Equity Bank, an indigenous banking company of Kenya, is in the news for its success in the field of microfinance. This is a success story of the characteristic feature of microfinance in terms of small size loans without any physical collateral.
The core idea is that ‘social collateral’ is sufficient and it is capable of replacing personal and physical collateral for taking any loan from a bank or any other financial institution. Established in 1984, the bank’s aim is to “mobilise resources to maximise value and economically empower the microfinance clients and other stakeholders by offering customer-focused quality financial services and solutions.”
The bank grew in a fast pace and now it is the third most profitable bank in the country and one of leading companies on the Nairobi Stock Exchange. It claims to have signed up its three millionth customers last month, giving it a 50 per cent share of the Kenyan market for the first time, and is opening 4,000 new accounts a day.
For decades multinationals such as Barclays and Standard Chartered dominated Kenya’s banking sector by focusing almost solely on the middle and upper classes. Equity went the opposite way. It targeted the unbanked poor – “the watchmen, tomato sellers and small-scale farmers” – with cheap savings accounts and micro loans backed by unusual guarantees.
Equity’s improbable story has attracted international attention. Teams from Stanford and Harvard universities have travelled to Nairobi to study its business model.
Equity Bank of Kenya is a purely commercial enterprise and it has avoided donor funding and state subsidies. This makes it different from the Grameen Bank of Bangladesh.
The government of Kenya too is keen to develop microfinance industry. Its poverty reduction strategy (Economic Recovery Strategy for Wealth and Employment Creation – ERS) identifies access to financial services as one means of creating employment, promoting growth and reducing poverty in the country. The ERS prioritises the development of the microfinance industry in order to deepen access to financial services, especially for the poor.
The micro and small enterprise sector (MSE) in Kenya contributes significantly to the economic development of the country: it is estimated that 2.3 million people (20% of the country’s employment) are engaged in the MSE sector. The microfinance industry in Kenya has as a result experienced rapid growth over the years.
The demand for micro finance services in Kenya is high, yet the industry is only able to meet about 20% of this demand because of a lack of financial resources and the capacity to assess risk, process and monitor loans to the smaller.