Local institutions take on giants as banking crises shake industry

Two banking crises that plagued the nation in 1986 and the 1990s left the industry in a mess.

Who would have foreseen the growth of the surviving local banks to become giants in the region?

As incumbent banks either fled or made rush decisions to cushion themselves from collapse, two institutions rose from building societies into banking multinationals by embracing a micro-financing model that others had looked down upon.

Family Bank and Equity Bank were both established in the 1980s as small building societies.

In the ensuing short-lived African-owned banking boom, and the subsequent banking crisis, both family-owned building societies struggled through non-performing loans and liquidity issues, which threatened their very existence.

As more Kenyan-owned financial institutions were declared insolvent, it became apparent that the experiment with local banks had failed, and the banking sector would remain the reserve of foreign-owned banks and the Kenya Commercial Bank, now simply known as KCB.

The big banks moved to cushion themselves from the cascading failures of the privately-owned banks in the early 1990s by increasing their minimum deposit amounts and the money required to open an account.

Receiving points
KCB and National Bank were also suffering under the weight of non-performing loans, and would only survive liquidation due to government goodwill.

They could not compete with Standard Chartered and Barclays, which arbitrarily raised their conditions to alienate ‘small-time’ depositors.

They ended up keeping away many more depositors, especially salaried ones, for whom banks were receiving points for salaries.

“It was chaos at first,” Solomon Kimani, a 62-year-old entrepreneur in Nyeri, says.

“Suddenly, we couldn’t access the banks and the options were either being declared insolvent or were not trustworthy at all.

The idea of saving inside one’s mattress was not a joke then. There was no choice.”

Equity and Family banks epitomise the few institutions that managed to survive and thrive in that banking crisis.

Neither of them emerged unscathed though. In fact, the then Equity Building Society (EBS) chairman and CEO Peter Munga, first hired James Mwangi to help him wind up the business.

Mwangi became the strategy and finance director when EBS had 27 employees and only five branches.

The building society had a cumulative loss of Sh33 million and owed its employees several months’ worth of salaries. It was the lowest on the financial sector ranking.

A lax in controls and standardisation had driven up the number of non-performing loans (NPLs) to 54 per cent and lowered its liquidity ratio to a paltry 5.8 per cent.

Like many other financial institutions of its kind, Equity was dying.

Turnaround strategy
As the newly established Deposit Protection Fund began to crackdown on firms with such unbalanced books, the EBS chose a turnaround strategy.

The most critical component of the strategy was skilled manpower, and the most valued hire in that endeavour turned out to be James Mwangi.

His strategies and foresight set the pace for rebuilding the building society and transforming it into a successful micro-finance institution.

By 2006, Equity was serving more than a million customers – more than 30 per cent of all Kenyan bank accounts.

It was by then a fully-fledged bank trading at the Nairobi Stock Exchange (now Nairobi Securities Exchange).

Mwangi had risen from director to CEO in 2004. He holds the position to date.

Equity is now the most profitable bank in East and Central Africa and the biggest majority-African owned Bank. It has the largest banking customer base in the continent.

Family Bank followed an almost similar trajectory, setting its eyes also on the mass market.

Its predecessor, Family Finance Building Society (FFBS), had been established about the same time as EBS.

Although FFBS’s transition to Family Bank was slow compared to Equity’s, it also thrived on reaching out to the unbanked masses that had been created by the restrictive conditions in the bigger banks.

According to its website, Family Bank sees itself as a “…financial intermediary, providing superior technology-driven savings facilities as well as affordable loans of all sizes for all kinds of needs, from working capital to school, medical fees, and even food.”

It goes on to assert the fact that none of the mainstream banks would have thought of giving a loan for school fees or food.

In recognising the logic behind the previous alienation of certain socioeconomic demographics, Equity and Family banks placed themselves right in the middle of the fast economic growth.

They guessed that more people would need loans to finance their investments, but would not have enough pre-existing property to raise collateral. Some would need short-term loans at an almost moment’s notice, repayable in a similarly short-term period.

To cater for this market, specially trained credit officers were deployed to all branches, tasked with tailoring loan agreements for individual customers.

The only condition was that one had been a deposit customer for at least six months.

The two followed the micro-finance model, focusing on the lower market segments and relying more on volume of deposit accounts than the amounts deposited in them.

Family Bank hired Peter Munyiri, a former deputy chief executive and chief business officer at KCB, immediately after he left the bigger bank.

Such hires were not accidental. Like that of Mwangi at Equity, they were designed to help the bank skirt the line between profitability and reaching out to the lower socioeconomic segments.
Micro-financing model

An industry analyst quips: “Offering such low terms as Equity and Family (banks) did at a time when the industry prospects were so grim was a gamble.

You could have a million customers with zero in their accounts, and that would mean the model had failed.

But it did not, and now you have a micro-financing model where profitability is based on volume of accounts instead of deposits. If nothing else, it works.”

Equity and Family banks deliberately chose areas from which the more established banks had pulled out. At the height of the industry downturn in the 1990s, the multi-national banks pulled out of rural areas, creating what one case study termed as a “damaging halo effect”.

The psychological impact of this withdrawal, often preceded by a cursory notice to the customers, was that it hurt the self-esteem of clients. In at least one case, in Kiambu town, Family Bank opened a branch in the same premises Barclays Bank had vacated only a few months before.

Equity’s niche was to make sure its deposit conditions were the lowest and most accessible to the previously unbanked segment of the market.

To do so, the bank first did away with the requirement of proof of property ownership and collateral.

All one needed to join the bank was a national ID and no minimum deposit. Bank transactions would cost Sh50 at a time when some of the bigger banks then charged as high as Sh500 for similar transactions.

To deal with the issue of trust, EBS’s transition into a bank was preceded by concerted efforts to encourage employees to buy into the institution and recommend it to their friends and family.

Both Family and Equity banks invested heavily in the use of local and vernacular media, selling their products and trustworthiness from a segment of the population, the largest by far, that could not access or trust the multinationals any more.

Perhaps the biggest change was accessibility of the manager. In multi-national banks that Kenyans had known, the manager’s office was a Santorum, only accessible through an appointment and wait list. Even then, a successful visit was not assured. The new banks worked to change that culture.

Instead of making the branch manager the unreachable overseer, it placed them right in the middle of the action, with their office near the main door and conspicuously lacking a secretary.

This open-door policy meant that suddenly, the depositor with nothing in his account could walk to the branch manager’s office. His financial books did not matter.

The banks cared for the customer, and not just his money.
With this brand image, the banks thrived, attracting more customers in the span of a decade than the incumbent banks had managed in four decades.

Today, Equity straddles not only the Kenyan market but has extended to Uganda, South Sudan, Tanzania and Rwanda. Its shares are also listed on the Nairobi Securities Exchange and Uganda Securities Exchange.

Another Kenyan bank that has survived a near-collapse and fought to be a regional leader is the KCB.
With branches in Tanzania, Burundi, Uganda, Rwanda and South Sudan, KCB Group is the largest financial services company in eastern Africa with an estimated asset valuation of Sh349 billion.

With over 230 branches, 940 ATMs and over 5,000 KCB Mtaani Agents spread across the region, this network makes the KCB Group the largest in terms of asset base.
But it has not been an easy ride for the bank, which in 1999, had in its books Sh24 billion non-performing loans and was selling its assets then to spruce up the records.

In 2003, the bank had made an after-tax loss of Sh3 billion for 2002, giving the management a hard moment in turning it around, especially in a low-interest environment.

Business volumes

With a clear debt-recovery strategy, an economic boom and political goodwill, KCB managed to take advantage of the first five years of the Kibaki presidency to grow its networks, increase deposits and expand across the region.

Two successful Rights Issues gave the bank the required fillip and by February 2006, audited reports showed that it had managed to post an impressive pre-tax profit of Sh1.9 billion.

The bank attributed the growth to a rise in net interest income from Sh3.7 billion in 2004 to Sh5 billion in 2005, arising from growth in business volumes.

From then on, KCB has been expanding across the region and taking on giants who would have written it off in 1999.

Tough job

In 2001, another bank that was almost written off was Co-operative Bank. Angry shareholders confronted the managers in that year’s Annual General Meeting, wanting to know how the bank had managed to post a Sh2.3 billion loss.

The new managing director Gideon Muriuki had a tough job of turning around a withering institution.

As he would later tell a journalist, “My meeting with the angry shareholders, who were demanding better rewards for their investment, was among my main duties as the MD.

It was such a difficult moment. I now look back and wonder if there would have been any other work for me anywhere if I had given in to the challenges of the day.”

The bank was doing badly and had a shareholder base of Sh1.4 billion. Like KCB, the Co-op Bank had to float its shares in 2008, which saw this base increase to Sh31.5 billion.
The management also sought to increase the customer base, reduce operation costs and revamp it.

The bank has started to expand across the region. This year, it opened a branch in South Sudan in a joint venture with the Government of South Sudan. The idea is to transfer Kenya’s successful cooperative model to the north-western neighbour.