Three million customers and still counting: the bank getting rich by helping the poor

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By Xan Rice

Homegrown lender draws in customers shunned for decades by multinationals

In his 14th floor corner office overlooking the city, James Mwangi sits at the very top of Kenyan society. He got there by understanding the needs of those at the bottom.

Mwangi is the CEO of Equity Bank, a homegrown company that has turned the financial services industry on its head. For decades multinationals such as Barclays and Standard Chartered dominated Kenya’s banking sector by focusing almost solely on the middle and upper classes. Equity went the opposite way. It targeted the unbanked poor - "the watchmen, tomato sellers and small-scale farmers" whom Mwangi lists as typical customers - with cheap savings accounts and microloans backed by unusual guarantees.

The strategy has proved remarkably successful. In just a few years Equity has gone from being a quirky, fringe player to the third most profitable bank in the country and one of leading companies on the Nairobi Stock Exchange. It claims to have signed up its three millionth customer last month, giving it a 50% share of the Kenyan market for the first time, and is opening 4,000 new accounts a day.

"By focusing on the previously excluded Equity has revolutionised the banking sector," said James Shikwati, director of the Inter Region Economic Network, a thinktank in Nairobi. "It has forced the multinational banks to change their business strategies."

Equity’s improbable story has attracted international attention. Teams from Stanford and Harvard universities have travelled to Nairobi to study its business model, while Mwangi has advised the UN and the Bill and Melinda Gates Foundation on banking in the low-income sector. Last year he even shared a international microfinance award from the Berlin-based Global Economic Network with Muhammad Yunus, the Bangladeshi "banker to the poor" who won the Nobel peace prize in 2006.

But while Yunus’s Grameen Bank has relied on donor funding and state subsidies, Equity is a purely commercial venture.

It rose from difficult beginnings. Established as a building society in 1984, it was technically insolvent when Mwangi, an accountant, joined a decade later. Kenya’s economy was sliding, and the likes of Barclays were closing branches outside main towns, shrinking an already exclusive banking market.

Mwangi and his fellow managers realised that there were millions of low-wage earners in Kenya - a demographic economists call "the bottom of the pyramid" - who wanted to save and especially to borrow but were locked out of the financial system. As individuals the customers were not worth pursuing, but as a block they represented a huge, and potentially very profitable, market.

"Banking was the only industry in Kenya led by supply rather than demand," said Mwangi. "There was no ’bottom of the pyramid bank’."

That’s what a refocused Equity became. By 2003, when the economy began to pick up and bank launched an aggressive expansion drive, it had 256,000 account holders. While building up its network - there are now more than 100 outlets nationwide and 500 ATMs - Equity sent out armoured trucks into rural areas to serve as mobile branches. Traditional banks required payslips and utility bills as proof of address before opening an account with high minimum balances and monthly fees. Equity only asked for an ID card.

Within a year Equity had 600,000 account holders, and the growth trend has since continued. Most had never held a savings account - Equity’s competition is the mattress, Mwangi said. The typical savings account balance is about £100.

Even more important for profits - and to potential clients - was the microcredit operation. Loans can be for less than £5, repayable in just a few months. Since many of individual customers work in the informal sector and have few assets of value, the loans are often backed by what the bank calls "social collateral".

This can include account holders grouping together to guarantee an individual’s debt. Women can offer up their matrimonial beds as security; the theory being that no wife is going to want to tell her husband that their bed is gone.

"For us it’s psychological security. Nobody wants to be excommunicated and lose their inheritance to the Kingdom," Mwangi said. The bank claims that its unconventional credit risk strategy is proven, with a default of less than 3% on 600,000 outstanding loans, compared with an industry average of 15%. As with mobile phone service providers across the continent, Equity has proved the viability of the low-margin, high-volume business model.

With a cutting-edge IT infrastructure keeping transaction costs down, the bank earned £21m before tax in 2007, a return that encouraged the British private equity firm Helios Investment Partners to buy a 25% stake. This year earnings are expected to have more than doubled for the fourth successive year.

Though it was voted Kenya’s third most respected company in November, the bank does have its critics. Some people in the industry have questioned whether the Equity’s extraordinary performance statistics can be believed; Mwangi dismisses this as "competitors in self-denial". Still, experts say a slowdown in growth is inevitable. Mbithe Muema, an equity analyst with Renaissance Capital, said that other banks, including Barclays, were moving into the low-income sector, and would also try to make it hard for Equity to attract more affluent customers. A continued drive to expand its loan book might also increase Equity’s credit risk, she said.

But Mwangi seems unconcerned. He says that Kenya’s unbanked population remains large. And besides, the base of the pyramid is expanding: Equity has started operations in Uganda, and has plans to target Rwanda and South Sudan.

Cash transfers by text

Before the banking boom in Kenya came the mobile phone revolution. Now they are converging. Equity Bank recently launched a mobile banking service. But it is the move into banking by Kenyan mobile phone companies, which have signed up more than 15 million subscribers in under a decade, that has caught the public’s imagination. Safaricom, the biggest mobile service provider, launched a money transfer system in 2007 with Vodafone, its British partner. Known as M-PESA, it allows customers to deposit, transfer and withdraw money using their phones. Already 4 million people have registered for the service, which is cheaper and faster than more traditional cash transfer offerings. In December Vodafone began a pilot project enabling people to transfer money between Britain and Kenya.