CASE: E260 DATE: 07/20/07

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 the wheel of his car and began the long drive back to Nairobi, Kenya. He had just hosted a dinner for 2,000 people in a rural village three hours from the city. The event was designed to educate attendees 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 knew little about these resources, which made the large village gatherings strategically important to EBs growth. Mwangis association with the bank began in 1992, when a founder (who was also a family friend) 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 institution afloat and because he felt personally invested in its management team. He then watched EBS continue to decline at an alarming rate. In 1994, the Central Bank of Kenya (CBK) found EBS to be technically insolvent with poor management and inadequate board supervision. Equity officials agreed to overhaul the firms strategy and operations in exchange for avoiding dissolution. In 1995, Mwangi decided to get personally involved in turning Equity around. With several years of experience working for Ernst & Young and Trade Bank, he joined EBS as the finance director, and worked his way up to become CEO in 2004. During his time at Equity, he oversaw its massive transformation from a small, insolvent mortgage lending company, to a fastgrowing, internationally recognized financial services bank. Throughout the organizations evolution, it had focused exclusively on Kenyas economically marginalized citizens, the socalled unbanked population. It was a remarkable turnaround story. With hours to go before
Bethany Coates prepared this case with cooperation from Ana Garcia Azuelo, Jessica Flannery and Haydee Moreno under the supervision of Professor Garth Saloner as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business.

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reaching his home, Mwangi reflected on the banks history as well as the challenges that lay ahead. A BRIEF HISTORY OF MODERN KENYA The Kenyatta Era Kenya was declared a British colony in 1920. Shortly thereafter, indigenous Kenyans were banned from political participation. In the early 1950s a rebellion against colonial power began and continued throughout the decade. The Kenya African National Union (KANU) party was formed out of the struggle and in 1963, the country transitioned to independence. Jomo Kenyatta, the leader of KANU became president and remained in power for 15 years. Kenyattas government 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 of Kenyattas 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 a commanding position in Kenyas political system. After he assumed power, Kenya effectively became a one-party state. Critics claimed that, due to the lack of transparency and accountability, this government structure allowed Kenyas governing elite to heavily support their 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 preferential treatment towards his own ethnic group, the Kalenjin) which ultimately led to a failed coup in 1982. The government subsequently became increasingly despotic. Moi appointed his supporters into 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 Kenya was a strategic ally against communism in Uganda and Tanzania. However, when Russia opted for democratic reforms in 1985, the East African country no longer enjoyed this privileged position. By the late 1980s, the economy was stagnating under rising oil prices and falling prices for agricultural goods. By 1991, Moi was openly perceived as a despot by the international community and $250 million in foreign aid was consequently suspended. Moi responded by amending the constitution to allow multi-party politics. However, in the absence of an effective and 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 spiral and poverty increased significantly. Mwai Kibakis Leadership After 24 years in power, Mois rule came to an end in December 2002, when the first fully democratic elections were held. Mwai Kibaki, from the National Rainbow Coalition (NARC), became Kenyas next president. In contrast to Mois authoritarian style, Kibaki espoused a laissez-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 rival factions within the ruling coalition. Nonetheless, under President Kibakis leadership, Kenya began an ambitious economic reform plan, which promised reduction of government, privatization of state-owned companies and deregulation of select industries. Some of these ideas were quickly legislated. However, in general, related progress has been slow. Widespread corruption continued to be a problem in modern Kenya, resulting in low investor confidence and insufficient foreign aid. President Kibaki and his administration committed to fight graft by signing the Anti-Corruption and Economic Crimes Act and the Public Ethics Act in 2003. However, these efforts were not enough to overcome the modus operandi for many government officials. In 2006, two major government corruption scandals led to the resignation of three ministers. As a result, the World Bank suspended aid for most of 2006,1 and the IMF delayed loans. Officials noted that the disbursement of funds would remain on hold until the Kenyan 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 infrastructure compared with peer countries in the region. Although historical growth has been uneven, the country has been on more solid economic footing since 2002. GDP growth rates increased from 2.8 percent in 2003 to 5.8 percent in 2005 (see Exhibit 1). Sectors such as tourism and telecommunications expanded quickly during this timeframe and the trend appeared likely to continue. The energy, construction and manufacturing sectors also grew steadily. In the banking sector, asset quality strengthened and improved credit risk management contributed to an increase in overall profitability of banks, with an average return on equity (ROE) of 24.4 percent in 2005. Despite the progress, poverty and inequality remained at high levels. In 2006, approximately 23 percent of the population was still living on less than $1 a day,2 and 58 percent on less than $2 a day.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 42 percent of the countrys income, while their poorest counterparts received less than 1 percent.5 Kenyans began to demand the right to education in the early 2000s as a step toward higher quality of life. In response, the government introduced free primary education, which increased school enrollment by almost 70 percent. However, fees continued to be required in secondary
World Bank loans had been reinstated by October 2006. These 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 they cannot meet basic survival needs (e.g. food, water, clothing, shelter). An estimated 1.1 billion people worldwide live under these conditions. Roughly 2.7 billion people live on $2 per day - the World Banks definition of living in moderate 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
2 1

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and higher education. In addition, the high demand that existed for university-level education was not matched by local supply. As a result, large numbers of students had to leave Kenya in order 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, women still comprised 70 percent of the illiterate population in the country and many laws, including one that prohibited women from owning or inheriting land, continued to enforce a dual standard for men and women. Unfortunately, education and gender were just two of the hurdles faced by Kibakis administration in the effort to improve living standards of the Kenyan people. Other challenges included a life expectancy of just 48 years, due in part to poverty, violence and a 7 percent 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 been accessible to the impoverished entrepreneurs who comprise most of the worlds working population. Instead, informal systems and relationships, including neighbors, and rotating savings/ credit clubs, have filled this gap. While similar solutions have worked for some and are often the only option available, they can be inconsistent and unreliable during times of tremendous need. In addition, poor entrepreneurs can become trapped in vicious cycles of borrowing from local moneylenders, who may demand exorbitant interest rates. Traditionally, banks were unwilling to provide loans to poor entrepreneurs due to the perceived risk. Common concerns included the fact that the unbanked were often illiterate, had no collateral, 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 microfinance movement, bucked conventional wisdom and loaned the equivalent of $27 of his own money to an entire village of poor craftsmen in Jobra, Bangladesh. After all of the borrowers repaid, he repeated the experiment with more villages, and over the years, grew his series of experiments into 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 and Opportunity International were also emerging, basing their work on the same bold ideas as Yunus: that the poor could reliably repay their loans, with interest, and could use the profits to grow their businesses. Mission-driven, nonprofit MFIs also emerged. These organizations tended to pursue very rural or 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. Microfinance products 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. To widely varying degrees, NGOs would subsidize and/or pass along the higher costs associated with their in-depth services to clients. A common theme among these MFI providers was immediate 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 an important component to the profitability of MFIs. Interest rates worldwide center around 35 percent, and are ideally similar to local credit card interest rates. Loan repayment periods are relatively 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 Africa may 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 loan plus interest within a matter of months. MFIs also typically require borrowers to become part of a lending group that serves as a self-reinforcing community of support, encouragement and accountability. Most borrowers of microcredit loans are women. In 2006, just over 3,100 microcredit institutions reported reaching 113.2 million clients, 81.9 million of whom were among the poorest 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 about reinvesting 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 originally a provider of mortgage financing for the majority of Kenyans who fell into the low income population. The societys logo, a modest house with a brown roof, was meant to resonate with its 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 of friends of the founders, who did the latters bidding rather than provide professional oversight.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 percent required by law.10 Yet, unwilling to give up, the board of directors began an eleventh hour turnaround effort, which dramatically shifted the business strategy and led to the companys rebirth.

6 7

The Microcredit Summit Campaign: 2006 Report. Microsave, March 2007. 8 Kenyan shilling. The exchange rate in July 2007 was KSh 67.12 to US$1. 9 This ratio measures cash and liquid assets against deposits. 10 Graham 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 Kenyan organizations. EBS also began recruiting externally for key senior management positions, in order 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 build technical skills and boost confidence and 3) delegating responsibility, creating incremental challenges and rewarding performance. After becoming CEO in 2004, Mwangi continued guiding Equitys transformation from a mortgage financing provider to a savings and loan institution, a path completed on January 1, 2005. In August 2006, Mwangi also oversaw the banks 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, while also 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 that firmly committed staff and management to the micro-finance sector. New and existing executives and staff received self-awareness and management skills training that created a fresh appreciation for their ability to effect change within the microfinance market. The training provided an understanding of the microfinance sector and the enormous benefits their work could bring to Kenyan communities. Together, these changes paid off. From 2000 to 2006 the companys pretax profit grew at a compound annual growth rate of 79 percent, from KSh 33.6 million 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 providing banking 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 the preferred microfinance service provider contributing to the economic prosperity of Africa. While resoundingly for-profit, Equity also retained a passionate commitment to empowering Kenyas poor to improve their livelihoods and prospects for self-sufficiency. Industry experts routinely cited EB as the best bank in retail banking12 due to, among other factors, their customer dedication and talented management team. In addition to enjoying widespread recognition domestically, the company began to attract international attention, as other developing 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.

11 12

African Alliance, Kenya Banking Industry Review: Sector Report, April 19, 2007, p. 49. Market Intelligence 2006 Banking Survey.

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Deposit Offerings Equitys deposit products included accounts for personal, business, church and institutional savings, current accounts, call and fixed deposits and a product called Jijenge13 that helped customers 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 standard offerings was tailored to the previously unbanked segment of the market. While multi-national institutions 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 an account at Equity Bank.14 Minimum balance requirements were waived entirely, as were account 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 regular fees 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. In order to cover the interest expense and earn a profit, the bank created four types of loan products with 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 the profile of its borrowers and the focus on microcredit (see Exhibit 2). Equity made loans available 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 by specially trained branch credit officers. In 2006, EB loans ran from KSh 500 to over KSh 50 million depending on each applicants ability to repay. Rather than apply the conventional banking wisdom that pre-existing property was necessary to back credit outlays, EB management and employees committed to finding flexible sources of collateral to back loans. For example, salary advances were secured directly with ones employer through an automatic paycheck transfer. For self-employed entrepreneurs, personal belongings, including marriage beds, were sufficient to qualify. This approach helped open the market to creditworthy candidates who had previously been considered unbankable. As Alex Muhia, general manager and personal assistant to the CEO, stated, The majority of Kenyans

13
14

A Swahili term for build oneself. This card is similar to a drivers license in the U.S., but contains more identification information.

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will not be able to give you a title deed or car log book. Especially womenthey cant offer you anything. But when it comes to loan repaymentwomen are the best. Branches Since 2002, Equity Bank managers pushed to scale as quickly as possible. The number of branches expanded from 13 in 2002 to 42 in 2006, with 70 anticipated by 2008 (see Exhibit 3). This was a significant roll out, given that Barclays Bank of Kenya (Barclays), the largest financial institution in the country, only had 58 branches in 2006. Equity had three types of branches: regular for their core individual and small business clients; mobile for rural customers living in areas for which a permanent location was not yet economically viable; and prestige for Equitys emerging affluent segment who had grown with the bank over time. Regular Branches The typical branch had two floors, each one dedicated to a specific type of customer. The bottom was reserved for individual customers, while the top was designed for corporate clients. Equity split its clientele to offer more privacy to business customers, who tended to make larger cash transactions. All visitors chose from four main destinations (available on both floors): Tellers primarily managed balance questions, withdrawals and deposits. Credit Officers assessed credit-worthiness, offered loans and closely monitored the quality and size of their portfolios. Customer Service answered questions, addressed and monitored complaints Account Openings processed National IDs and other information to set up each deposit account holder.

Customers could also visit the branch manager without an appointment, an unusual level of accessibility in Kenya.15 Equity had an average of 24,238 customers per branch in 2006, which was very high relative to the industry average of 6,383 clients per location. Due to the volume of accounts, Equity branches often had cramped lines of at least 35 customers snaking through the building. As a result of increasing customer complaints, the bank installed over 120 ATM machines throughout the country, more than any other bank, to enable automatic withdrawal and deposit. By mid2006, ATMs accounted for over 40 percent of withdrawals. In order to further decongest the banking halls, Equity then introduced two additional alternative banking methods; Internet and mobile phone banking. Both offered the ability to check balances and transfer funds between accounts, among other services. Customer uptake of these locally unconventional methods was slow to moderate, and most permanent locations continued to have a significant amount of foot traffic. To further reduce considerable crowding, bank managers also began exploring point of sale banking (e.g. drawing cash at the supermarket check-out).
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Incumbent banks regarded visits with branch managers to be an honor for customers, awarded when they signed large loans. An open-door policy for branch managers was largely unheard of when EB established the practice.

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Mobile Branches EB outfitted branded, armored trucks to serve as mobile branches in rural locations that did not yet have enough foot traffic to support a permanent location (see Exhibit 4). A mobile branch manager and staff would drive in the banking van to one of five sites each week, returning to the same 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. EB expanded security for these automobiles (when car jackings became more frequent in the early 2000s) 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 a customer segment that became relatively wealthy over time. These clients began to approach the level of personal net worth at which the multinational banks became interested in banking them. In order to stave off the competition, and better serve customer needs, Equity created two prestige branches. These locations offered largely the same products as regular branches, but customers had to maintain a minimum balance of KSh 50,000 to be eligible. As a result, the banking halls had a very different feelquiet and spacious, well-appointed with comfortable seating where visitors could watch TV, refreshments were provided, and the surroundings looked new and well-maintained. EB staffed these branches with bank employees who had demonstrated 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 place to prevent robberies and other disruptions. Armed guards were stationed in every branch. They also played a secondary role of directing foot traffic inside the banking halls. All vaults were protected by a series of electronically-operated doors and gates. Enterprise and prestige clients had their own dedicated cashiers who worked in separate cubicles with lockable doors. Equity officials 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 banking services had been manually processed. By 2004, BR began to show signs of stress like hanging due to the banks dramatic customer growth. In addition, it could not handle the introduction of ATMs. Bankers Realm consultants were almost permanently stationed at the banks headquarters to manage capacity issues and hold the system together. After customer and branch complaints increased, Equity began a concerted search for a new IT system. 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 team invested KSh 650 million into a three-part system that had plenty of room to scale as Equity grew. 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 corporate banking and trade finance. It linked the branches, ATMs and mobile banking channels back to the 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 openings and cash transactions went from requiring 25-30 minutes to 5-10 minutes, which meant that customers spent less time standing in line.16 Transaction (e.g., phone, postage) and branch expenses both dropped,17 fast data centralization enabled faster account reconciliation and Equity Bank was able to respond more nimbly to demand for innovative products.18 In addition, Finacle seamlessly 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 offering exemplary 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). These average Kenyans, roughly 80 percent of the countrys population, often lived below the poverty line as defined by Western standards. The firms positioning statement summed up the brand attributes it used to appeal to this formerly unbankable population: Equity Bank provides accessible, customer-focused banking services for microfinance clients to meet their aspirations for today and tomorrow. Unlike other financial institutions, Equity is down-to-earth and friendly. 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 revolved around cultivating mutual trust with target customers. Since the industry downturn of the mid1990s, this market segment had been wary of re-joining formal banks. The large, multi-national institutions that preceded Equity had created a damaging halo effect when they pulled branches out of the less profitable rural areas with only cursory notice to customers. Not only was it of practical concern that these communities no longer had a safe place to secure their savings and acquire credit but, as Winnie Kathurima, change and corporate affairs director, noted, it also hurt the self-esteem of many people to receive letters that said sorry, youre not our customer any more. Equity endeavored to fill the vacuum by being market-led. As Kathurima mentioned, We go out 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
Microsave. Redundant employees were deployed to new branches rather than being laid off. 18 For 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 educate potential clients about its offerings. In order to best reach locals, EB representatives set up booths in open air markets, hosted free mass public financial training and education days (see Exhibit 6) and established a presence at community agricultural trade fairs.20 They also conducted focus groups discussions and surveys. Once newcomers decided to visit a branch, the marketing effort continued. All branch employees 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. In addition, the branches showcased posters and fliers that further described EBs products and services (see Exhibit 7). To a lesser extent, the bank also funded radio spots in local dialects and signage on lampposts in socio-economically depressed areas.21 In describing core aspects of Equitys brand, including modesty, accessibility and passion for customer service, Mwangi recalled a story, now embedded within the banks lore, of an 80-yearold 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 opened our first savings account. And after some time we went and borrowed 10,000 shillings, and we bought a heifer which was almost ready to calve. And after some time the heifer calved and now my wife, like other women, is able to take milk to the factories. And today we dont have to rely on my children, and we are able to meet our expenses. Three years ago, we struggled. Now we have bought a piece of land where we reside and we are fine. Mwangi asserted that Kenyas low-income population derived much more than financial services from having a bank specifically tailored to them. He noted: We bend over backwards for our customers. And the banks accessibility gives them a strong sense of fellowship. Our customers say, We have forever been excluded, but now theres a bank able to accommodate usthis is where I belong. And that feeling of community and partnership gives them a very strong sense of pride and self-esteem. Equity linked those positive feelings to the banks high levels of customer advocacyover 50 percent of new customers were convinced to join by another account holder. Financial Performance After Mwangi took over as CEO in 2004, the number of deposit clients more than doubled within 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
Popular 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 33 percent 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 it only 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 a typical customers account at larger banks including Barclays and Kenya Commercial. Yet, the bank gained 14 percent of new deposits in 2006. Although some industry commentators feared an increase in non-performing loans (NPLs) as the EBs asset base increased, the quality of the loan book as represented by the ratio of non-performing loans and advances to gross loans and advances 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, with the biggest increases in the last two years (see Exhibit 10). Yet, although annual management expenses increased by 85 percent from 2004 to 2005 and by 78 percent from 2005 to 2006, this line item stayed relatively constant as a percentage of net revenue. Helped by EBs comparatively attractive spread between lending and savings rates, Equitys profit before tax increased even faster than sales during this six year time period, from KSh 33.6 million in 2000 to KSh 1.1 billion in 2006 (see Exhibit 11). Equitys operating margin was 22 percent in 2006, somewhat below the larger players such as Barclays and Standard Chartered, but also comfortably above other medium-sized players, including the Cooperative Bank of Kenya. In general, Equity exercised fiscal discipline, for example 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 bank itself. He and his executive managers maintained open door policies, even as the organization stretched beyond 1,000 employees. As Equity evolved from a family-run to a professionally managed institution, the bank began to explicitly celebrate meritocracy. The top 10 percent of performers 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 other multinational institutions. Every employee was placed on a six-month probation so that cultural fit could be assessed in real time. Individuals who did not actively uphold the companys values were soon counseled out. Employees at every level, both at the corporate office and within the branches, shared a firm commitment to customer service. Equitys secondary role as an indigenous community-building organization (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 positive and non-exploitative manner. Nonetheless, as the bank evolved, HR managers ensured that salaries and benefits were in line with the rest of the industry. Medical care and pensions were part of most compensation packages and an employee share ownership program (ESOP) was
22 23

Equity Bank 2006 Annual Report and Financial Statements, p. 10. African Alliance, p. 24.

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also offered. Staff also received extensive training. Equity managers expected that these activities would directly benefit their clients. Peter Lengewa, head of human resources and organizational development observed, Investing in our employees is a prerequisite to exceeding our customers expectations. Key Risks and Threats James Mwangi expected that EB would have to face two main challenges in the future: increased competition and threats to EBs unique culture. Increased Competition By 2006, Equity Banks fast growth and successful financial performance attracted the attention of other players in the market. In addition to the larger MFIs, Equity also had to compete with international financial behemoths including Barclays and national players including Kenya Commercial Bank (KCB) and the Cooperative Bank of Kenya (Co-op). These banks all signaled an intention to begin targeting poor Kenyans. Mwangi noted that increasing competition could potentially result in a price war or higher marketing spendboth of which would depress Equitys margins. EB could even be a hostile takeover target, should one of these enterprises attempt to buy their way into the sector, as opposed to building out the infrastructure to accomplish it in-house. Finally, in what had become a tight labor market, Barclays, KCB and Co-op had all made overtures to some of EBs carefully trained staffhighlighting that it could become more difficult to hold on to star performers. Threats to Culture A second key threat was the ability to stay client-focused as the bank expanded both the number of branches and the staff to run them. Equity had deliberately cultivated its brand and culture over more than a decade of operations. It was becoming more challenging (yet no less important) to instill the customer-service values in each new employee, and to monitor their performance in exhibiting these values. As growth continued at an accelerating rate, Mwangi thought that replicating the customer experience in increasingly far-flung locations would be tricky. It was difficult for regional managers to travel to some of these locations. In addition, although Kenya had made substantial progress building out infrastructure, basic business needs including a constant supply of electricity and access to the Internet, continued to be only inconsistently available throughout the country, somewhat limiting smooth and regular communication. THE ROAD AHEAD As Mwangi neared his house in the suburbs of Nairobi, he reflected on the fact that Equity Bank had already succeeded beyond his wildest dreams. But he was not content to stop now. The future lay in international expansionfirst to East African countries including Uganda, Tanzania and Southern Sudan, and then around the globe. When addressing the audience earlier that day, he had said, Great organizations are built on scalable systems and structures. We now have that infrastructure in place and are ready to roll out branches anywhere in the world. Yet, he also wondered what other aspects of EBs strategy to date could and should be replicated internationally as the bank continued to make history.

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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 (%)

Source: African Alliance

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Exhibit 3 Number of Equity Branch Locations

70

56

42 31 22 10 12 13 16

2000

01

02

03

04

05

06

07E 2008E

Source: Equity Bank

Exhibit 4 Village Mobile Banking

Source: Equity Bank

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Exhibit 5 Equity Banks Loan Book 2005-2006 KSh 000s

Category Agriculture Consumer Micro Enterprise SMEs Corporate Total 2006 499,271 2,098,183 2,476,035 2,335,462 4,019,722 11,428,673 2005 206,430 1,528,542 510,635 529,522 3,110,157 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

1014

556
413 252 155 105

2001

02

03

04

05

2006

Source: Equity Bank

Exhibit 9 Kenyan Banking Sector Deposit Share (%) in 2006 100% = KSh 625 billion
Barclays
15

Other

45

Kenya 12 Commercial

10

Standard

Housing Finance

4 13 3 3 4 National Bank NIC Bank

Equity

CFC Bank Diamond Trust

Source: African Alliance

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Exhibit 10 Growth in Staff Numbers

1394

884

530 354
165

210

2001

02

03

04

05

2006

Source: Equity Bank 2006 Annual Report

Exhibit 11 Condensed Equity Income Statement: 2000 2006 KSh 000

2000 65 77 142 82 16 10 108 34 16 18 Equity Building Society 2001 2002 2003 105 197 257 125 171 306 230 368 563 131 191 319 32 40 51 12 25 51 175 257 420 55 111 143 23 37 45 32 74 97 2004 396 640 1,036 563 84 171 818 218 82 136 Equity Bank 2005 2006 866 1,508 937 1,864 1,803 3,371 1,040 1,856 138 280 124 133 1,302 2,269 500 1,103 156 350 345 753

Net Interest Revenue Comm./ Other Revenue Total Operating Revenue Mgt Expenses D&A Provision of bad debts Total Expenses Profit Before Tax Tax Profit After Tax

Source: Equity Bank 2006 Annual Report