Strategic Environmental Analysis of Equity Bank

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  • 1. STRATEGIC ENVIRONMENTAL ANALYSIS OFEQUITY BANKBy Mohamed AbdimalikIntroductionThe Banking industry in Kenya is governed by the Companies Act, the Banking Act, the CentralBank of Kenya Act and the various prudential guidelines issued by the Central Bank of Kenya.The banking sector was liberalized in 1995 and exchange controls lifted. The Central Bank ofKenya, which falls under the Minister for Finance docket, is responsible for formulating andimplementing monetary policy and fostering the liquidity, solvency and proper functioning of thefinancial system. As at December 2011 there were forty six banking and non-bank institutions,fifteen micro finance institutions and one hundred and nine foreign exchange bureaus (CBK,2011). The banks have come together under the Kenya Bankers Association (KBA), whichserves as a lobby for the banking sectors interest.Equity Bank was founded in 1984 as a building society with the purpose of pooling resources ofmembers for onward provision of mortgage facilities. The growth in business volume andoutreach necessitated the conversion to a commercial bank. The bank was registered as acommercial bank in December 2004 and listed at the Nairobi Stock Exchange in the same year.The bank’s primary goal is to provide financial services to those who have difficulty accessing it.Though its business model focuses on providing convenient, accessible and affordable bankingto those at the bottom of the pyramid, it also provides retail banking to a large variety ofconsumers from various social and economic backgrounds. In addition to this Equity Bank alsocarries out corporate banking, and business banking as well as several other financial servicesthat serve different levels of society (Equity Bank Official Homepage, 2012).Mohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 1
  • 2. External Environmental Analysis of the bankMacro factorsThe Central bank of Kenya moved in fast enough to tighten and streamline the sector by puttingweak banks under statutory management, setting up bank supervision departments to enhancecloser surveillance and early detection of fault lines and therefore institution of preventivemeasures before situations ran out of hand. Guidelines for classification of loans were alsorevived and issued to facilitate better credit risk assessment.The sectorial composition of Kenya economy in terms of Agriculture, Industry and Servicecontribute 19%, 16.4% and 64.6% to GDP of $33.62 billion in 2011 respectively. The economyis expected to grow by 5.2 in terms Real GDP growth with 2.5 real per capita GDP growth rate.The official usable foreign exchange reserves held by the Central Bank declined to 3.13 monthsof imports cover as at March 05, 2009 (CBK, 2011). This foreign exchange decline is likely tolead to the depreciation of the Kenyan shilling and high fluctuation in foreign exchange rate.The economy hosted a single digit inflation rate of 7.6 %, with Ksh 1339.40 billion MoneySupply (M2) in 2012 while the industry average interest rate for loan is around 19.73 whilesaving and deposit rate are 1.55% and 7.4% respectively (IMF, 2012).The general economic growth in the region, boosted by increased manufacturing output,substantial oil discoveries in Uganda and the establishment of the newest state in the world,Southern Sudan, with its own oil resources, are turning East Africa into the continent’s latestgrowth dynamo. The integration of the East African countries has played a big role in thediversification of financial institutions in East Africa, Equity bank being one of them. Theintegration process has realized harmonization in general tariffs, reduced tax rates for EastAfrican companies compared to ones outside the region, cross-border listing of East Africancompanies which has brought about host country nationals investing in companies based outsidetheir county’s border’s but within the east African region. Cross-border labor mobility across theMohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 2
  • 3. region is increasing and an East African power pool is planned, yet nowhere is regionalintegration moving at a faster pace than in the banking sector. It is this favorable environmentthat Equity has taken advantage of by forming cross-border strategic alliances by way of mergersand acquisitions, for example Equity acquired Uganda micro-finance Ltd to penetrate theUgandan market.Technology wise, commercial banks in Kenya have also made very heavy investment ininformation technology. The operations of commercial banks are becoming very dependent onthe level of technology implemented.Industry AnalysisKenyan banking sector is comprised of 44 commercial banks including two Islamic banks, 2mortgage finance companies, 109 foreign exchange bureaus and 15 micro finance institutions(CBK, 2011). Though the number of banks in the country is large in comparison with other subSaharan countries, only 19% of the population is banked. Further 194(44%) branches out of 443are located in the capital city, yielding intensive urban banking competition for Equity bank plusproviding bank services to the unbanked strategy is already adopted by more than 35 Microfinance institution with potential to become major bank creating serious competition.Contestability in banking has also been raised. Competition is not a new phenomenon inbanking.However, three particular aspects to the way competition is evolving give it a new dimension:  Technology is eroding entry barriers and hence banks face pressures from a wider and more diverse range of competitors;  As a result of deregulation, the regulatory environment has become less protective of the banking industry; and  Competition has increasingly become global in nature.CustomersMohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 3
  • 4. The banking industry has a unique nature in terms of customer characteristics. In 2011, 80% ofthe bank’s asset was financed by borrowed money and further the banks customers financedmore than 70% of the total asset owned by the bank putting the customers in peculiar positions.The bank provides its services to more than 4.3 million customers while no individual customeris significant enough to twist arms.SubstitutionThe banking industry can be characterized by products which are perfect substitute to each othergiving great strength to saver and/or creditors.Hence competition in the banking industry in terms of interest paid on deposits and charged onloans has sticky nature while service using state of the art technological platform is becoming acustom.Prospect for new entrantsNew regulations especially with the passing of the new constitution Central Bank of Kenyarequires financial institutions to build up their minimum core capital requirement to Kenyashillings 1 Billion by December 2012 which increases the financial burden for new entrants.Though banks from the Gulf and West Africa are among the short listed candidates to enter theKenyan banking industry.  The Terrorist attacks on the twin towers in United States of America led to mandatory Acts like Anti-money laundering. Nations are working closely to ensure that proceeds of crime do not get into the financial systems of the world.  The Global crisis experienced affected banking industry in Kenya and more so the mobilization of deposits and trade reduction  The Interest margins declines have also affected the banking industry in Kenya.Mohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 4
  • 5. Investing in Africa indexed Equity as leader in Return on Asset and Growth score despite furiouscompetition in the banking industry.Internal environment Analysis of the BankEquity is projected as the bank which has grown fast within 5 years and even gone regional inthe unprecedented speed in Uganda after acquiring Uganda micro finance limited at Sh. 1.7million and converting it into a commercial bank in December 2008, it moved to Tanzania,Uganda, South Sudan and Rwanda.The bank is governed by board which has eleven board members Mr. Peter Munga as a chairmanand Dr. James Mwangi CEO. The board is composed of vast academic spectrum and workexperience with youngest aged 42 and oldest 68 years. The bank has 7 directors and 5 generalmanagers of their respective departments employing 6243 personnel in total.The banks total asset reached to Ksh 176,911 million in 2011 with more than 10% cash reserveand 60% in loan outstanding of the total asset. The bank is financed by 80% of liability 20 %equity . Profit before tax increased by 42% in 2011 reaching Ksh 12,834 million.Technology has had a massive revolution in Banking and Equity has embraced technology invarious forms and with various strategic players. It has done this by implementing products thatare technology driven e.g. ATM machines and customer mobile telephony alerts, using the latesttechnology in internal and external communications, banca-assurance where it has integratedinsurance as a product with its core banking systems technology with access to its 4.3 millioncustomers data base, staff training in intra-net systems, quick turnaround in loans processingMohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 5
  • 6. with 20 minutes credit automation outcome on all loans inquiry, automation of loan collectionprocesses where customers in arrears are informed by automatic telephone calls.ConclusionAn analysis of the current Kenyan environment reveals the economic challenges listed belowwhich are affecting the banking industry  The rising inflation to double digit is likely to negatively impact on the Kenyan economy in general and banking sector in particular.  High foreign exchange rate fluctuations and shortage of hard currency.  Banks in Kenya are competing for deposits, loans and advances. Competition is likely to intensify in the banking industry.Mohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 6
  • 7. ReferenceAnnual Report (2009). Central Bank of Kenya.Annual Reports and Financial Statements (2009). Equity Bank.Annual Reports and Financial Statements (2011). Equity Bank.Derek A. Abishua (2010). Strategic Responses Used by Equity Bank to Compete in the KenyanBanking Industry. University of Nairobi, December.Gloria Adero (2010). Maintaining Competitiveness Through Strategic Alliance: Case study ofEquity bank, Kenya. Linkoping University.Hildah Wambui Mugo, Kenneth Wanjau, Eunice M. A. Ayodo (April 2012) An investigationinto competitive intelligence practices and their effect on profitability of firms in the bankingindustry: A case of Equity Bank, MKU Journals.Nicholas Murithi Ndwiga (June 2011) The Role of Management Accounting in Creating andSustaining Competitive Advantage: A Case Study of Equity Bank, Kenya. University of SouthAfrica.Regional Economic Outlook, Sub- Saharan Africa: Maintaining Growth in an Uncertain World(October 2012). World Economic and Financial Surveys. IMF.Tobias Olweny and Themba Mamba Shipho (July 2011). Effects of Banking Sectoral Factors onthe Profitability of Commercial Banks in Kenya. Economics and Finance Review.http://www.equitybank.co.ke/index.php/about/our-historyhttp://investinginafrica.net/2012/05/kenyas-best-bank-stocks/Mohamed Abdimalik is Post graduate student at University of Nairobi, he can be reached atMohamed.abdimalk@yahoo.com Page | 7