Kingdom/Valley Technologies deal turned sour

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Last Friday the financial markets woke up to disturbing news that all was not well at Kingdom Bank.

CLIVE MPHAMBELA

It emerged Afrasia Kingdom Bank (Kingdom) had been struggling to manage its lending relationship with a major debtor, Valley Technologies, resulting in the bank being exposed to the tune of more than US$21 million to the mobile phone operator.

There were immediate and mixed reactions from various quarters as stakeholders digested the news of developments unfolding at Kingdom.

By and large, the news report told a story that has become all too common in our banking sector; bad lending and bankers straying from their core mandate of safeguarding peoples’ savings which they hold as deposits.

A top banker who spoke to businessdigest on condition of anonymity said the Kingdom saga once again negatively branded indigenous bankers in particular and local businessmen in general.

“Unfortunately, the situation at Kingdom is bad for the indigenous banks. People out there will begin to think that indigenous bankers cannot run banks. One can see that the basics of banking are being violated and it cannot be good for the image of Zimbabwean banking professionals,” the banker said.

According to sources, the company formerly owned by Zachary Wazara’s Spiritage Group, now effectively owned by the Kingdom following a series of transactions and agreements, was at centre of row.

Information gathered by the businessdigest confirms that late last year, an agreement was reached between Kingdom Bank and the shareholders of Valley Technologies that the former relinquish their equity in the techcnology company in exchange for being absolved from paying back loans that the company had obtained from the bank.

This deal was a culmination of a series of disagreements between the parties regarding the loan, during which Valley Technolgies was accusing its bankers – Kingdom —of failing to meet its end of the loan deal.

Valley Technologies accused Kingdom of overcharging on interest due on its facilities to the tune of almost US$3,2 million as well as late loan disbursements and holding back loan funds to the detriment of the client.

However, the bank hit back accusing its client of misusing funds to the tune of US$4,7 million, a claim Wazara says was proven to be untrue by auditors who carried out the enquiry on the instructions of the bank.

Following the recent high profile failure of Interfin Banking Corporation, the broad implications of the fight between the bank and its client are that in the pursuit of profit, some bankers may be taking far too much risk. Clearly, for the bank to have an exposure of such magnitude to a single borrower, begs several questions.

Did Kingdom and its management exercise due diligence and caution in handling this loan relationship?

Are shares held in private companies by private individuals good security for a loan, particularly if the loan is to the company whose shares are being pledged?

It is also common cause that under our banking laws, banks are prohibited from loaning out more than the equivalent of 25% of their capital base to a single borrower. The facts show that Kingdom was exposed to the tune of over US$21 million to Valley Technologies.

According to Kingdom Bank’s own published results, its total equity, including retained earnings for the year ended December 31 2012, amounted to just more than US$31 million.

The facts emerging around the dispute indicate essentially the Valley technology facility was non-performing, culminating in an attempt, firstly by the bank to effect a takeover of Valley Technology through a debt-to-equity swap deal negotiated in December and consummated in January this year.

Secondly, Kingdom is on public record as attempting to sell via public auction, various assets of Valley Technologies which had been pledged as collateral for the facilities.

Banks generally sell collateral assets belonging to its bad debtors in the normal course of business as part and parcel of processes to recover long outstanding debts.

The circumstances surrounding the Kingdom-Valley technologies fiasco point to a breakdown in corporate governance at the bank. Indeed, the Reserve Bank seems to have been assured that these, together with other shortcomings, would be addressed.

However, the lesson to draw out of the unfolding saga is that financial engineering sometimes does not work, and cannot be concealed forever.

Analysts say bankers should stay clear of the sort of deals that eventually raise prudence and corporate governance questions.
Bankers have a fiduciary duty to walk the straight and narrow path and never to deviate from their core mandate.

Financial analyst James Msipa pointed out that one weakness of Zimbabwe’s system was that bankers were being allowed to stray from core business.

“Our bankers have also become industrialists and entreprenuers in fields other than banking. This has tended to divert their attention from banking, eventually blurring their focus,” Msipa said.
The Zimbabwe Independent’s own investigations of the developments at Kingdom show that Nigel Chanakira, a founder and major shareholder in the bank, had developed a keen personal interest in telecommunications.

What is now clear with the benefit of hindsight is that this misadventure, whether pursued through the bank or in his personal capacity, was risky and a deviation from the bank’s core business.
By owning equity in Valley Technologies, the bank essentially strayed from its core business and areas of competence.

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