How strategic shift dimmed Jamii Bora Bank’s dream

In 1987, Bob Munro, a Canadian from St Catherine’s township, created Mathare Youth Sports Association (MYSA) that became a hub for young sporting talents from Mathare slums.

His wife, Ingrid Munro, perhaps spurred by her husband’s charitable work, took a challenge. In November 22, 1999, the Swedish architect and housing expert founded Jamii Bora Trust.

Riding on the contributions of 50 destitute families on the streets of Nairobi who gave 50 cents a week, Munro grew the trust into a strong social-economic movement that shuttled thousands out of scarring poverty.

By mid-2009, the trust had hit a total loan portfolio to Sh3 billion having disbursed over 329,000 loans.

Eleven years after its establishment, in March 2010, Jamii Bora was acquired by City Finance Bank (CFB) and rebranded into Jamii Bora Bank.

CFB was a small private financial services provider which had previously provided services to large corporations and high-net-worth individuals.With the acquisition the bank, then 14-years-old in the market - 10 of which it was making losses - saw a chance to redeem itself.

As at 30 June, 2007 CFB had assets valued at Sh510 million and net loss of Sh10.7 million. It was in search for strategic investors to sharpen its competitive edge in the market, and shore up its capital base that had been severely eroded.

The acquisition deal came after a consortium of local investors — Baraka Africa Fund (BAF), and other individual investors — acquired a 51 per cent interest in CFB, with intentions of kick-starting the bank’s dreams.

The deal, whose price was never made public, was the beginning of deviation from Ms Munro’s dream. Many of the members that Jamii Bora (Kiswahili for better families) was serving were street beggars and very low income earners, at that time viewed as unbankable.

Ms Munro would organise them into credit groups of five so that they guaranteed each other loans averaging about Sh8,000. A member could borrow twice as much as they saved in their accounts for at least one-and-a-half months.

In 2011, Samuel Kimani and Timothy Kibiru left Kenya’s biggest lender by assets, Kenya Commercial Bank, and bought into Jamii Bora through Asterix Holdings, which became the largest shareholder with a 25 per cent stake worth Sh320 million.

CORNER OFFICE

Mr Kimani, who had served as deputy CEO for group controls while Kibiru was director of retail banking left KCB at the tail end of Martin Oduor-Otieno’s tenure at the helm, in what was then considered a transition-related restructuring process.

Six months later, he was sitting in the corner office at Jamii Bora. With their money locked in, Asterisk Holdings took up the responsibility of proposing Jamii Bora’s management for a five-years turnaround strategy.

The deep pocketed investors, as their big dream suggested, took over the bank and drew a big picture. In an interview with The Standard on August 2015, Mr Kimani laid this bare.

“We came in and found a social enterprise, which was not entirely for profit. Its target market was to lend to customers organised in groups - mostly in the informal sector,” he said.

But that, he argued, could not be sustainable in the long-term, considering there was a whole segment of SMEs that was untapped. The new management wanted to find a new niche to serve and that required more money.

“Now, we are the enterprise bank focused on trade cycle financing, mortgages and personal lending,” he said.

Unlike the founder, who believed in humble growth pegged on members’ savings, the new management chose a different path - introduce debt in the books, grow and expand. To them, that was the only way to win big business.

In December 2011, just a year after the acquisition deal was completed, the bank’s board turned to debt. The bank concluded a rights issue that shored up the capital base by raising Sh270 million from the shareholders.

In 2012, the bank’s appetite for debt led them back to another rights issue. It raised an additional Sh520 million through the issue concluded in December 2012, bringing its core capital to Sh1.3 billion.

This means that the bank raised over Sh1 billion in capital in less than two years in a bid to send confidence to the market and attract more business.

To diversify funding and stabilise its balance sheet, the bank in August 2013 issued a Sh1 billion corporate bond via private placement with a five-year tenure. The bond, priced at 13.3 per cent per year was oversubscribed by two per cent within a month.

Jamii Bora continued to be on the offensive, penetrating into the micro-enterprise and housing sector and the under-served SME market.

Still, in 2014, shareholders of the bank approved a resolution to raise an additional Sh1 billion through a combination of a rights issue and conversion of debt into equity.

The bank executed a Sh417.97 million rights issue the same year to fund asset growth and invest in the branch network and alternative channels across the country.

ASSETS GREW

Total assets of the group grew from Sh13.1 billion as at December 31, 2014 to Sh16.6 billion by close of 2015.

On May 31 this year, the bank issued an information memorandum for yet another rights issue. It wants to raise Sh496.8 million from 3.55 million new ordinary shares. But this might not be the last, looking at the situation in the bank’s books now.

Its 2017-21 strategy, according to the bank’s Chairman James Gacheru, requires that “we have commensurate and sustainable funding.”

“This funding will enable us to increase our capacity and scale up our business operations, ultimately increasing our market share,” he said when the bank issued another rights issue in March this year.

However, questions are being raised on whether the money was channeled towards the right investments even as the bank now grapples with ownership of two insolvent businesses - Kenya Airways and Uchumi Supermarkets.

“Generally, the bank made some liquidity deployment decisions that turned out to be toxic, exposing its balance sheet to significant refinancing risks beyond its capability, hence the current liquidity mess,” says George Bodo, head of financial research at Ecobank Capital.

In 2014, the Tier Two lender used Sh500 million to acquire a stake in Uchumi, hoping to ride on the chain’s countrywide network of distribution and clientele. This has now proved costly as the bank’s stake will likely be watered down once a strategic investor takes over Uchumi’s shredded balance sheet later this year.

Jamii Bora also lent Kenya Airways Sh412 million when the troubled national carrier knocked on its doors, but now it has been forced to take up part ownership by the court despite the risk on the lender’s liquidity.

Worse still, the industry regulator, Central Bank of Kenya, has said it will not accept that KQ setback as an excuse for breaching capital adequacy levels, investing more than 25 per cent of their core capital or failure to indicate that a loan has gone sour.

The lender also went on an expansion binge, growing branches to 26 despite the shift in the industry where many players are turning to alternative channels such as agency and mobile banking. Despite signing up 57 Jamii Bora Chap Chap agents, efficiency is yet to be realised.

These investment decisions may be partly to blame for the lender’s fortunes, which last year saw it soak into a gross loss of Sh490 million, joining Bank of Africa Kenya, First Community Bank, Middle East Bank, Consolidated Bank of Kenya, Spire Bank and Ecobank Kenya in the list of banks that recorded losses.

In the latest financial statements, its balance sheet as at June 30, 2017 has a loan book of Sh9.1 billion, a drop from Sh10.26 billion in the previous half year.

GOT BOOST

The bank is also grappling with piling non-performing loans (NPLs). Gross NPLs have more than doubled from Sh990.5 million by mid-2015 to Sh2.03 billion.

Last December, Jamii Bora also suffered a bank run in the two-year banking crisis that mostly affected small lenders. It nonetheless got a boost when Chicago-based private equity fund Equator Capital Partners LLC, under its ShoreCap II Fund, gave it Sh600 million.

As at June this year, Jamii Bora had Sh6.2 billion in customer deposits, but had gone on to lend out Sh9 billion which means that it if the customers were to show up, they would not get their money.

This put the lender’s loan to deposit ratio (LTD) at 150 per cent against what tradition and prudence dictate as the ideal LTD ratio of between 80 per cent and 90 per cent.

However, depositors should not be too worried since banks maintain mandatory deposits at Central Bank of Kenya and most of the financial institutions are insured. CBK also offers banks loans as a last resort - especially after the collapse of three lenders, Dubai, Imperial and Chase in less than a year.