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Orient bank finds saviour in popular rock musician

L-R Orient bank MD Julius Kakeeto, VC Ketan Morjoria & 8 Miles Partner Hemen Shah

After a few years of a change in its shareholding, Orient bank has found solace in the arms of an international music rock star.

The London-headquartered private equity fund 8 Miles, founded by musician Bob Geldof, who is known to campaign for more aid to Africa, announced last week that it had acquired a 42 per cent stake in Orient bank (U) Ltd, becoming the third investor to buy into the bank in less than six years.

The original founders of the bank, led by Ketan Morjaria, increased their stake from 20 to 49 per cent. The remaining nine per cent was bought by two individual shareholders, Alemayehu Fisseha, the owner of Prime General Supplies, and the Ugandan-based Chinese manufacturer and property developer, Zhong Shuang Quan – each taking 4.5 per cent.

This deal makes it the second time the bank is being sold in less than three years and the third in six years.

HISTORY

In 1993, Orient bank launched its services in Uganda. Until 1996 when it opened a branch in Jinja, Orient had not ventured into any other town of Uganda apart from Kampala. When the bank was about to make 10 years in the country, it acquired Trans-Africa Bank Limited in 2002, which had been declared insolvent by Bank of Uganda.

Between 2002 and 2009, Uganda’s financial regulators were putting in place laws to strengthen regulation. For example in 2004, the Financial Institutions Act came into existence.

Under this act, Bank of Uganda ruled that no family could hold beyond 49 per cent of a financial institution. This was after the country was faced with huge spate of bank failures in the early 1990s with most of the failed banks being family-owned and capitalized inadequately.

Orient bank was forced to raise capital levels and was asked to dilute the stake held by the family. Events in Nigeria would also play into Uganda’s financial industry. Around 2005, Nigeria, faced with many small banks that were financially unstable, decided to change its law by, among other things, raising the reserve requirements.

As a result, many of these small banks were gobbled up the bigger banks, leaving Nigeria with fewer but bigger banks. The shareholders of these small banks would seek operations elsewhere. Uganda was a soft target, especially at the time when the country was about to lift the moratorium on bank licensing.

It is no wonder that the likes of smaller players such as Global Trust bank, together with their West African neighbours such as Ecobank, and United Bank of Africa, would come to Uganda.

In April 2009, Nigeria’s Bank PHB bought 80 per cent of the bank for $63.7m, then the biggest pay-out for any financial institution in the country. Barclays bank had bought Nile bank in 2006 for roughly $24m, which was by the time the biggest deal in the banking industry.

However, Bank PHB’s acquisition of Orient bank did not go without issues. The Uganda Revenue Authority raised alarm over the sale, demanding that Orient bank pays $18 million as capital gains tax on sale.

COURT INJUCTION

In November 2009, Ketan Morjaria, Rajni Karia and Jay Karia – the founders of the bank in 1993 – secured an injunction in the Commercial division of Uganda’s High court, which blocked the tax collector’s move to enforce the payment.
Meanwhile, then majority shareholder Bank PHB was in trouble at home.

When the Central Bank of Nigeria (CBN) in 2011 conducted a stress test on the bank, it found it to be weak. Consequently, PHB’s assets were then transferred to Keystone bank Limited in 2011, a public bank in Nigeria.

At the time, a rumour went around that Orient was not financially sound and it would also fold anytime. BOU came out with the statement defending the bank’s financial standing.

“As with the previous intervention measures taken by the Nigerian authorities since August 2009, the transfer of Bank PHB’s assets, which include its shareholding in Orient Bank (U) Ltd, to the new Keystone bank, will have no adverse impact on Orient Bank (U) Ltd. Orient Bank (U) Ltd remains a standalone subsidiary which is fully capitalized,” BOU said in a statement in 2011.

At the time, Orient bank’s balance sheet was not worrying, especially as its assets grew in 2011 and 2012. The bank is strong among the Indian community, where it has many accounts.

In 2013, the bank had one of its worst years in the country – registering a loss of Shs 16bn after making a profit of more than Shs 9bn the year before. Its total assets, which had reached Shs 517bn in 2012, dropped to Shs 419bn in 2013, according to the bank’s financial performance report published last year.

The bank’s reserve capital with BOU and the loans given out dropped significantly while its bad debts also grew. It is not clear whether Orient bank has run through the storm. The new investors have to turn around this state of issues.
Julius Kakeeto, Orient bank CEO, said a lot of their losses “came from bad risk assets and we are pursuing an aggressive internal recovery process not to suffer the same again.”

GLORY DAYS

Meanwhile, according to Morjaria, “Keystone opted to concentrate in Nigeria and sell all its subsidiaries outside, including Uganda”. 

Keystone and the founders embarked on negotiations to find a buyer last year. Morjaria and other founders decided to buy back another 29 per cent stake to bring their shareholding to 49 per cent. 8 Miles, founded by Irish singer and political activist Bob Geldof, bought 42 per cent. And two minority shareholders bought 4.5 per cent each.

8 Miles also bought into Biyinzika poultry farm, which is one of the biggest in the country.

According to Morjaria, this current sale will drive “the bank back to its glory days.”

“We believe there is a lot of potential to turn around the fortunes of Orient bank. The banking sector in Uganda has been growing and the economy is doing well. We have a very strong plan and strategy for the next three years.”

8 Miles is expected to inject more money in the bank as it seeks to turn it around to profitability. According to Hemen Shah, a partner at 8 Miles, “they were looking at a comprehensive business plan to determine how much money they would inject in.” But media reports last week said the new investors could inject as much as $200m into the bank.

amwesigwa@observer.ug

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