year, the firm negotiated to extend payments to quarterly bits in 2022, 2024, 2026 and 2028 if they could secure an investor to inject Sh600 million by August 3, 2019. This has since passed.
By the end of June, the board said that since the investors that they are looking at had not come back with a proposed deal yet, they pre-emptively approached investors to move the trigger date for getting an investor to January 2020.
“So we decided to have another meeting just to change the trigger date to move far ahead but the redemptions stay the same. We explained that we might come in September and say the deal is done and dusted but to be sure that if the first three investors are not the kind of people that we like we need to have the freedom to go back to the market and get another option,” Kocks said.
Real People says their case is different, they have found three people who believe their story the same way their creditors have.
“We made these mistakes and we have owned up to the investors; sure the economy was too bad with two elections. But we made mistakes and we are not making mistakes any longer,” Kocks said.
They promised to keep paying interest on the notes and turned to cut costs in the business. They cut down losses from Sh591.7 million in 2017, a year later they lost Sh371 million and this year Sh173 million.
“Yes we are still making a loss and in this case, in the few months the loss was actually the interest we pay on the notes, earnings before interest and tax we were positive and we are working every month to make it better,” Kocks said.
Lenders who have managed to get strategic money to come in include Prime Bank, which secured Sh5.1 billion from AfricInvest and Catalyst Principal Partners.
It is seeing better times having posted a Sh1.2 billion in net profits for the six months ending June this year, a 32 percent jump from Sh93 million in a similar period last year over increased lending to the government.
Prime Bank made portfolio shift cutting loans to the private sector from Sh35.8 billion to Sh34 billion shifting the money to the National Treasury as government securities rose from Sh20.5 billion to Sh36.6 billion.
Sidian Bank inked a deal with The Investment Fund for Developing Countries (IFU), a Danish Development Finance Institution(DFI) that saw it get access to Sh1.2 billion Tier 2 capital injection.