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Jun212015

Kenyan Bank Helps the Poor and Gets Rich

Sunday, June 21, 2015 at 4:07PM

Good quality banking services are a basic building block to rising incomes. Yet the poor across the South are often overlooked and denied access to savings accounts and loans.Many low-income people are openly discriminated against as ‘bad risks’ by banks, and denied the sort of banking services middle and higher income people take for granted. Yet it is a myth that the poor do not have money or do not wish to save and invest for their future or for business.

The so-called Bottom of the Pyramid (BOP) – the 4 billion people around the world who live on less than US $2 a day – are being targeted by a wide range of businesses. Indian business consultant and professor CK Prahalad (http://en.wikipedia.org/wiki/C.K._Prahalad) , the man who coined the term BOP, has gone so far as to claim this is a market potentially worth US $13 trillion, while the World Resources Institute puts it at US $5 trillion in its report, “The Next 4 Billion” (http://www.nextbillion.net/thenext4billion).

A Kenyan commercial bank has proven it is possible to target the BOP and become successful doing it; so successful that they have seen off foreign rivals and were voted Kenya’s third most respected company.

By offering Kenya’s poor people savings accounts and microloans, Equity Bank (http://www.equitybank.co.ke/) has captured 50 percent of the Kenyan bank market. It now has more than 3 million customers and 2.8 million account holders and opens 4,000 new accounts a day.

Its chief executive officer, James Mwangi, said Equity Bank built its success by doing the opposite of what other banks have done – it doesn’t target the middle and upper classes, but the “the watchmen, tomato sellers and small-scale farmers”.

The Kenyan banking sector in the past was dominated by foreign banks. But by investing in the 46 percent of the population who still live below the food poverty line, Equity has become the third most profitable bank in the country. Its approach was once considered odd. Most of the bank’s borrowers work in the informal sector and have few assets to use as collateral for the loans. So Equity uses what it calls ‘social collateral’. This includes a mix of measures: in some cases, account holders join together to guarantee a person’s debt. Even more unusually, women offer their matrimonial beds as security – it would be shameful for a woman to admit her bed has been taken to pay for the debt.

“For us it’s psychological security. Nobody wants to be excommunicated and lose their inheritance,” said Mwangi.

“By focusing on the previously excluded, Equity has revolutionized the banking sector,” James Shikwati, a director of Kenyan think tank the Inter Region Economic Network (http://www.irenkenya.com/), told The Guardian newspaper. “It has forced the multinational banks to change their business strategies.”

Started in 1984, the bank was still insolvent by 1994, when Mwangi joined as an accountant. Things were looking grim as Kenya’s economy was in a slump and foreign banks like Barclays were closing branches outside big centres.

Mwangi and other Equity Bank managers realized there were millions of low-paid poor in Kenya – all BOP – but who wanted to save and borrow but had nowhere to go.

“Banking was the only industry in Kenya led by supply rather than demand,” said Mwangi. “There was no ‘bottom of the pyramid bank’.”

While absolute poverty in Kenya has declined in recent years, inequality remains high. The population of 37 million people make on average a per capita income of US $580.

By 2003, as the economy picked up, Equity Bank gained 256,000 account holders. It now has 100 branches across the country and 500 automatic teller machines (ATMs). It uses armoured trucks to go into rural areas so that the people can receive banking services. While traditional banks require pay slips and utility bills as proof of a person’s address before letting them open an account, and charge high monthly fees, Equity only requires an identity card.

Within just one year, the bank saw the number of account holders jump to 600,000. Mwangi likes to say that the bank’s competition is the bed mattress, since most people have never had a bank account before. Most savers have around US $148 in their savings account.

The bank’s micro credit operation makes loans of less than US $7 and gives borrowers a few months to repay them.

The bank claims loan defaults are less than 3 percent on 600,000 outstanding loans – the banking industry average is 15 percent.

It keeps its transaction costs down by using the latest in information technology. These efficiencies enabled the bank to earn pre-tax profits of more than US $40 million in 2007.

Equity does face competition, as its success attracts mainstream banks into the BOP market.

In Africa these days, banking is hot: a South African research and analysis company BMI-TechKnowledge (http://www.bmi-t.co.za/) in a report identifies a boom in banking services across Africa. In particular, South Africa, Botswana, Namibia, Angola, Mauritius, Tanzania, Kenya, Ghana, Nigeria, Egypt and Morocco – all have seen surges in profit and services as a result of improving banking regulations and political conditions.

Mwangi isn’t worried, however, since the number of people still without bank accounts is huge. Equity Bank is expanding its operations into Uganda, Rwanda and Sudan.

Elsewhere, mobile phone banking in Kenya is proving highly successful. Equity has a service, but so does Safaricom with M-PESA (http://www.safaricom.co.ke/index.php?id=745). Customers can deposit, transfer and withdraw money using their phones. Over 4 million are now using the service.

By David South, Development Challenges, South-South Solutions

Published: January 2009

Development Challenges, South-South Solutions was launched as an e-newsletter in 2006 by UNDP's South-South Cooperation Unit (now the United Nations Office for South-South Cooperation) based in New York, USA. It led on profiling the rise of the global South as an economic powerhouse and was one of the first regular publications to champion the global South's innovators, entrepreneurs, and pioneers. It tracked the key trends that are now so profoundly reshaping how development is seen and done. This includes the rapid take-up of mobile phones and information technology in the global South (as profiled in the first issue of magazine Southern Innovator), the move to becoming a majority urban world, a growing global innovator culture, and the plethora of solutions being developed in the global South to tackle its problems and improve living conditions and boost human development. The success of the e-newsletter led to the launch of the magazine Southern Innovator.

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Google Books: https://books.google.co.uk/books?id=bbCXBgAAQBAJ&dq=development+challenges+january+2009&source=gbs_navlinks_s

Slideshare: http://www.slideshare.net/DavidSouth1/development-challenges-january-2009-issue

Southern Innovator Issue 1: https://books.google.co.uk/books?id=Q1O54YSE2BgC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 2: https://books.google.co.uk/books?id=Ty0N969dcssC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 3: https://books.google.co.uk/books?id=AQNt4YmhZagC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 4: https://books.google.co.uk/books?id=9T_n2tA7l4EC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 5: https://books.google.co.uk/books?id=6ILdAgAAQBAJ&dq=southern+innovator&source=gbs_navlinks_s

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Turning Street Children into Entrepreneurs

Tuesday, June 16, 2015 at 11:23AM

The UN estimates that 500 million people around the world are homeless, and UNICEF estimates India alone has 11 million homeless children on its streets (though it is difficult to pin down the figure). In order to survive another day, these children will work in one way or another. While there are many campaigns to ban children from working, and charities dedicated to getting them off the streets and into shelter, the raw fact remains: many of these children slip through the cracks and remain vulnerable, poor and neglected.

Most street children suffer from malnutrition, hunger, health problems, and abuse. They make ends meet by working various jobs or by stealing. While they have dreams, there is no mechanism for them to save for the future. It is a live-for-now existence that, if they survive to adulthood, means they will probably remain homeless and vulnerable.

Street and working children have money: it is a natural consequence of having to be resourceful to survive. But what they don’t have is access to banking services or trustworthy financial advice that can help them to gain wealth and move out of poverty and into a brighter future.

The Children’s Development Bank in India is one initiative that seeks to turn these neglected children into the next generation of entrepreneurs. The bank works on banking and co-operative principles, where savers are members and joint owners of the bank. Any child can save money with the bank and earn interest, as well as take out loans if they are over 15 years old. It was started in 2001 and was inspired by the Youth Bank in the UK. Interest made by the bank is shared by its members, as with many co-operative banks and credit unions.

The bank is managed jointly by children and adults. The children have a say in how the bank is run and on what conditions it should lend money. They also keep an eye on borrowers to prevent them from running off without repaying loans.

For these vulnerable children, it has many advantages: they can put money aside without fear of it being stolen or lost, save for important things like clothes, or pay for their education.

A key part of the bank’s mandate is helping the children build entrepreneurial skills for business. Mentors help the children choose a business model, select an occupation with minimal risk and more benefits, get training and solve business problems.

The bank has branches in India, Afghanistan, and Sri Lanka.

Ten-year-old Deepak Prahlad, a street child in Delhi, dreams of being a doctor.

“I know what it takes to be a doctor. I need to study hard and need to save a lot of money,” he told the Hindustan Times. For now, he works as a rag picker but has started saving 30 to 40 rupees a day in the Children’s Development Bank. The bank has 1,300 members in the city. It pays 3.5 per cent interest on savings accounts.

“Some of them want to fly very high,” said Rita Panicker, who helped set up the bank in 2001. “We have been working with street children for the past two decades. Some of these children are very talented and have entrepreneur qualities. One of the biggest problems facing these children was that they did not have a safe place to keep their hard-earned money. In fact, it was the children who came up with the idea of the children’s bank. It started with 20 members in 2001 – and now it has 1,300 members in Delhi.”

Sudesh, a 15-year-old manager who looks after the bank’s current accounts, said: “We are extremely careful about whom to offer loans since we do not want to see our members’ savings lost because of bad loans. The skills I have learnt here are going to stand me in good stead in life.” Managers are chosen every six months by the children and they compete for the job.