Background
Equity Building Society was our first investment, in April 2003 when it was still a Building Society, and it continues to outperform expectations. It obtained a bank license in December, and converted all its assets and liabilities to the new entity - Equity Bank Limited (“EBL”). It now has the largest client base of any financial institution in Kenya, with 20% market share (based on number of clients), and plans further expansion.
While EBL is not a typical MFI, with a focus on attracting savings from new clients among the target market, and less emphasis on micro-lending per se, it has successfully developed a business model to provide financial services to the “un-banked” that carries important lessons for other aspiring MFIs elsewhere in Africa.
Growing the client base by attracting new deposit accounts with no minimum balance and clever marketing and client service, and then charging for a variety of banking services that these customers demand, means that EBL is able to reach break even point on a new client or new branch relatively quickly, and then slowly build the loan portfolio prudently.
Although T-Bill rates have increased in Kenya during the second half of the year, EBL has had to cope with a declining interest rate environment for most of the past 15 months. It has compensated for the drop in interest revenue with increased service fees, which now account for roughly 60% of total revenue, while remaining at or below the levels charged by the main banks.
2004 Highlights
The past year was full of changes and expansion:
The incumbent CEO retired and James Mwangi, previously CFO was appointed Managing Director mid year and soon implemented numerous management changes, in style and substance. The Board was closely involved with this management transition.
The cramped conditions at the old head office became unsustainable, and new premises were secured and the move implemented mid-year. The new space is more expensive, but is already contributing to improved staff morale and productivity.
Significant investments were made throughout the year in additional institutional capacity:
Staff increased from 350 to 550;
8 new senior managers were hired;
Credit policies and procedures were revamped and 20 new credit managers hired;
The IT platform received attention, a Wide Area Network was installed for branch communications, a centralized server and IT system developed, the MIS was enhanced, and evaluation started for a next generation MIS investment; and
New management systems and preparation for operating under a banking license were implemented.
6 new branches were opened, mostly within Central Province, thereby fuelling the client and deposit growth.
After reviewing various options in the fall of 2004 for converting to a bank, including acquiring a defunct bank, the decision was made to apply for a banking license and concurrently raise additional capital. The license was obtained on December 31 and over KSh 720 million (over $9 million) was raised from Kenyan investors.
EBL has maintained its profitability, despite declining interest rates through most of the period and higher operating expenses, and higher provisions. Preliminary unaudited results for 2004 show an increase in net income of about 45% to $ 1.9 million.
AfriCap’s investment
We invested Kenyan Shillings 120 million, @ KSh 60/share, for 16% of the company in April 2003. EBL has about 2,500 shareholders, widely held among Kenyans - clients, staff, and individual investors. AfriCap has been represented on the Board and has contributed actively to strategic discussions, to resolving management issues, and to the continued institutional strengthening of the senior management team.
The recent share issue mentioned above, at a price of KSh 134/share, demonstrates the increase in value of our investment. At that price the value of our initial investment has more than doubled in less than two years, to $3.4 million, representing an unrealized gain of $1.8 million.
TSF Program
Our contribution to the combined TA support from DFID, Swiss Contact, and MicroSave has continued, with a focus on institutional transformation. Priorities shifted somewhat following the departure of John Staley, the Operations Mgr funded by TSF, and consultants for Change Management and Bank conversion have been more active as those issues came to the fore in the second half of the year.
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