Equity Bank: A New Approach to Banking for Small Businesses

More than 95 per cent of Kenyans earn little from either micro-enterprises or what might be described as "micro-jobs." But if Kenya is to develop, micro-enterprises must be transformed into large, wealth creating businesses with capacity to create high paying jobs.
And access to financial services and finance is central to this economic transformation strategy. This is where Equity Bank, the most successful indigenous bank, steps in. Its mission is to create that change. But how is it going about it?EMMA MULI, Investment News Editor, discusses Equity Bank's strategy and successes with DAVID MUKARU, the bank's head of microfinance sector.

Equity is more than traditional bank. It is a bank takes risks in order to create change-positive change for the Kenyan entrepreneur and the country.

Mr. David Mukaru, the bank's head of microcredit sector says the bank's business strategy is based on creating change in provision of banking services. "It's all about change. Change must be made to happen if this country is to begin making wealth. Businesses must take risks in order for them to grow."

Equity takes risks to grow its business by providing financial services to the traditionally unbanked in the society-the people "at the bottom of the pyramid" as the bank puts it, and it takes risks to develop the entrepreneurs in this group to grow their enterprises into wealth-generating, viable businesses.

Mukaru says many Kenyans are engaged in micro-enterprises such as hairdressing, radio repairs and wedding card-making. These are entrepreneurs who avoid using banking services. They, in fact, see the traditional bank loan, with its emphasis on collateral, as the beginning of financial problems for entrepreneurs who get it. The result is that even among the bankable 23 per cent of them only 1.8 per cent have bank loans.

Mukaru explains, "Access to affordable financial services is a big problem for most Kenyan entrepreneurs. Even if you put together all the avenues of accessing finance - including the Shylocks - you still have 59 per cent of Kenyans without access to finance and financial services. Available statistics show that most banks and micro-credit organizations have been sharing customers, giving the wrong impression of a high percentage of banked Kenyans."

In order to change attitudes and profitably provide banking services to this large and untapped group of Kenyan entrepreneurs, Equity Bank has adopted the following strategy:

Redefining and Demystifying Banking

Demystifying of banking started with conveyance of new, positive messages to the public who were reluctant to join banks given the past unfriendly experiences," says Mr. Mukaru. The components of the message were outlined by Dr. James Mwangi, the bank's Chief Executive Officer, during his address to the bank's shareholders at last year's Annual General Meeting. He cited professionalism, integrity, creativity and innovation, team work, unity of purpose, respect and delight for customer care and effective corporate governance as the values behind Equity's approach to business. "The values describe a management empowered to understand and create change," he said.

Strategy starts with understanding the limitations of traditional banking. Mr. Mukaru says, "Traditional banking has been limited to credit services." And this, according to him, is the source of fear that most Kenyans have towards banks.

Equity Bank worked on changing this by establishing rapport with its customers. Unlike other banks, Equity established non-financial services which it considered more urgent for micro and small business owners. They included teaching the entrepreneurs how to find and develop markets for their products, how to brand their products, how to cost their products and book-keeping.

Mr. Mukaru says, "There has been a mistaken idea that businesses need only credit to grow." The truth is that eight out of every 10 businesses started in Kenya fail in the first year because of non-financial reasons. In other countries, says Mr. Mukaru, these services are provided by the government. In Kenya, however, the government has not put in place business support structures for entrepreneurs. The need for these structures is underlined by the fact that the strategy brought in a large number of customers to the bank in less than two years, according to Mr. Mukaru. Over the same time, the bank dispersed loans amounting to more than Sh5 billion to youth and women groups.

In deed, "Fanikisha" a women specific loan targeting micro-enterprises and small business, has become the flagship of the bank, says Mukaru.

De-emphasizing collateral

The second element of change involves the lending policy itself. The purpose was to de-emphasis traditional collateral that had earned banks a bad name among micro entrepreneurs. Guided by the principle that you must take risk in order for business to grow, the bank went about creating lendable units by initiating a training programme "tailored to meet the different needs and levels of knowledge of our clients," according to Mr. Mukaru. "Individual entrepreneurs were brought together in groups ranging from 15 to 30 that guarantee each other for loans, thus eliminating the need for collateral."

Training

To minimize risks, the bank developed a two-level training programme for the groups. "We have tailor-made our training to meet the different needs and levels of knowledge of our clients," says Mukaru. The first level teaches group dynamics to ensure the groups are cohesive. Members are trained to understand responsibilities and duties and to develop a group vision. This encourages discipline because members are required to attend meetings and to fully participate in discussions. "This encourages both discipline and trust among members," says Mukaru.

The second level is enterprise training. This involves business development, bookkeeping, marketing and costing. In order to strengthen its services, Equity bank is working with donors and organizations such as United Nations Development Programme (UNDP) to further training and mentorship programmes for different levels of business in a ladder-like manner starting with micro enterprises. However, Mukaru is quick to point out that the bank prefers to "work with donors given the immense wealth of information that they have and structures that they have created that make it easy to penetrate."

Increasing Accessibility to Banking Services

In order to encourage use of banking services, Equity Bank has introduced a variety of savings products - a service that industry experts say is "a more crucial micro-finance need," even more important than loans. The bank has also done away with account opening obstacles such as opening fees, minimum balances, ledger fees, monthly charges and requisition of photos to open an account.

"Our loan interest rates are far below what the competition offers," Mukaru says. "Competition" he says includes providers of formal and informal financial services such as roscas and shylocks, the traditional source of financial services to the micro-enterprise sector.

In addition, by using technological innovations such as ATMs and points of sale agents, the bank has increased access to its services. The latter is especially useful in remote rural areas outside bank branch network. Agents are provided with technology that can facilitate withdrawal and deposit of cash. Thus, low income earners and micro-entrepreneurs don't have to travel long distances spending money to reach a bank.

Partnering with Service and Product Providers

To further assist micro-entrepreneurs, Equity Bank is partnering with service and product providers in the sector to ensure proper chain link. According to Mukaru, if a link is missing in a chain, chances are that a business will not succeed. A good example is its memorandum of understanding (MoU) with the agribusiness firm Amiran in provision of greenhouses and irrigation technology to farmers in a project targeted to reduce dependency on rain-fed agriculture.

Another good example of this approach to banking by the Equity Bank is the Hola Irrigation Scheme. Stalled in 1980s for lack of credit to the poor farmers, Equity Bank initiated a programme to revive the scheme. And for the first time in 23 years, the farmers and villagers are laughing all the way to the bank with bountiful harvests.

Appreciation by Kenyans has been overwhelming. Today, Equity Bank has more than 4.5 million customers, way ahead of its nearest competitor with only a half a million customers.

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