Co-op Bank to invest 7% equivalent of 2019 profit in Jamii Bora

Co-op Bank revised its plan for Jamii Bora. Covid-19 outbreak is forcing banks to rethink their investment strategy. Equity Bank shelved regional expansion plans to preserve cash.


Jamii Bora Bank shareholders at a special meeting on July 1 endorsed the planned takeover of the business by Co-operative Bank of Kenya (COOP). The shareholder nod brings Co-op Bank closer to finalising one of its largest investments in a subsidiary business in recent years.

Co-op Bank will inject Ksh1 billion into Jamii Bora in exchange for a 90% stake in the business. Notably, Co-op Bank’s planned investment in Jamii Bora is equivalent to 7% of the Ksh14.3 billion profit it made in 2019.
With the investment, Jamii Bora will become a subsidiary of Co-op Bank but continue to operate separately under its own brand. Co-op Bank will have the saw on how the business is run as it will appoint the directors who sit on Jamii Bora board.
Co-op Bank departs from full takeover of Jamii Bora
Co-op Bank previously aimed for a full takeover of Jamii Bora. But the Covid-19 situation appears to have caused it to change its mind as banks try to preserve cash to enable them ride out the crisis.
As the pandemic has disrupted business across the country and caused loss of millions of jobs, banks are bracing for a spike in loan defaults. Additionally, deposits have dropped while withdrawals have increased, putting banks at risk of cash shortage.
In response, banks are racing to shore up their cash reserves. Co-op Bank has set aside more cash to cover potential loan losses as it braces for increase in loan repayment defaults. The bank raised its loan loss provision to Ksh900 million in the first quarter of 2020, compared to Ksh510 million in the first quarter of 2019.
Co-op Bank rival Equity Group Holdings Ltd (EQTY) has also taken steps to preserve cash in response to Covid-19 fallout. For example, Equity has paused a regional expansion plan and cancelled dividend payment in a bid to conserve cash to combat Covid-19 impact.
In addition to pausing big investments to preserve cash, banks are revising loan terms for existing borrowers to offer them some relief as they go through the crisis.
Consolidation of Kenya’s banking industry
Jamii Bora operates 17 bank branches and now has 444,000 customers, up from 350,000 customers last year. Its target market segment is small business lending and household microfinance.
The Jamii Bora deal is expected to expand Co-op Bank’s small business lending operation, an area of growing interest among Kenyan banks. For example, Family Bank, which is contemplating IPO, has launched several vehicle purchase credit programmes targeting small businesses.
Jamii Bora teaming up with Co-op Bank will continue the consolidation of Kenya’s banking industry. The industry consolidated last year when KCB Group (KCB) swallowed National Bank of Kenya in a Ksh6.5 billion deal.
The Jamii Bora-Co-op Bank deal still requires the approval of the central bank, capital markets watchdog and the competition regulator before it can close.
Finally, Co-op Bank shares closed at Ksh12 on July 1. The shares are down 25% for the year. But Co-op Bank is not the only company whose shares are falling this year. The stock market has generally been on a selloff since Kenya began reporting Covid-19 cases in March.
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