Equity Bank may have stopped lending to the common Mama Mboga long time ago

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According to article published today in the Standard, it seems Equity Bank may not lend Mama Mboga money anymore like it used to do during its inception.

When Equity Bank started on its journey to becoming a financial institution of repute, it largely focused on the unbanked poor —’the watchmen, grocery sellers and small-scale farmers’. Many foreign-owned banks had shunned this segment with some even blacklisting customers who could not maintain minimum balances of about Sh10,000.  Equity tapped into the low-income class and informal or jua kali sectors and ended up redefining the banking industry. This is the category that Equity listed as typical customers — with cheap savings accounts and microloans backed by unusual guarantees. This was at a time when these customers were not even a distant thought for mainstream financial institutions.

Banks that had attempted to set up few branches banished the thought, gave up on the lot and closed branches in low income areas. Between 2003 and 2010, the bank brought more people into the mainstream financial services system and also made money. With time, this forced other institutions to rethink their strategy for this market segment that they had deemed unworthy. For you to be a ‘member’ all you needed was your ID card, doing away with barriers such as referees that had locked away millions from banking halls. It also did away with minimum account balances. These were moves that other banks would later borrow. With this, Equity went from being a quirky, fringe player to one of the most profitable banks in the country and a leading player on the Nairobi Securities Exchange. The strategy proved remarkably successful.

Dr. James Mwangi (CBS)

Indeed, the bank, how it revolutionised banking and the role it played in deepening financial inclusion has been a case study for scholars, market regulators and global financial services industry players. This market, however, is slowly not making business sense for the bank, especially in the era of interest rate caps. The folk that propelled Equity Bank into being one of the largest financial institutions in the region are however now threatening to drag down the bank with an avalanche of bad loans. Capping interest rates has made interest income from micro loans unattractive. According to the law, a micro enterprise is defined as a business with less than ten employees and an annual turnover of Sh500,000. Since the law capping interest rates came into place, Equity Bank said it has increasingly found it difficult to advance credit to micro enterprises due to low returns. According to the bank, the interest income on loans advanced to micro enterprises is too marginal to cater for the cost of administering the same loans.

The lender is not taking chances and has decided to let go the micro enterprises and low income earners from the roll of customers that qualify to get loans from Equity. Equity Bank CEO James Mwangi, who spoke on Thursday at an investors’ briefing said the earnings on loans advanced to the very small entrepreneurs and low income customers were marginal and  ultimately unsustainable. Risk is too high “The area where we have had significant problems is the micro enterprises. What we are saying is that you cannot lend at 14 per cent when your non-performing loans are at 11.5 per cent. That is where the decline in lending is. We have focused on SMEs and large enterprises,” said Mwangi. “We have really controlled underwriting to micro enterprises because it is not sustainable. When you are lending at 14 per cent and lose 11 per cent, (the difference which is three per cent) cannot cover your operating expenses leave alone giving you an economic return. When you look at the contraction (in lending), it is in the micro sector where the risk is too high to be able to continue lending at 14 per cent.” Mwangi noted that the bank did not have a problem lending to small, medium and large enterprises, noting that the difficulties were among the micro-sized enterprises.


Commercial banks have previously made a kill lending to small businesses, advancing them credit at rates that were as high as 30 per cent. The argument has been that the risky nature of micro credit necessitated banks to charge high interest rates. It is still the case for financial service providers that are not covered by the interest rate capping law. The amendment to the Banking Act, however, capped this at 4.5 per cent of the Central Bank Rate, which the CBK has at the moment set at 10 per cent. This would mean that commercial banks cannot advance credit at more than 14.5 per cent. While the interest rate capping law was introduced to cushion common folk and businesses that do not have the capacity to negotiate friendly rates with commercial banks, it now seems to be working against them. Banks have opted to reduce lending to borrowers that are deemed risky, even instances where it has meant decline in profitability. This is seen in the industry’s results for the first quarter of this year, where major lenders have reported decline in profits, with a number of them reducing lending despite being liquid enough to support continued lending. Many of the banks have instead opted to invest in Government securities that they argue are low risk, making them more attractive compared to loans.

In the case of Equity Bank, despite a 14 per cent growth in the Group’s balance sheet during the quarter to March 2017, the bank held back on lending, with its loan book shrinking five per cent. According to the bank’s results released last week, the balance sheet grew to Sh492 billion from Sh430 billion driven by a growth in customer deposits. Deposit base grew to Sh349.3 billion during the quarter from Sh300.3 billion. The bank’s loan book declined five per cent to Sh262 billion from Sh275 billion. While this maybe a short term measure, as the baking industry believes the interest rate capping law will be repealed, for Mwangi and Equity Bank, it could be a departure from the past. The man has received numerous awards for providing the poor with banking facilities, including a 2008 international microfinance award by the Berlin-based Global Economic Network which he shared with Grameen Bank’s Muhammad Yunus, the Bangladeshi banker.


He has advised prestigious institutions such as United Nations on providing banking facilities to the poor. Mwangi has come to be known as the poor man’s banker. The bank was in 2012 referred to as a ‘cult’ by the Economist in reference to its huge customer base and being able to transform a previously unbanked population into a legion of loyal clients. A 2008 Financial Times article noted that Equity had institutionalised the bottom of the pyramid and ‘turned it into the foundation of the fastest-growing bank in Kenya’. This is in addition to in-depth studies by institutions such as Harvard Business School and Stanford Graduate School of Business on how Equity Bank succeeded in making a business case for a market segment that nobody wanted to touch. Different players have weighed on whether the caps should be maintained or repealed. A majority of borrowers, as is expected, prefer maintaining the controlled regime but there are also a number of lenders that feel they should be retained. Repeal rate cap The Kenya Private Sector conducted a survey in April among its members on the impact of the capping rates, with most respondents holding the view that the caps should be maintained. Some banks that participated in the survey also held the view that the caps should not be scrapped.

According to the survey by the private sector lobby, 22 per cent of banking institutions support the move to putting a limit as to how much interest banks can charge on loans. “On whether to interest rate capping should continue or be repealed, 63 per cent of the respondents were in favour of continuance of interest rate capping while 37 per cent were of the opinion that it be repealed,” said KEPSA, in the Private Sector Survey on the Interest Rates Capping in Kenya. “Those in support of the capping were; 22 per cent of the banking institutions and 73 per cent of the borrowers (non-banks), 58 per cent of the business associations and 66 per cent of the corporates; while those who expressed opinion that the capping should not continue include; 78 per cent of the banking institutions, 27 per cent of the borrowers (non-banking institutions), 42 per cent of the business associations, and 34 per cent of the corporates.” ALSO READ: Equity Bank trains over 5,000 students on saving “Similarly, the large enterprises were split in half (50-50) in support of the capping versus those against it, the micro enterprises (70 per cent -30 per cent), small (67 per cent -33 per cent) and medium enterprises (77 per cent -23 per cent).”

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