Smart regulators, a wave of broadband and an enterprising population has put East Africa and particularly Kenya on top of the continent's Internet pile. So it's not surprising to see Kenyan banks leading the way in the practical application of technology to their operations – with some astonishing results. In this respect Equity Bank, Kenya's largest by number of accounts and number two by market cap, is streets ahead of its bigger counterparts down south. Its cost to income ratio, the key determinant of banking efficiency, is 49% – and being targeted at 45%. I took the opportunity on the release of the group's interims to quiz CEO James Mwangi on a lot more than the financials. .ALEC HOGG: Equity Bank has reported a 17% rise in first half profits to nine billion Kenyan shillings (US $103m) with the improvement attributed mainly to a fall in costs. Total income grew 15% to twenty billion shillings. Joining us now to unpack the numbers is James Mwangi, the Chief Executive of Equity Bank. James, there's lots going on in the banking scene in Kenya and we're certainly going to be talking about some of those developments in a moment, but the interesting part of the numbers to come out today was the fact that your cost to income ratio is now down to 49%. There aren't many banks in the world close to your level. I guess that does support your statement in the results today that a big reason for your profitability improvement is cutting of costs..JAMES MWANGI: It is true that the cost structure and the efficiency of the bank is a major driver, a world class efficiency in the utilisation of capital. We are ranked 12th best bank in the world and in terms of efficiency and the utilisation of assets we are ranked the 4th best bank in the world by The Banker magazine for the top 1000 banks. And essentially what we have done is; over the last three years we have been focused on structuring our balance sheet, both assets and liabilities, to align them appropriately to optimise earning assets and ensure other portfolios in the mix that optimises return. But at the same time we then have looked at the delivery channels and said "how can we move our 8.3 million customers to a self-service menu?" And we now have nearly 3 million customers accessing the bank from their mobile phones and that clearly reduces enormous cost structure, both in terms of infrastructure and in terms of staff costs. But the biggest part is coming from the agents..ALEC HOGG: That mobile phone penetration is world class and the question is the one I asked to your peer at KCB, why do you not export that? Export the intellectual property?. We know that Kenya is ahead of every other African country when it comes to the Internet and Mobile generally. Why don't you use that advantage to expand outside of East Africa?.JAMES MWANGI: I think the biggest challenge in exporting the model is Regulation. You must win the confidence of the Regulators. They must be willing to approve mobile banking as a delivery channel. We now have.got Rwanda as a country approved and we have already launched that. Their interface with telecoms is proving to be very impactful on the model. But in addition to mobile, I think the agency is the ultimate thing. We have seen an agency model provides a win-win situation where customers are able to access banking from their doorsteps or from their places of work and at the same time we save them the cost of accessing the bank. The barrier to banking access is also removed. I would be very optimistic that in the next two years we shall have a cost income ratio of 45%..ALEC HOGG: Wow. That's incredible. James, just to look at the competitive situation within Kenya – the recent transaction between Absa and Barclays where Absa will now become Barclays Africa and no doubt be investing a bit more time and effort in its Kenyan subsidiary: are you expecting this could shake things up?.JAMES MWANGI: The Kenyan market is going to see a very competitive environment going forward. We have seen the South African banks – so far we have three here. The Nigerian banks – so far we have four. This combines with the 40 plus Kenyan banks and is likely to increase competition very significantly..ALEC HOGG: If we talk competition, the question that keeps coming up internally is why banks in Kenya have not reduced their average lending rates to the same degree that the Central Bank has been reducing its lending rates. What is the story there? What is the rational answer to that?.JAMES MWANGI: I think the story is the structure of the Kenyan economy. You'll find that today we are still talking about Treasury Bills at 12%. So that is the true cost base of lending. So when banks start lending at 16%, the margin they're making is only 4% and this has to do with getting it right with the economy. A lot of effort has been made. We are seeing the micro economic development stabilising, shaping and moving in the right direction but volatility is what really causes these challenges..ALEC HOGG: Thank you for clarifying that one. The Chinese influence in Kenya is significant, but the innovative approach that you've taken to opening a branch (in Nairobi) for Chinese people, staffed by Chinese people and under the Equity Bank banner is unusual. Tell us about it..JAMES MWANGI: What we have realised is that the infrastructure development in this country, to a great extent, is being done by Chinese companies; whether it is roads, whether it is bridges, airports and ports. And essentially we wanted to promote a supply chain that includes the Chinese companies and local businesspeople – the (Chinese) SMEs – and we couldn't do that integration without embracing the Chinese companies. So we felt the best way of doing it is forge an alliance with the China Development Bank so that we could really have a referral process. At the same time create a branch and make it easy for them by speaking their language; get bankers from China who are able to analyse. The process becomes easy and that has been very helpful to the bank. The risk factor on these Chinese companies is low because they fund up to 60% of the business. When they come to you they have already financed 60% of the project so it's more bridging (finance) rather than the traditional lending that we talk about..ALEC HOGG: And they also save a lot more than we Africans do?.JAMES MWANGI: That is true. You look at the (high bank) balances of the employees of the Chinese companies.which we are banking. The culture also, of them, is that they maintain very healthy balances. They want to make money before going home. We assume they have come here to consume. They don't. Their consumption propensity seems to be much, much lower than our (African) propensity to consume..ALEC HOGG: And that deposit base no doubt helps you to fund more cheaply. But give us an understanding of the size of the deposit base in the Chinese specialised branch and how long it would take for one of your other branches to get to the same level..JAMES MWANGI: Well, we have been amazed the branch that we've opened for them within the Lavington Supreme Branch of Equity Bank. In six months this branch has two billion shillings, we are talking about $30M, in terms of savings (deposits). So you find the culture is very, very different. And then it is these savings that are availed to the corporations that are borrowing, so it's a self-funding program..* Alec Hogg is a Business Keynote Speaker, online publisher, writer and broadcaster
