NEWS WIRE: Kenya: Equity bank: Runaway Profits from Banking the Poor

Source:Financial Times.

Original news wire here.

Kenya, October 22 – The cover of an Equity Bank brochure carries snapshots of life in Kenya: a blue-blazered farmer tending his cows; a hardware trader inspecting his goods on a dusty road; a child studying a globe under his mother’s gaze.

They are also images of the “unbanked poor”, people who for years were shut out of the financial system. But through loans from Equity Bank they have been able to invest for the first time in agriculture, business and education.

Breaking an African habit of restricting banking services to a wealthy elite, Equity has institutionalised microfinance and turned it into the foundation of the fastest-growing bank in Kenya. Its loans can be as small as USD 6 (KSh500) and it has been known to take marital beds as collateral.

The bank – which has 97 bricks-and-mortar branches, 54 trucks that serve as roving branches, plus a mobile phone banking service – says it has proved that lending for a profit is not incompatible with transforming the lives of poor Kenyans. In fact, the two are mutually reinforcing.

Microfinance is a low-margin business but, thanks to its rising volumes, Equity’s pre-tax profit exploded from USD 1 million (KSh74m )in 2002 to in USD 32.7 million (KSh2.4bn) in 2007, more than doubling in each of the past three years.

Equity’s total assets also rocketed from USD 35.5 million (KSh2.6bn) in 2002 to USD 724 million (KSh53.1bn) in 2007, making it Kenya’s fifth biggest bank with an asset share of just under 6 percent, according to Renaissance Capital, an investment bank.

Its stellar performance attracted Helios Investment Partners, a London-based private equity group, which last December bought a 25 percent stake for USD 150 million (KSh11bn), just days before the election that plunged Kenya into bloody chaos.

So far, Helios has been amply rewarded: while the Nairobi market yo-yoed up and down for the first five months of this year, and has been falling ever since, Equity Bank’s shares are up nearly 40 percent in 2008 and it is now the third biggest company on the exchange.

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But the small world of Kenyan finance is prone to bouts of over-exuberance and analysts at Renaissance Capital say Equity’s valuation appears overdone.

Some skeptics, meanwhile, voice doubts about the solidity of a business that has expanded so fast. “I have a feeling all is not well. It is not solid. What are its structures?” says one retired banker. “The question is whether it’s a house of cards,” says a Nairobi businessman.

The evangelism with which Equity Bank talks about its social mission has heightened such suspicions. “We’re pushing the gospel of inclusion,” says James Mwangi, the bank’s chief executive. “It’s all about giving basic finance to ordinary people on the street to transform their livelihoods.”</p.<p.
But Mr Mwangi, a former Ernst & Young accountant, is also a numbers-and-systems man. He boasts of the bank’s rigorous credit analysis, which uses techniques devised for low-income borrowers to reconstruct the profit and loss accounts and balance sheets of households, rather than individuals.

“Our customers are not like you or me,” says Mr Mwangi. “They have very sophisticated mechanisms for diversifying risk. They might have a chicken, a cow, a banana crop; one of them might have a salary, another a pension. So we take the family as a financial unit.”

Its risk management is partly a defenae against regression to a sorry past: Equity was founded as a mortgage lender in 1984 but poor management caused a steady decline into insolvency. Mr Mwangi joined as finance director in 1995 to help turn the group around and he now claims to have 2.8 million account holders – which would equate to more than half of all the retail accounts in Kenya – and 600,000 borrowers.

He says Equity’s proportion of non-performing loans, at 2.8 percent, is the lowest in the sector. In close-knit villages, the shame attached to the arrival of an Equity Bank car plastered with the words “debt collection unit” is enough to keep able borrowers making prompt repayments.

And even as inflation crimps urban spending, Mr Mwangi says its effects are not yet showing up in areas of subsistence farming where there is still relatively little cash in circulation.

Until 2000, Equity processed all its data manually, but it has built a state-of-the-art information technology system that the chief executive says can handle ever higher volumes of customers without an appreciable increase in costs.

The system underpins its ambitious plans for regional expansion, which are funded by capital from Helios and began with the USD 23 million (KSh1.7bn) acquisition of Uganda Microfinance in July, followed by the September announcement of plans to open branches in south Sudan.

The expansion strategy was given extra impetus by Kenya’s post-election crisis. Equity’s customers were among the 300,000 forced from their homes by violence. Because its chairman had campaigned for president Mwai Kibaki, the bank became the target of an abortive boycott campaign by the opposition.

“In January we realised we had too much risk in one country,” says Mr Mwangi. In five years time, he says, Equity wants to be in Rwanda and Tanzania too, and aims to have cut the proportion of its profit that comes from Kenya from almost 100 percent to just 40 percent.

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