By: Tim Harwood
An interdepartmental OPIC team traveled to Kenya in 2012 to monitor the performance of three financial institutions whose microfinance lending is supported by the agency: Musoni, the Kenya Women’s Finance Trust DTM Ltd (KWFT), and Equity Bank. Over the course of three days, members of OPIC’s Office of Investment Policy, Portfolio Management Department, Small and Medium-sized Enterprise Finance Department, and Office of External Affairs met with staff from each institution, microloan groups organized by each, and with individual loan recipients. The goal was to assess the financial performance and developmental impact of the institutions’ microfinance lending, and more broadly, their efforts to implement the principles of the Smart Campaign, a global effort to integrate client protection into MFIs’ due diligence, investee selection and loan covenants.
Day Three: Equity Bank’s big plans
If Kenya’s financial industry is the great laboratory it appears to be, firing off one innovation after another to draw ever more Kenyans into the formal banking sector, its nerve center may very well be the ninth floor of the Equity Centre in Upperhill Nairobi – headquarters of Equity Bank. It is difficult to imagine investment strategies being enacted anywhere in Kenya having greater impact on the country’s financial future than Equity’s.
Certainly Equity’s presentation on the final morning of OPIC’s monitoring trip brought home the stakes of guiding Kenya’s financial growth responsibly. In explaining how the bank was using $8.45 million in OPIC financing – as part of a $50.7 million investment by the Helios Sub-Saharan Africa Fund I – a senior Equity team detailed a methodical plan to enable customers to “graduate up” from smaller products to larger transactions; adherence to a ‘bottom of the pyramid’ banking model that emphasizes low costs and stable funding, resulting in a non-performing loan ratio that had dropped to 2.7 percent in 2012; and the rollout of a host of customer-friendly products – from agricultural and microbusiness loans to education and remittance support – that had enlisted the support of the US Agency for International Development to the UN Development Program, Visa, MasterCard, Save the Children and the Bill and Melinda Gates Foundation.
If it lacked the headline splashiness of Musoni’s mobile banking revolution or KWFT’s empowerment of women entrepreneurs, Equity’s presentation described a model that had successfully balanced the need for profits with grassroots empowerment, and an ambitious determination to lead the country forward. It was enough to bring Dennis Aluanga, a Helios partner, up from Johannesburg on the red-eye that morning, and he seemed as impressed as the rest of us.
Group CFO Paul Njaga began with a little Equity history. Founded as the Equity Building Society in 1984, it was initially a small rural bank for older women and subsistence farmers. Equity’s first decade ended badly: losses totaling 32 million in Kenyan shillings (including 54 percent in non-performing loans) prompted the Central Bank of Kenya in 1993 to declare Equity technically insolvent.
Equity reemerged thereafter with a new business model working from the bottom of the pyramid up, with a conservative emphasis on savings. As Director of Treasury and Trade Finance Michael Wachira put it, “we moved from a product-led approach to customer-led approach, emphasizing inclusivity.”
It worked. Riding the hiring of then-Finance Director James Mwangi, Equity has since become the largest bank on the Nairobi stock exchange, managing 50 percent of all account holders in the country, and the largest African majority-owned company in East and Central Africa, with branches in Uganda, South Sudan, Rwanda and Tanzania.
Having become a full-service deposit-taking institution in 2010, Equity’s numbers speak for themselves:
- More than 8 million bank accounts and system with capacity to bank 35 million bank accounts, and process 300,000 transactions per minute;
- 700 ATMs, over 6,000 Equity agents and over 4,500 POS and with a card system that can handle 75 million bank cards;
- 12 billion Kenyan shilling profit in 2012;
- 136,000 loans for women since 2007 worth kshs 12.6 billion;
- 13 billion Kenyan shillings’ worth of microbusiness loans issued in 2012;
- 110,000 youth loans since 2007 worth Kshs 5.2billion;
- Financial literacy training for nearly 500,000 people, with a target of one million by 2014.
For his efforts, now-CEO and Managing Director Mwangi was named 2012 Ernst & Young World Entrepreneur of the Year, becoming the first business leader from Sub Saharan Africa to win the award; he was named 2012 Forbes Africa person of the year; and Equity was awarded Best Managed Company in Africa in 2012 by EuroMoney magazine, as well as Most Innovative Bank in Africa Award at the African Bankers Awards.
Perhaps most impressive was Equity’s determination not to rest on those laurels. Director of Mobile Banking and Payment Innovations John Staley, last speaker of the morning, presented a mesmerizing outline of Equity’s plan to make mobile banking in Kenya more efficient and impactful than it already is. Concerned about the lack of regulation by the Kenyan government, he fears money transfer by the telecommunication providers’ monopoly is inhibiting the sector’s growth.
“Money transfer by telcos is an electronic medium, but it’s treated as cash by customers,” Stale said. “And although it has enabled the poor to do more transactions, its cost for merchants is high. What we’re trying to do is make e-money more useful for merchants, by creating mental models that convince customers to use credit instead of hiding cash.”
Equity seemed well on the way to doing so. Already, recent investments had increased Equity’s mobile customer base from 417,000 in January 2011 to more than 1.5 million by March 2012, in part through support from the Gates Foundation and the Consultative Group to Assist the Poor (CGAP).
Equity Kawangware Branch Office
Heads swimming from the deluge of Equity statistics, the OPIC team was to happy to get out into the sunlight and make for Equity’s Kawangware branch office, not far from where our Musoni site visits began two days earlier. Manager Ben Kithuli detailed a phenomenal growth record: since its 2007 launch, the branch’s customer base had grown from 5,000 to 80,000, with 7,000 active borrowers within a 30-kilometer radius. The branch supported 300 students at 12 secondary schools, provided customers with training in financial responsibility, and was negotiating with area slum lords to improve local housing. “Our bankers are very skilled at identifying and delivering products quickly and with the help of technology,” Kithuli said. “Kawangware is a slum that is becoming a middle class area.”
Kifaru Youth Group
A short drive from the Kawangware branch office was our first site visit of the day. In a dark room adjacent to a working garage, 17 members of the Kifaru Youth Group, a microfinance loan group named after the Swahili word for rhinoceros, met to update their finances.
Kifaru chairman Godfrey Chege, a chicken dealer, says that whereas youth in Kawangware typically lack title for loan collateral, “here we can meet to guarantee each other with our savings… The need for capital is the biggest challenge, but we found that Equity had the product we needed.” The group has established savings, loans and emergency accounts with Equity; a number of members have used loans both to support their businesses and for home improvements.
Chege had touched on a salient point, for Equity Bank and beyond. According to a 2012 report by the UN Capital Development Fund, the current global youth population of 1.2 billion is the largest in history, representing approximately 18 percent of the world’s population. And 85 percent of young people live in developing countries.
Given the high levels of youth unemployment in developing countries, governments are increasingly looking for proactive approaches to help young people realize their full economic potential. Increasingly, youth represent the next wave of new clients for financial services providers, with the population expected to grow by one billion over the next decade, particularly in sub-Saharan Africa.
With its great entrepreneurial energy and ubiquitous cell phone use, Kenya is an ideal crucible for innovation in youth development. The number of mobile phone subscribers below the age of 30 is predicted to increase in 2012 throughout the world; in sub-Saharan Africa, the number is projected to rise to 108 million. Youth, who are often most likely to own or have access to a cell phone may be more comfortable using cell phones to access their savings account.
To the extent our lasting impression of Kenya was that of a country receiving a symbolic fresh coat of paint via the rise of mobile banking and growing access to capital for women entrepreneurs, our final stop was appropriate. Hard by a busy Kawangware corner was Njikim’s Metal Hardware Store, a bustle of industry unto itself. Shelf upon shelf of paint and neat piles of powdered concrete suggested more supply than demand, but they were flying out the door. Overseeing it all was Selena Njikim, recipient of five Equity Bank loans, the most recent for 4.2 million Kenyan shillings (about $48,000).
“I started in 2001 with five tins of paint and now have 18 staff people,” she said. “Equity, they pushed me, and in short my business has grown, and I’m proud of it. As a result, my children direct three other stores for me.”
Her pride was evident, as was the toll of a mountainous effort.
“It’s difficult as women entrepreneurs, I can tell you that,” she said. “I’ve been able to educate my children, own some properties, and now I drive a nice vehicle. But I’m open every day from six a.m. to seven p.m. I’m looking forward to being at home within five years.”
With that, the monitoring trip was over. The OPIC team climbed into its white minivan and headed back to downtown Nairobi, anxious about making our flight out. But a mile from the hotel the rush-hour traffic stopped us dead for a good 15 minutes. After much compulsive watch-checking, we decided to walk the final last stretch ourselves, against the advice of our minders. Out we hopped, onto the highway. Nairobi’s bustle had gotten the best of us, and a little individual initiative seemed the Kenyan thing to do.
For more on OPIC’s trip to Kenya, read the first two posts in the series: OPIC Monitoring Trip to Kenya and OPIC monitoring trip to Kenya: A revolution realized.