Kenya: Equity digitising SME lending with eye on higher repayments

By Sherif Tarek
Posted on Tuesday, 3 January 2023 15:18

Customers are pictured on their motorcycle taxis outside the Equity Bank Kasarani branch in the outskirts of Nairobi, Kenya March 22, 2022. REUTERS/Monicah Mwangi

The overwhelming majority of loans from Equity Group Holdings are processed via mobile in Kenya, where the pan-African bank is now seeking to further push for digital SME lending, says Mary Wangari Wamae, the group executive director.

“Right now [in Kenya], about 95% of all the loan transactions in the bank are happening on the mobile [phone],” she told The Africa Report on the sidelines of the African Financial Industry Summit in Togo in late November.

Digital loans are mostly taken out by small traders, says Wangari. Conversely, procedures for loans of higher value, mostly secured by SMEs and corporates, are usually conducted at Equity’s branches.

Equity, ranked 7th in Africa by The Banker Magazine, recently developed an in-house engine using algorithms to determine credit ratings of small borrowers without outsourcing credit scoring services from a third party.

The engine, which facilitates digital lending, takes into account banking history, past transactions, Credit Reference Bureau’s (CRB) ratings, and a psychometric assessment through which customers directly provide personal data.

What we have seen is that the rate of repayment for these [digital] loans is extremely high at about 98% compared to the loans at the branch…

After a current pilot phase, Equity is planning to use the engine for SME lending.

“Hopefully in the next few months, we’ll also be able to use that same engine to actually process the SME loans, in addition to the retail and the consumer loans,” says Wangari.

Higher loan repayments

Not only does digitising lending services enhance customer accessibility, but it also culminates in higher loan repayments, says the executive.

“What we have seen is that the rate of repayment for these [digital] loans is extremely high at about 98% compared to the loans at the branch […] where the repayment is much less, at about a range of 92%,” Wangari says.

Loans and advances from Equity Group Holdings increased 21% year on year in the first nine months of last year, standing at KSh673.9bn ($5.46bn). The company’s after-tax profit jumped 28% during the same period, hitting KSh34.4m (nearly $278.8m).

“The loan book quality held at a nonperforming loan ratio (NPL) of 9.0% against industry average of 14.2% as at 31 August 2022,” says the financial statements of Equity, which is listed on the Nairobi Securities Exchange, Uganda Securities Exchange, and Rwanda Stock Exchange.

Digital expansion

Equity is seeking to emulate its digital drive in Kenya (its prime market), in the DRC, and in Uganda, says Wangari. The bank also has operations in Rwanda, Tanzania, and South Sudan.

“Strong risk mitigation policies have seen the loan book reflect a diversified risk across various market segments of large enterprises 27%, SMEs 43%, consumer 21%, agriculture 7%, micro enterprises 2% and across sovereign geography, with Kenya holding 63.6%, [the] DRC 21.4%, Uganda 7.2%, Rwanda 4% and Tanzania 3.7% respectively,” says Equity’s financial statements, released last November.

In addition to swathes of unbanked population “[…] in Africa, the uptake of mobile phones is very, very high, so we expect a similar result[s]” to those in Kenya, Wangari says.

Equity adopts a two-pronged approach to snap up needed tech talents, who amid Africa’s multiple digital transformations these days can be scarce.

“We like the outsourcing model, because you can keep on picking […] the resources that we require,” she says. “Of course, the disadvantage is that this resource is then available to everybody. You may not get them at that point that you require them, but we have about 10 different providers.

“The other strategy [is to] actually generate our tech talents and that is why we are now working with some of the key universities to encourage the tech resources to come up.”

East Africa aspirations

Equity has also been eyeing establishment of a comprehensive operation in Ethiopia, where the bank only has a commercial representative office for now.

“Our dream is to have a full commercial banking licence” after Ethiopian authorities recently decided to open the door to talks with foreign banks willing to tap the second most populous African nation, she says.

We still feel that Ethiopia is a prime market for us…

“Now we have been engaging [with] the government on how they are viewing that approval, would it be a full approval? Or is it subject to some limits?

“We still feel that Ethiopia is a prime market for us, looking at the size of the economy, looking at the population, and also the fact that they require more innovations in that market; they are not at the same level of advancement, for instance, with the other countries in the East African region”, particularly Kenya.

Equity, meanwhile, is holding out hope for achieving unfulfilled potential in Tanzania, where its operation was previously thwarted by a stuttering economy and “a high level of non-performing facilities”.

“With the new government and policies that we are seeing on the ground, the indications for growth, investments in infrastructure, new airports, restructuring of ports, more free movement of […] labour, [and] a more liberal kind of policy, we feel that this is a market to watch,” Wangari says.

Equality is currently mulling some collaborative programmes with partners in Tanzania. “We’ve already rolled out some agribusiness [and] SME support […] we are looking at risk sharing guarantees for the customers in that market.”

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