Former Fidelity Bank owners are suing the Central Bank of Kenya (CBK) and Mauritian bank group SBM Holdings for Sh2.5 billion, claiming that the banking regulator pressured the investors at night to sell the troubled lender for Sh1.
Sultan Khimji, a shareholder representing the owners, has petitioned the High Court to declare the 2017 forced buyout null and void, claiming that the CBK forced the directors to sell the bank for pennies on the dollar under threat of criminal charges, regulatory sanctions, and closure.
According to the shareholders, the central bank forced them to accept a negative valuation of Fidelity Bank by inflating operational costs and provisions for bad loans.
The Mauritian bank group acquired Fidelity Bank in a deal facilitated by the CBK after the Kenyan lender experienced financial difficulties under a regulatory framework that sought to rescue rather than close troubled banks.
SBM stated in 2007 that the transaction was valued at Sh100 and that it would inject Sh1.45 billion to turn around Fidelity Bank, which was on the verge of becoming the fourth lender to fail in a matter of months.
Mr Khimji and his partners have also accused SBM of breaching a promise of a Sh600 million deferred payment and a similar amount of goodwill.
The CBK is accused of bullying and intimidation in the lawsuit, including summoning the directors in the middle of the night to force the sale of Fidelity Bank.
“The plaintiff (Mr Khimji) prays for judgment against the defendants (CBK and SBM), for a declaration that the share purchase agreement between the plaintiff and first defendant dated March 28, 2017, is invalid, null and void and of no legal effect and that the shareholders of the former Fidelity Bank are entitled to compensation for the full value of the said bank,” the suit papers say.
The suit seeks Sh2.5 billion in damages, which is the full market value of Fidelity Bank as of December 2016.
Alternatively, they argue that the court should order SBM to comply with the share purchase agreement, which stipulates a Sh1 initial consideration, a Sh600 million deferred payment, an additional Sh1.3 billion for lender undervaluation, and a Sh600 million goodwill payment.
Mr. Khimji has also requested restitution of sale profits as well as damages compounded at a rate of 12% per year beginning in January 2017.
In 2017, the Indian Ocean Island banker purchased Fidelity Bank, a tier-three bank with 14 branches that ranked 31st out of 41 Kenyan banks.
SBM later acquired Chase Bank, another failed lender, in a deal that boosted the combined bank’s assets from Sh11.7 billion to Sh75.3 billion in months.
SBM Bank Kenya now has Sh84.2 billion in assets and Sh186.8 million in profits for the six months ending June.
The owners of Fidelity Bank claim that the CBK gave SBM Sh4 billion to fund their deal and pay exiting shareholders, but the money was diverted and used to buy Chase Bank’s good books.
According to Mr Khimji, the CBK initially pledged to inject Sh1.4 billion into the bank but later increased it to Sh4 billion as liquidity support, claiming that SBM funds were blocked elsewhere.
“SBM failed to pay the Bank shareholders and instead leveraged the funds to facilitate purchase of another bank namely Chase Bank, which was in liquidation, thus profiting from the purported agreement and the collusion with the second defendant,” the suit papers say.
The CBK has not yet responded to the suit. The Mauritian bank group asked the court to dismiss the suit, claiming that a clause in the agreement required any disputes arising from the buyout to be resolved through arbitration.
Owners of Fidelity Bank claim their bank was forced into the deal after seeking a bailout from the CBK due to financial difficulties.
The bank blamed its financial woes on the ripple effect of Chase Bank’s closure, which was followed by the closures of another mid-sized lender, Imperial Bank, and a smaller lender, Dubai Bank Kenya.
The string of bank closures shook Kenya’s banking sector, particularly small banks.
The CBK then connected Fidelity Bank to a senior partner of an accounting firm acting as a broker for SBM to arrange a merger in which the Mauritian lender would have acquired 70% of Fidelity Bank and the remaining stake in three years.
The SBM valued the tier-three lender at Sh1.3 billion, but the Mauritian lender was wary of Fidelity’s size, stating that it preferred to enter the market through a larger bank.
Mr Khimji stated that the CBK approached its counterpart, the Mauritius central bank, and offered to sell Fidelity for $1, which was equivalent to Sh101.3 at the time, in order to entice SBM back to the table and close a quick deal to restore confidence in the Kenyan banking sector.
According to Fidelity, as a result of the delays in finalizing the deal, SBM provided new valuations of negative Sh411 million and altered the lender’s financial statements, inflating operational expenses and provisions for bad debts.
Fidelity would also have to bear the cost of the bad loans so that the new owner would not have to borrow money to operate.
The bank’s owners claim that the CBK influenced the preparation of an initial agreement and fired the bank’s directors immediately after signing the Heads of Terms [document].
