BANKING THE UNBANKED – Taking Microfinance to the ...

You may recall that we recently wrote about M-PESA, Kenya’s mobile phone banking service from its leading mobile operator, Safaricom (Dial M for Money).It is a truly fascinating story and a great example of the creative forces that are driving Africa’s stellar economic growth. The mobile phone is having a dramatic effect on the lives of Africans and is proving to be a life transforming device.

Limited by weak physical infrastructure and supported by their ingenuity, the people of the continent are turning to the mobile phone to improve their living standards. From a mere 1 million cellular phones in 1996, Africa is now estimated to have over 278 million subscribers.

This week, with the help of Funmi Akinluyi, our Investment Director for Sub-Saharan equities, we focus on Equity bank, and how they have used telephone banking technology to take micro finance to the next level.

As is true for most countries in Africa, Kenya’s success will very much depend on bottom-up entrepreneurial activity. Access to money is crucial and it will allow entrepreneurs to turn ideas into action. Microfinance plays a leading role in this development story.

Equity Bank was originally set up as a building society in 1982. Its focus was to serve the unbanked population in Kenya. Currently, over time Equity Bank has arisen to be one of the most successful microfinance houses in Africa with around 4.6m account holders in both Kenya and Uganda. The bank expects to grow its customer base up to 10 million account holders by the end of 2010.

It is very likely that Equity Bank will achieve this, especially if we consider the synergy that will be created with the introduction of the M-PESA product in collaboration with Safaricom, which has about 8.5 million subscribers. In other words, these million of mobile phone users will be able to seamlessly start banking with Equity Bank by the mere use of their mobile phone device!

In Kenya as in the rest of the African continent, there are large percentages of the population that don’t have bank accounts, in Kenya the ‘unbanked’ population is just under 40% of the total population. This number lies very much in line with the developing world, where banking penetration rates are typically between 30 and 50%. As with many things, it is difficult to generalize these numbers for a continent of 54 countries such as Africa. According to World Bank Policy Research Paper 5020, banking penetration in South Africa is just above 40%, while in most of East Africa this number lies below 20%. While Kenya seems to be better off that most of these places, it could be template for providing more people with access to financial services in these countries.

As in ‘if Mohammed won’t go to the mountain, the mountain will come to Mohammed’, Mobile banking could be the much sought after solution for banks to reach potential customers and will probably serve as a standard for banking in other African nations, who are equally trying to raise banking penetration ratios. In Kenya, 22% of the population already uses M-PESA for banking and this number is growing very rapidly. With regards to the industry in general, it is needless to say, the unbanked millions – Africa has just over 200 million unbanked households – constitute an enormous profit potential for banks.

Equity Bank is also known as having been very successful in the microfinance space and it has received awards ranging from best Microfinance Institution to Best Bank in Kenya from Euro money, Superbrand and Africa Investor.

Equity Bank’s products range from SME (Small and Medium sized Enterprise) lending, microfinance and agribusiness loans to mobile banking accounts such as the ‘Eazzy Banking’ and its newest product called ‘M-KESHO’.

Equity Bank’s partnership with Safaricom’s M-PESA has created the M-KESHO service which is a bank account designed for Safaricom’s 8.5 million M-PESA users. M-KESHO gives the account holder the opportunity to deposit and withdraw money from their account using their M-PESA account with Equity Bank through their handset. The account also allows the holder to apply for small amount loans ranging from Kes100 (Eur 1) to Kes 5,000 (EUR 50) via SMS Text messages. Although we expect that some of Equity bank clients may already have M-PESA account, we believe that the synergy will still give Equity Bank the opportunity to covert many more M-PESA users over to Equity Bank account holders using M-KESHO.

Even with the proposed amendment of the Microfinance Act which is expected to enable 3rd party agents for deposit taking will increase competition for Equity Bank, on the other hand, the bank’s access to Safaricom’s 17,000 M-PESA agents, it is fair to anticipate that Equity Bank will continue to grow its already significant market share in the microfinance sector.

We believe equity bank has a few strong competitive advantages:

• A very experienced management team
• The most advanced ICT Platform in the banking sector in the country
• Continued to expand outside Kenya, The bank is currently looking at expanding into Southern Sudan.Its operations in Uganda have already contributed to roughly 25% to the bank’s overall revenue
• Although Equity Bank has been very successful in unbanked sector, we believe that its partnership with Safaricom will see it take up further market share from other microfinance houses.
• M-KESHO will provide its customers with access to micro-loans within the space of a few minutes, most competitors still have a process where loan approvals can take several days.
• Large growth opportunity: The unbanked population in Kenya has a penetration of only 38% of which only about 1% are users of microfinance.