equity bank report

8/7/2019 Equity Bank Report

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CASE: E260DATE: 07/20/07

Bethany Coates prepared this case with cooperation from Ana Garcia Azuelo, Jessica Flannery and Haydee Morenounder the supervision of Professor Garth Saloner as the basis for class discussion rather than to illustrate eithereffective or ineffective handling of an administrative situation.

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EQUITY BANK (A)

I have no intention of ... looking backwards. We are going to forget the past and look

forward to the future.

Jomo Kenyatta, first President of Kenya

INTRODUCTION

James Mwangi, the CEO of Equity Bank, a microfinance services provider, settled behind thewheel of his car and began the long drive back to Nairobi, Kenya. He had just hosted a dinnerfor 2,000 people in a rural village three hours from the city. The event was designed to educateattendees on financial services in general as well as on Equity Bank (Equity or EB) in particular.The vast majority of Kenyans had historically been excluded from formal sources of capital,such as banks, building societies and other regulated financial institutions. They therefore knewlittle about these resources, which made the large village gatherings strategically important toEBs growth.

Mwangis association with the bank began in 1992, when a founder (who was also a familyfriend) urged him to deposit his savings in what was then a struggling indigenous enterprise

called Equity Building Society (EBS). Mwangi agreed, both to help keep a Kenyan institutionafloat and because he felt personally invested in its management team. He then watched EBScontinue to decline at an alarming rate. In 1994, the Central Bank of Kenya (CBK) found EBSto be technically insolvent with poor management and inadequate board supervision. Equityofficials agreed to overhaul the firms strategy and operations in exchange for avoidingdissolution. In 1995, Mwangi decided to get personally involved in turning Equity around. Withseveral years of experience working for Ernst & Young and Trade Bank, he joined EBS as thefinance director, and worked his way up to become CEO in 2004. During his time at Equity, heoversaw its massive transformation from a small, insolvent mortgage lending company, to a fast-growing, internationally recognized financial services bank. Throughout the organizationsevolution, it had focused exclusively on Kenyas economically marginalized citizens, the so-

called unbanked population. It was a remarkable turnaround story. With hours to go before


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Equity Bank (A) E260 p. 2

reaching his home, Mwangi reflected on the banks history as well as the challenges that layahead.

ABRIEF HISTORY OF MODERN KENYA

The Kenyatta Era

Kenya was declared a British colony in 1920. Shortly thereafter, indigenous Kenyans werebanned from political participation. In the early 1950s a rebellion against colonial power beganand continued throughout the decade. The Kenya African National Union (KANU) party wasformed out of the struggle and in 1963, the country transitioned to independence. JomoKenyatta, the leader of KANU became president and remained in power for 15 years. Kenyattasgovernment promoted capitalist economic policies and extensive investments in infrastructure.He also focused his foreign policy on establishing strong relations with the Western world,which led to foreign private investment and external economic assistance. For most ofKenyattas tenure, the economy grew at an annual rate of 5 - 8 percent.

Kenyatta carefully appointed the government body in a way that enabled him to maintain acommanding position in Kenyas political system. After he assumed power, Kenya effectivelybecame a one-party state. Critics claimed that, due to the lack of transparency andaccountability, this government structure allowed Kenyas governing elite to heavily supporttheir agendas through corruption.

The Legacy of Colonialism

Upon Kenyattas death in 1978, Daniel arap Moi, until then vice-president of the country,assumed the role of president. He developed many unfavorable policies (including preferentialtreatment towards his own ethnic group, the Kalenjin) which ultimately led to a failed coup in1982. The government subsequently became increasingly despotic. Moi appointed his supportersinto key government roles and dismissed all critics. In order to consolidate his power, he

changed the constitution to establish a de jure single-party state. Incidences of press repression,torture and violations of human rights became common.

During the Cold War era, the Western world ignored many of these transgressions since Kenyawas a strategic ally against communism in Uganda and Tanzania. However, when Russia optedfor democratic reforms in 1985, the East African country no longer enjoyed this privilegedposition. By the late 1980s, the economy was stagnating under rising oil prices and falling pricesfor agricultural goods. By 1991, Moi was openly perceived as a despot by the internationalcommunity and $250 million in foreign aid was consequently suspended. Moi responded byamending the constitution to allow multi-party politics. However, in the absence of an effectiveand organized opposition, he had no difficulty winning the subsequent elections of 1992 and

1997. For the second half of Mois administration, the economy continued its downward spiraland poverty increased significantly.

Mwai Kibakis Leadership

After 24 years in power, Mois rule came to an end in December 2002, when the first fullydemocratic elections were held. Mwai Kibaki, from the National Rainbow Coalition (NARC),became Kenyas next president. In contrast to Mois authoritarian style, Kibaki espoused alaissez-faire approach. He gave ministers broad mandates to run their respective governmental


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areas, a strategy that led to some fragmentation of objectives and conflicts of interest among rivalfactions within the ruling coalition. Nonetheless, under President Kibakis leadership, Kenyabegan an ambitious economic reform plan, which promised reduction of government,privatization of state-owned companies and deregulation of select industries. Some of these ideaswere quickly legislated. However, in general, related progress has been slow.

Widespread corruption continued to be a problem in modern Kenya, resulting in low investorconfidence and insufficient foreign aid. President Kibaki and his administration committed tofight graft by signing the Anti-Corruption and Economic Crimes Act and the Public Ethics Act in2003. However, these efforts were not enough to overcome the modus operandi for manygovernment officials. In 2006, two major government corruption scandals led to the resignationof three ministers. As a result, the World Bank suspended aid for most of 2006,1 and the IMFdelayed loans. Officials noted that the disbursement of funds would remain on hold until theKenyan government made substantial progress toward rectifying the issue.

Opportunities and Challenges

Kenya has historically served as the main communication, trade and financial hub of East Africa.This has resulted in relatively modern transportation and telecommunications infrastructurecompared with peer countries in the region. Although historical growth has been uneven, thecountry has been on more solid economic footing since 2002. GDP growth rates increased from2.8 percent in 2003 to 5.8 percent in 2005 (see Exhibit 1). Sectors such as tourism andtelecommunications expanded quickly during this timeframe and the trend appeared likely tocontinue. The energy, construction and manufacturing sectors also grew steadily. In the bankingsector, asset quality strengthened and improved credit risk management contributed to anincrease in overall profitability of banks, with an average return on equity (ROE) of 24.4 percentin 2005.

Despite the progress, poverty and inequality remained at high levels. In 2006, approximately 23percent of the population was still living on less than $1 a day,2 and 58 percent on less than $2 aday.3 Fewer people were impoverished in 2007 than in 1997,4 but widespread suffering still

existed. Inequality was also prevalentthe wealthiest 10 percent controlled more than 42percent of the countrys income, while their poorest counterparts received less than 1 percent.5Kenyans began to demand the right to education in the early 2000s as a step toward higherquality of life. In response, the government introduced free primary education, which increasedschool enrollment by almost 70 percent. However, fees continued to be required in secondary

1World Bank loans had been reinstated by October 2006.

2These figures have been adjusted for purchasing power parity (PPP). PPP equalizes the purchasing power of

different currencies for a given basket of goods and is used to compare the standards of living between countries.The World Bank characterizes those who survive on $1 per day as living in extreme poverty, meaning that theycannot meet basic survival needs (e.g. food, water, clothing, shelter). An estimated 1.1 billion people worldwidelive under these conditions. Roughly 2.7 billion people live on $2 per day - the World Banks definition of living inmoderate poverty.3 United Nations 2006 Human Development Report.4

46 percent in 2007 compared to 52 percent in 1997.5

Rodolfo Stavenhagen, Report on the situation of human rights and fundamental freedoms of indigenous people,

United Nations General Assembly Mission to Kenya, February 2007, p. 23


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and higher education. In addition, the high demand that existed for university-level educationwas not matched by local supply. As a result, large numbers of students had to leave Kenya inorder to pursue degrees in neighboring countries.

Gender inequality was also a challenge. During the early years of the twenty-first century, some

government policies and legislation started to favor women's rights. However, in 2006, womenstill comprised 70 percent of the illiterate population in the country and many laws, includingone that prohibited women from owning or inheriting land, continued to enforce a dual standardfor men and women. Unfortunately, education and gender were just two of the hurdles faced byKibakis administration in the effort to improve living standards of the Kenyan people. Otherchallenges included a life expectancy of just 48 years, due in part to poverty, violence and a 7percent HIV/ AIDS infection rate.

GLOBAL MICROFINANCE

Microfinance is the supply of basic financial services to the poor, including loans, credit,

savings, insurance and transfer services. The formal financial sector has not traditionally beenaccessible to the impoverished entrepreneurs who comprise most of the worlds workingpopulation. Instead, informal systems and relationships, including neighbors, and rotatingsavings/ credit clubs, have filled this gap. While similar solutions have worked for some and areoften the only option available, they can be inconsistent and unreliable during times oftremendous need. In addition, poor entrepreneurs can become trapped in vicious cycles ofborrowing from local moneylenders, who may demand exorbitant interest rates.

Traditionally, banks were unwilling to provide loans to poor entrepreneurs due to the perceivedrisk. Common concerns included the fact that the unbanked were often illiterate, had nocollateral, no prior credit history, and were not employed by anyone other than themselves.However, in 1976, Mohammed Yunus, seen by many as the visionary behind the microfinancemovement, bucked conventional wisdom and loaned the equivalent of $27 of his own money toan entire village of poor craftsmen in Jobra, Bangladesh. After all of the borrowers repaid, herepeated the experiment with more villages, and over the years, grew his series of experimentsinto a multi-billion dollar bank that has provided small loans to over 5 million people worldwide.Around this same time, leading microfinance institutions (MFIs) including ACCION andOpportunity International were also emerging, basing their work on the same bold ideas asYunus: that the poor could reliably repay their loans, with interest, and could use the profits togrow their businesses.

Mission-driven, nonprofit MFIs also emerged. These organizations tended to pursue very ruralor otherwise unreachable clients, even at great cost. They were able to provide financial

services, including credit, tailored to the unique needs and limitations of the poor. Microfinanceproducts and services provided by an NGO versus a for-profit tended to be more flexible,forgiving, and higher-touch. They were also typically bundled with education and training. Towidely varying degrees, NGOs would subsidize and/or pass along the higher costs associatedwith their in-depth services to clients. A common theme among these MFI providers wasimmediate poverty alleviation, coupled with outreach to the poor over immediate profitability.


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Today, average microfinance loans are only a few hundred dollars, a fact which makes scale animportant component to the profitability of MFIs. Interest rates worldwide center around 35percent, and are ideally similar to local credit card interest rates. Loan repayment periods arerelatively short, often between 6 to 12 months, and repayments are collected frequently (e.g.weekly). This system helps borrowers stay on track by managing regular, small payments on

loans for specific purchases. For example, a farmer living in a dry region of sub-Saharan Africamay want to irrigate her land in order to produce a greater harvest. Borrowing as little as $100,she could invest in a water pump, use it to irrigate her fields, and if all goes well, pay off her loanplus interest within a matter of months. MFIs also typically require borrowers to become part ofa lending group that serves as a self-reinforcing community of support, encouragement andaccountability.

Most borrowers of microcredit loans are women. In 2006, just over 3,100 microcreditinstitutions reported reaching 113.2 million clients, 81.9 million of whom were among thepoorest when they took their first loan.6 Of these poorest clients, 84.2 percent are women.Women have proven themselves to repay more consistently than male borrowers. Additionally,

women are seen as ideal clients due to the perception that they are more disciplined aboutreinvesting profits back into their businesses, or to improving their familys standard of living(e.g., health and nutrition, education for their children).

EQUITY BANK HISTORY

The Early Years

Equity Bank was founded as Equity Building Society (EBS) in October 1984 and was originallya provider of mortgage financing for the majority of Kenyans who fell into the low incomepopulation. The societys logo, a modest house with a brown roof, was meant to resonate withits target market and their determination to make small but steady gains toward a better life.Despite its well-intentioned mission, EBS went through significant turmoil during the next

decade. The firms decline, although exacerbated by a downturn within Kenyas banking sector,was primarily self-inflicted.

In these early days, EBS operated as an informal family business. The board was comprised offriends of the founders, who did the latters bidding rather than provide professionaloversight.7 The lack of standardization and controls increased the firms lending risk. By 1993,non-performing loans (NPLs) made up 54 percent of its portfolio, accumulated losses totaled

KSh8 33 million and the societys liquidity ratio9 stood at 5.8 percentwell below the 20 percentrequired by law.10 Yet, unwilling to give up, the board of directors began an eleventh hourturnaround effort, which dramatically shifted the business strategy and led to the companysrebirth.

6The Microcredit Summit Campaign: 2006 Report.

7Microsave, March 2007.

8Kenyan shilling. The exchange rate in July 2007 was KSh 67.12 to US$1.

9This ratio measures cash and liquid assets against deposits.

10Graham Wright and David Cracknell, A Market-led Revolution Equity Banks Continuing Story, MicroSave,

March 2007.


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Turnaround and Takeoff

Equitys board was restructured to include four independent members from preeminent Kenyanorganizations. EBS also began recruiting externally for key senior management positions, inorder to position the institution for long-term growth. James Mwangi was the most critical hire.Mwangis energetic and dynamic presence quickly contributed to the companys turnaround

efforts. His leadership style involved: 1) motivating staff to make EBS the leader in its sector(which ultimately became the companys creed) 2) providing systematic training to buildtechnical skills and boost confidence and 3) delegating responsibility, creating incrementalchallenges and rewarding performance. After becoming CEO in 2004, Mwangi continuedguiding Equitys transformation from a mortgage financing provider to a savings and loaninstitution, a path completed on January 1, 2005. In August 2006, Mwangi also oversaw thebanks listing on the Nairobi Stock Exchange, with an initial valuation of KSh 6.3 billion.

The banks main income-generating products became micro-loans on the order of KSh 16,000.Equity shifted to small loans since they offered a less competitive market than mortgages, whilealso representing an opportunity for growth and innovation. Yet, the company did more than

simply swap financial products; it underwent a company-wide vision and mission process thatfirmly committed staff and management to the micro-finance sector. New and existingexecutives and staff received self-awareness and management skills training that created a freshappreciation for their ability to effect change within the microfinance market. The trainingprovided an understanding of the microfinance sector and the enormous benefits their workcould bring to Kenyan communities. Together, these changes paid off. From 2000 to 2006 thecompanys pretax profit grew at a compound annual growth rate of 79 percent, from KSh 33.6million to KSh 1,103 million.

EQUITY BANK TODAY

Equitys transformation into a rapidly growing retail bank was widely considered to be an

inspirational success story. One industry analyst voiced a popular opinion that by providingbanking services to the masses and generally expanding its distribution channels and services,Equity Bank will be a star performer.11 In 2006, EB served more than 1 million customers -over 31 percent of all Kenyan bank accounts. The companys official mission was to be thepreferred microfinance service provider contributing to the economic prosperity of Africa.While resoundingly for-profit, Equity also retained a passionate commitment to empoweringKenyas poor to improve their livelihoods and prospects for self-sufficiency. Industry expertsroutinely cited EB as the best bank in retail banking

12due to, among other factors, their

customer dedication and talented management team. In addition to enjoying widespreadrecognition domestically, the company began to attract international attention, as otherdeveloping countries in Africa and Asia sought to learn from Equitys low-margin, high-volume

model.

Products

Equity Bank offered both deposit and loan products designed specifically for their target market.

11African Alliance, Kenya Banking Industry Review: Sector Report, April 19, 2007, p. 49.

12Market Intelligence 2006 Banking Survey.


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Deposit Offerings

Equitys deposit products included accounts for personal, business, church and institutionalsavings, current accounts, call and fixed deposits and a product called Jijenge13 that helpedcustomers model out and stick to savings plans for specific goals (e.g. a new car).

The deposit products themselves were fairly commoditized within the retail banking industry.What set Equity apart from the competition was how the access to and pricing of those standardofferings was tailored to the previously unbanked segment of the market. While multi-nationalinstitutions required proof of property ownership or other forms of conventional collateral,nothing more than a National ID (a document every citizen had) was needed to sign up for anaccount at Equity Bank.14 Minimum balance requirements were waived entirely, as wereaccount maintenance fees. Service charges on withdrawals at Equity were about KSh 50, or just 10 percent of what the incumbents typically charged. By dropping prices substantially,Equity Bank addressed the financial discomfort its target customer felt from absorbing regularfees on savings and services. Henry Karugu, marketing and product development director,explained, Banks here levy charges in many ways. So, the perception is that your money might

be safe because its in a bankbut its not secure from the institution itself.

Loan Offerings

In 2006, Equity paid an interest rate of 1.25 percent to account holders on deposited funds. Inorder to cover the interest expense and earn a profit, the bank created four types of loan productswith an average lending rate of 17.5 percent:

Social for medical, household, education and emergency loans Working Nation for salary advances and larger check off loans Agricultural for farm development, animal feed, vet services and livestock Private sector for micro-enterprise, overdraft, working capital and business growth

EBs lending rate was high compared to the sectors average of 13.7 percent because of theprofile of its borrowers and the focus on microcredit (see Exhibit 2). Equity made loansavailable to all account holders once they had been deposit customers for at least six months.Both the size of the loan and its repayment schedule were customized to each applicant byspecially trained branch credit officers. In 2006, EB loans ran from KSh 500 to over KSh 50million depending on each applicants ability to repay.

Rather than apply the conventional banking wisdom that pre-existing property was necessary toback credit outlays, EB management and employees committed to finding flexible sources ofcollateral to back loans. For example, salary advances were secured directly with ones

employer through an automatic paycheck transfer. For self-employed entrepreneurs, personalbelongings, including marriage beds, were sufficient to qualify. This approach helped open themarket to creditworthy candidates who had previously been considered unbankable. As AlexMuhia, general manager and personal assistant to the CEO, stated, The majority of Kenyans

13A Swahili term for build oneself.

14 This card is similar to a drivers license in the U.S., but contains more identification information.


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Mobile Branches

EB outfitted branded, armored trucks to serve as mobile branches in rural locations that did notyet have enough foot traffic to support a permanent location (see Exhibit 4). A mobile branchmanager and staff would drive in the banking van to one of five sites each week, returning to thesame home branch each evening. A pared down set of deposits and loans were offered and the

mobile branch manager used a lean version of Equitys IT system to process transactions. EBexpanded security for these automobiles (when car jackings became more frequent in the early2000s) by assigning an armed guard and chaser cars to each.

Prestige Branches

Equitys drive to empower some of the countrys poorest citizens resulted in the emergence of acustomer segment that became relatively wealthy over time. These clients began to approach thelevel of personal net worth at which the multinational banks became interested in bankingthem. In order to stave off the competition, and better serve customer needs, Equity created twoprestige branches. These locations offered largely the same products as regular branches, butcustomers had to maintain a minimum balance of KSh 50,000 to be eligible. As a result, the

banking halls had a very different feel

quiet and spacious, well-appointed with comfortableseating where visitors could watch TV, refreshments were provided, and the surroundings lookednew and well-maintained. EB staffed these branches with bank employees who haddemonstrated impeccable customer service skills over several years in regular branches.

Security was a top priority at every Equity location. The bank put a number of measures in placeto prevent robberies and other disruptions. Armed guards were stationed in every branch. Theyalso played a secondary role of directing foot traffic inside the banking halls. All vaults wereprotected by a series of electronically-operated doors and gates. Enterprise and prestige clientshad their own dedicated cashiers who worked in separate cubicles with lockable doors. Equityofficials also stayed closely connected with local police and other banks in order to stay

informed about recent crimes and suspects.

Operations

Until Equity installed Bankers Realm (BR), its first core banking software, in 2000, all bankingservices had been manually processed. By 2004, BR began to show signs of stress likehanging due to the banks dramatic customer growth. In addition, it could not handle theintroduction of ATMs. Bankers Realm consultants were almost permanently stationed at thebanks headquarters to manage capacity issues and hold the system together.

After customer and branch complaints increased, Equity began a concerted search for a new ITsystem. Peter Gachau, head of IT, noted, We did not care if it cost KSh 67 or KSh 670 million,we were just determined to get the best possible solution. Eventually, Gachau and his teaminvested KSh 650 million into a three-part system that had plenty of room to scale as Equitygrew. It consisted of:

An Infosys core banking system called Finacle An Oracle database An HP hardware platform


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The Finacle system covered daily bank processes and products for consumer banking, including:savings and checking, deposits and consumer lending as well as those required for corporatebanking and trade finance. It linked the branches, ATMs and mobile banking channels back tothe centralized head office for data collection and management. Prior to rolling out the solution,the company invested an additional KSh 17 million into training the entire organization on how

to use it.

Once installed and refined, the IT system produced nearly immediate results. Account openingsand cash transactions went from requiring 25-30 minutes to 5-10 minutes, which meant thatcustomers spent less time standing in line.16 Transaction (e.g., phone, postage) and branchexpenses both dropped,17 fast data centralization enabled faster account reconciliation and EquityBank was able to respond more nimbly to demand for innovative products.18 In addition, Finacleseamlessly interconnected EBs other specialized software solutions, including MEEPS,

19

SWIFT, RTGS and the lean version of Finacle used in Equitys mobile branches.

Customer Acquisition and Retention

Equity used a high-touch approach to acquire account-holders and retained them by offeringexemplary customer service. EBs retail customers were primarily small-scale farmers (e.g.,dairy, rice and tea), entrepreneurs and low-end salaried workers (see Exhibit 5). Theseaverage Kenyans, roughly 80 percent of the countrys population, often lived below thepoverty line as defined by Western standards. The firms positioning statement summed up thebrand attributes it used to appeal to this formerly unbankable population: Equity Bank providesaccessible, customer-focused banking services for microfinance clients to meet their aspirationsfor today and tomorrow. Unlike other financial institutions, Equity is down-to-earth andfriendly. EB also espoused twin mottos of the listening, caring financial partner, and,growing together in trust.

As signified by their motto, a key component of EBs customer acquisition strategy revolvedaround cultivating mutual trust with target customers. Since the industry downturn of the mid-1990s, this market segment had been wary of re-joining formal banks. The large, multi-nationalinstitutions that preceded Equity had created a damaging halo effect when they pulled branchesout of the less profitable rural areas with only cursory notice to customers. Not only was it ofpractical concern that these communities no longer had a safe place to secure their savings andacquire credit but, as Winnie Kathurima, change and corporate affairs director, noted, it alsohurt the self-esteem of many people to receive letters that said sorry, youre not our customerany more.

Equity endeavored to fill the vacuum by being market-led. As Kathurima mentioned, We goout and listen to the people. We say What do you need? If you had a bank, what would you do?If you were to borrow, what would you borrow for? And then we come back and develop

16Microsave.

17Redundant employees were deployed to new branches rather than being laid off.

18For example, Equity made it possible for parents of students at a Kenyan university to direct deposit tuition just

one week after the school requested this feature.19

MEEPS enables check clearing and can handle up to 15,000 checks per day; SWIFT is used internationally for

cash transfers; RTGS is used for domestic cash transfers.


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products that suit those needs. Equity began sending employees into rural areas to educatepotential clients about its offerings. In order to best reach locals, EB representatives set upbooths in open air markets, hosted free mass public financial training and education days (seeExhibit 6) and established a presence at community agricultural trade fairs.20 They alsoconducted focus groups discussions and surveys.

Once newcomers decided to visit a branch, the marketing effort continued. All branchemployees were trained to promote the products and services best suited to each customer.Credit officers received additional, specialized training on how to market particular loans. Inaddition, the branches showcased posters and fliers that further described EBs products andservices (see Exhibit 7). To a lesser extent, the bank also funded radio spots in local dialects andsignage on lampposts in socio-economically depressed areas.21

In describing core aspects of Equitys brand, including modesty, accessibility and passion forcustomer service, Mwangi recalled a story, now embedded within the banks lore, of an 80-year-old account-holder who traveled 450 kilometers by bus to meet with him. The elderly man had

come unannounced, and after waiting hours to see the CEO, he said:

When your bank opened a mobile branch in my area, me and my wife, we openedour first savings account. And after some time we went and borrowed 10,000shillings, and we bought a heifer which was almost ready to calve. And aftersome time the heifer calved and now my wife, like other women, is able to takemilk to the factories. And today we dont have to rely on my children, and we areable to meet our expenses. Three years ago, we struggled. Now we have boughta piece of land where we reside and we are fine.

Mwangi asserted that Kenyas low-income population derived much more than financial servicesfrom having a bank specifically tailored to them. He noted:

We bend over backwards for our customers. And the banks accessibility givesthem a strong sense of fellowship. Our customers say, We have forever been

excluded, but now theres a bank able to accommodate usthis is where Ibelong. And that feeling of community and partnership gives them a very strongsense of pride and self-esteem.

Equity linked those positive feelings to the banks high levels of customer advocacy over 50percent of new customers were convinced to join by another account holder.

Financial PerformanceAfter Mwangi took over as CEO in 2004, the number of deposit clients more than doubledwithin two years (see Exhibit 8). Revenue increased by over 300 percent during that timeframe,from KSh 1,035 million to KSh 3,371 million and pretax income more than quintupled, from

20Popular multi-day forums designed to educate farmers and the public about emerging agricultural technologies to

improve crop and animal husbandry. Sponsors set up booths and help pay for the event.21

EB called this the Lighting the Slums outreach program, whereby they endeavored to make slum areas safer for

residents at night.


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KSh 218 million to KSh 1,103 million. In addition, the pretax margin rose from 21 percent to 33percent due to effective control of personnel and bad debt provisioning spend.

In 2006, Equity was the seventh largest bank out of 45 operating in Kenya based on profit, yet itonly had 3 percent market share of loans and deposits (see Exhibit 9). Due to the relatively

limited means of EB customers, the average deposit account held just 10 percent of the value in atypical customers account at larger banks including Barclays and Kenya Commercial. Yet, thebank gained 14 percent of new deposits in 2006. Although some industry commentators fearedan increase in non-performing loans (NPLs) as the EBs asset base increased, the quality of theloan book as represented by the ratio of non-performing loans and advances to gross loans andadvances actually improved markedly from 10 percent in 2005 to 5 percent in 2006.22

In an effort to drive sales, the number of staff expanded from 117 in 2000 to 1,394 in 2006, withthe biggest increases in the last two years (see Exhibit 10). Yet, although annual managementexpenses increased by 85 percent from 2004 to 2005 and by 78 percent from 2005 to 2006, thisline item stayed relatively constant as a percentage of net revenue. Helped by EBs

comparatively attractive spread between lending and savings rates, Equitys profit before taxincreased even faster than sales during this six year time period, from KSh 33.6 million in 2000to KSh 1.1 billion in 2006 (see Exhibit 11).

Equitys operating margin was 22 percent in 2006, somewhat below the larger players such asBarclays and Standard Chartered, but also comfortably above other medium-sized players,including the Cooperative Bank of Kenya. In general, Equity exercised fiscal discipline, forexample by breaking even on new branches within 6 to 9 months.23

Culture and Talent

James Mwangi replicated the openness of the branches within the inner workings of the bankitself. He and his executive managers maintained open door policies, even as the organizationstretched beyond 1,000 employees. As Equity evolved from a family-run to a professionallymanaged institution, the bank began to explicitly celebrate meritocracy. The top 10 percent ofperformers were placed on rotational programs to help them develop as future bank leaders.Highly experienced executives were recruited from a range of competitive banks and othermultinational institutions. Every employee was placed on a six-month probation so that culturalfit could be assessed in real time. Individuals who did not actively uphold the companysvalues were soon counseled out.

Employees at every level, both at the corporate office and within the branches, shared a firmcommitment to customer service. Equitys secondary role as an indigenous community-buildingorganization (versus a large multinational) gave employees a sense of purpose and passion for

their careers. As Alex Muhia noted, The majority of employees see what we do as a calling.Its not about the money we believe in changing the destiny of normal Kenyans in a positiveand non-exploitative manner. Nonetheless, as the bank evolved, HR managers ensured thatsalaries and benefits were in line with the rest of the industry. Medical care and pensions werepart of most compensation packages and an employee share ownership program (ESOP) was

22Equity Bank 2006 Annual Report and Financial Statements, p. 10.

23African Alliance, p. 24.


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Exhibit 1

GDP Growth and Per Capita Income

Source: African Alliance

Exhibit 2

Net Interest Margin and Average Cost of Deposits FY06 (%)



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Exhibit 3

Number of Equity Branch Locations

Source: Equity Bank

Exhibit 4

Village Mobile Banking

Source: Equity Bank

1012 13

16

22

31

42

56

70

2000 01 02 03 2008E05 07E0604

1012 13

16

22

31

42

56

70

2000 01 02 03 2008E05 07E0604


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Exhibit 5

Equity Banks Loan Book 2005-2006

KSh 000s

Category 2006 2005

Agriculture 499,271 206,430

Consumer 2,098,183 1,528,542Micro Enterprise 2,476,035 510,635

SMEs 2,335,462 529,522

Corporate 4,019,722 3,110,157

Total 11,428,673 5,885,286

Source: Equity Bank 2006 Annual Report

Exhibit 6

Mass Public Financial Literacy Education and Training Day

Source: Equity Bank


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Exhibit 7

Equity Bank e-Banking Flyer (Front and Back)

Source: Equity Bank


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Exhibit 8

Growth in Equity Bank Customer Numbers

Source: Equity Bank

Exhibit 9

Kenyan Banking Sector Deposit Share (%) in 2006

100% = KSh 625 billion


105155

252

413

556

1014

2001 02 03 05 200604

105155

252

413

556

1014

2001 02 03 05 200604

15

12

10

443331

45

Equity

Other

Housing

Finance

Barclays

KenyaCommercial

Standard

National BankNIC Bank

CFC Bank

Diamond Trust

15

12

10

443331

45

Equity

Other

Housing

Finance

Barclays

KenyaCommercial

Standard


CFC Bank

Diamond Trust

Equity

Other

Housing

Finance

Barclays

KenyaCommercial

Standard


CFC Bank

Diamond Trust


19/19


Exhibit 10

Growth in Staff Numbers


Exhibit 11

Condensed Equity Income Statement: 2000 2006

KSh 000

2000 2001 2002 2003 2004 2005 2006

Net Interest Revenue 65 105 197 257 396 866 1,508Comm./ Other Revenue 77 125 171 306 640 937 1,864

Total Operating Revenue 142 230 368 563 1,036 1,803 3,371

Mgt Expenses 82 131 191 319 563 1,040 1,856

D&A 16 32 40 51 84 138 280

Provision of bad debts 10 12 25 51 171 124 133

Total Expenses 108 175 257 420 818 1,302 2,269

Profit Before Tax 34 55 111 143 218 500 1,103

Tax 16 23 37 45 82 156 350

Profit After Tax 18 32 74 97 136 345 753

Equity Building Society Equity Bank


165210

354

530

884

1394

2001 02 03 05 200604

165210

354

530

884

1394

2001 02 03 05 200604

equity bank report

Documents