Kenya’s Equity Bank expansion in DRC may trigger more foreign interest

The bank said this week that it has reached a non-binding agreement to buy a controlling stake in BCDC, the oldest bank in the Democratic Republic of Congo (DRC), for an undisclosed amount.

If concluded, the timing of the purchase with the DRC under the new leadership of President Felix Tshisekedi could turn out to be a “stroke of genius,” says Olivier Lumenganeso, an economist and banker in Kinshasa.

• Lumenganeso notes that BCDC has been for sale for five years, with the price that was being sought in the past was too high.
• According to Johnson Nderi at ABC Capital in Nairobi, Equity Bank will likely be able to secure the new asset and is most likely going to pay for it with newly issued shares.

Tshisekedi is “changing the landscape,” for business in the DRC, Lumenganeso argues. Political tensions have “substantially decreased” and the environment for SMEs has improved.

• Airports are now noticeably more crowded with prospective foreign investors, Lumenganeso says.
• Equity Bank already has SME and retail businesses in the DRC, and will now be able to add larger corporate customers, Lumenganeso says.
• Crucially, Equity has an existing digital strategy which they be able to apply to an enlarged customer base.
• The combination would be “more than the sum of its parts,” Lumenganeso says.

The combined bank, which Lumenganeso expects to have close to $1bn in assets, won’t be able to catch up with DRC market leader Rawbank in terms of size, he says.

• He expects more banks from Kenya to enter the DRC, arguing that 15 or 16 banks is not enough for a country of such a size.
• There’s space, he says, for banks with different kinds of business model to enter.

Power house

Reginald Kadzutu, project head for pensions, insurance and savings at Zamara Actuaries in Nairobi, agrees on the potential that the DRC offers. The country has the potential to become the “power house of Africa” if political and social stability can be achieved.

The DRC has “low financial inclusion ratios and a huge unbanked population,” Kadzutu says, with “a lot of arbitrage opportunities exist as regulation catches up.”

• Banking sector performance in Kenya has flattened out due to the macro economic environment, he says.
• Equity has already taken stakes in banks in Rwanda, Zambia, Mozambique and Tanzania.
• Kadzutu notes that the Kenyan interest cap only affects only Kenyan operations, but regional subsidiaries. “Diversifying country risk is truly a smart move” for Equity, he says. “Most of the markets they have entered have huge growth potential as financial inclusion and banking penetration are low.”
• Equity Bank has the ability to offer “value adds, such as insurance, fund management, medical in less penetrated markets against competition which might not have the same financial muscle,” Kadzutu says.

But if Equity tries to replicate the Kenyan model “they will find themselves in a big hole.”

• Equity needs to show that its organizational structure is adapted for rapid expansion, and that it has a segmented understanding of the markets that it’s entering.
• Currency volatility could hurt Equity’s profits, Kadzutu says.
• Lumenganeso in Kinshasha notes that the cost-to-profit ratios at both Equity and BCDC need to come down.

Bottom Line: Execution and the political environment in the DRC will determine if Equity Bank’s vision becomes a reality.