This guest post is by Michael Abrahams, General Partner of the New Markets Financial Fund, L.P.
While Kenya’s safari and ecotours remain more popular, banking tours may soon catch up. I’ve just returned from a self-guided tour of that country’s banks and came away impressed by the innovation, social impact, and profitability of banking the un- and underbanked there.
In Nairobi, I met with both commercial banks and non-profit microfinance institutions. The companies included:
- Equity Bank (EQBNK:KN), a global leader in banking the unbanked with creativity and innovation. At its launch, Equity’s management focused on answering a simple question: How can we lower the consumers’ cost of entry to banking? While the bank now has a broader ranger of offerings, with some strength in SME lending, 60% of new customers are still from the ranks of the unbanked. Now with 6.7 million customers, the bank has cut costs and improved access by offering a low cost, flexible back office system and a focus on mobile phone banking, whose costs are approximately a tenth the cost of a branch-originated transaction. Equity has also developed a low-cost agency system to serve customers in rural areas. These agents are self-employed individuals (often operating out of their own retail stores) who are trained to provide Equity’s basic banking services, particularly in deposit-taking and small balance lending.
- Family Bank is a company founded in 1984 expressly to serve the underbanked. Although their average deposit is only $200, Family has $160 million in deposits and 61 branches. The company is not yet listed but expects to debut on the Nairobi Stock Exchange shortly.
- Co-op Bank (COOP:KN) was established in 1965 by tea, coffee and sisal farmers whose cooperative savings groups could not obtain banking services. Cooperatives are widespread in Kenya, and much of Africa, and they remain about 20% of the bank’s business. The bank has an active consultancy devoted to helping in the formation of new cooperatives as well as assisting existing co-ops flourish.
How profitable are these banks? Very. The two publicly traded banks, Equity and Co-op, have returns on equity exceeding 25% and show growth in both loans and earnings per share in excess of 40% annually. Family Bank, not yet publicly traded, is not quite as profitable as the other two banks or showing as rapid growth through year-end 2010 but is still doing very well.
Perhaps the most revolutionary banking product in decades is M-Pesa, transaction banking through simple 2-G mobile phones, which has spread like wildfire in Kenya. Following the introduction of M-Pesa by the mobile provider Safaricom (SAFCOM:KN) in March 2007, it is now utilized by 14.9 million people, or 65% to 70% of the adult population.
And this is not the very limited mobile banking service found in the US, but a full range of transaction services, including the purchase of goods and services, remittances, and bill-pay. For M-Pesa customers who link their phone to a bank, particularly the three above, a full banking platform is available including interest-bearing savings accounts and credit.
Innovation is not limited to cell phone banking. Seventy percent of Kenya’s 41 million people work in agriculture, typically very small-scale farming. Historically, banks have lent little to this sector because of its high risks, in part due to the highly volatile nature of crop production and prices.
Currently, Equity, Co-op and Family Bank are testing the use of index-based crop insurance, a low-cost insurance that will provide farmers a payout should total rainfall come in below some threshold level. This insurance, sometimes combined with forward purchase agreements for farmers’ crops by large financially sound buyers, will substantially reduce risks to borrowers and lenders, permitting an expansion of credit to this large sector.
New developments in mortgage lending are permitting lower income borrowers to build a roof over their heads. We met with Select Africa, a subsidiary of African Alliance, a leading pan-African securities firm, who provide incremental mortgages to their customers. Incremental mortgages are structured to safely and soundly meet the repayment abilities of lower income consumers.
The poor in much of Africa often build a home over years, first acquiring land, then building one room at a time with much of the labor provided by the owner. Now, some lenders are financing each stage, with each loan maturing in about two years and a new loan being granted only after the first is paid off. For example, a borrower may borrow enough to build the framing and roof, payoff that loan over time and then take out a new loan to finance the construction of outer walls. While it may take some years to finish the home, the financing never becomes overwhelming to the borrower. The loans may be as small as US$800 or as large as US$3,500. In addition, only days ago, Equity Bank announced their partnership with a Kenyan building supply company. Equity Bank will provide micro-mortgages to enable borrowers to purchase building construction materials for as little as US$2,000.
I left Kenya very encouraged by the financial institutions I had met. Unlike banking in much of the US and Europe, financial institutions are designing and introducing products that meet the needs of their customer base. Because so much of that potential customer base has been un- and underbanked to date and because that base is so large, the banks are having a huge positive social impact and have tremendous growth potential. It is really impressive to see what banking can be.
[Editor’s Note: Read more about Mike Abrahams’ approach to investing in Africa’s banks in this interview.]