Advisers used by Co-operative Bank of Kenya to handle its ill-fated 2009 acquisition of Jamii Bora Bank were prevented from carrying out the full due diligence work that they were originally hired to do, financial analysts says.
A leading financial expert in the country, told media in a statement that, a combined decision by the regulator Central Bank of Kenya (CBK) and political influence from senior members of retired President Uhuru Kenyatta’s government paved way for the purchase of the country’s lowest-rated bank in a ‘disastrous’ purchase.
In a silent warning, leading banking experts and officials note that scrutiny of the deal did not extend to assessing Jamii Bora’s corporate lending portfolio – which later proved the bank’s undoing.
Instead, an assessment of that part of the low-rank bank business was left to the Co-op itself.
Earlier it emerged that former’s corporate loan book had deteriorated to such an extent that it was the main cause of a more that Sh1.5 billion capital black hole discovered at the Co-op Bank after purchase and takeover.
Many in the banking industry note that the exposure might in the long run hit the operations of Kingdom Bank, a company that came from the amalgamation of Cooperative Bank and Jamii Bora.
“One of the issues the mid-tier banks have is scale. We can do a lot on costs – and we’ve done a lot on costs and will continue to be focused on that – but you can’t keep cutting costs, you need to generate more income. This is a mid-tier bank with a Sh-100,000 million balance sheet and a combination if it happened, would not create a challenger with the order- so not that dissimilar to Mayfair Bank.”
More mergers and acquisitions among the smaller Kenyan banks would be a continuation of a process that began seven years ago and which, as evidenced by the takeover by CBA Bank of NIC Bank to create NCBA and the creation of Kingdom Bank after the Coop-Jamii Bora merger.
Co-op Bank itself is no stranger to takeover approaches from financial buyers. However, CBK later clarified that its due diligence mandate was originally meant to encompass the whole of Jamii Bora – but was later restricted. KPMG and other institutions charged with due diligence did not explain why the poor due diligence was overlooked allowing for the creation of a new entity from what was CEO Gideon Muriuki’s original business entity, Kingdom Securities that even employed Nairobi Securities Exchange CEO Edward Odundo.
KPMG was not involved in the deal to buy Jamii Bora bank, a senior official at the company said. The same was confirmed by Coop Bank management.
Co-op Group declined to comment, saying that an ongoing review being conducted by a former civil servant, would be examining such issues. This revelation about the due diligence came as MPs gave a roasting to advisers used by the Co-operative Bank for its Jamii Bora deal.
The KPMG at the same time denied they worked on the transaction.
Shareholders said there had been “an enormous amount of writing on the wall”, warning that a deal of this kind was being struck at an unwise moment, given ongoing turbulence in the financial markets. Paul Muturia and other shareholders accused the bank of pursuing a deal because of their fee structure.
“Your fee structure is hard-wired to get a transaction,” Muturia said in a statement.
A senior Coop bank official admitted “demonstrably we didn’t get it right” but denied that he and his colleagues were motivated to do the wrong thing.
It might be “thoroughly sensible” to make a portion of a fee dependent on the success of a deal, rather than merely on its happening, he conceded, although he said it might be difficult to structure such an arrangement fairly.
He said he was “100 per cent confident” in the integrity of his own advice not being influenced by the promise of a fee.
Coop Bank has been fighting one accusation after another. From steamy sex scandals, the nepotism, to officially tribalising the top echelons and mounting customer complaints, they stand in the eye of any storm that engulfs the banking industry that is dominated by one community in the Kenya kaleidoscope.
As a deal to buy into non-performing Jamii Bora Bank gained pace, analysts were worried about due diligence done by Cooperative Bank which had in the past been hit by cases of fraud perpetrated by bank employees who work in cahoots with external persons to obtain money from the bank.
The bank was on the spot as having weaknesses in its IT systems, which was attributed to sources within the bank.
Co-operative Bank has in the past reported erratic systems of poor quality and that explains for instance the constant system hitches.
“The former bank chairman’s sons are said to have supplied IT systems to the bank. The same family have also been rumoured to be supplying and tendering with the bank,” says a former employee, sacked in 2017.
The downtime attributed to a technical fault left the bank’s ATM Services, Card transactions at Merchants and other Point of Sale outlets dysfunctional rendering transactions by its customers impossible.
The bank, then announced having moved almost 90 percent of its customer transactions to alternative delivery channels including mobile and ATMs, has 580 ATMs and over 11,000 Co-op kwa Jirani agents across the country and the number is set to increase with the opening of new ATM machines and branches in Northern and Eastern Kenya.
Malfunctioning systems have been reported on December 22, 2017 and the worst would be on July 22, 2014 when the systems failed leaving numerous customers stranded with all manner of complaints.
On the Jamii Bora Bank purchase, which is as good as done, financial analysts are wondering why a behemoth like Coop Bank with a big financial muscle can go for a bank that survive by ‘the Grace of God’.
Jamii Bora Bank had in the entire period of its existence remained stagnated, refusing to innovate and introduce any change in the banking industry.
The transaction required regulatory approval from the CBK, Capital Markets Authority and the Competition Authority of Kenya and in the tribal oligarchy and corruption perpetrated by Cooperative Bank management ensured that it was easy for CBK boss to give the nod at first sight of the application.
The Nairobi Securities Exchange-listed Co-op Bank commenced operations in 1965 and had the fourth highest market share (9.63 percent) in the banking industry at the end of last year.
In contrast, Jamii Bora, started in 2010 after the acquisition by City Finance Bank, and had a market share of 0.12 percent, putting it at position 38 out of 39 banks.
The deal will lead to changes in market share as well as expansion of Cooperative Bank branches.
Jamii Bora’s last published financials are for the first quarter of 2018 when it had assets worth Sh12.5 billion.
Its liquidity ratio was in negative 11.1 percent compared with CBK’s minimum of 20 percent as at end of March 2018, leaving it in liquidity deficiency of 31.1 percent.