Equity bank case study free essay sample

Equity bank group is a financial institution based in Kenya, East Africa, offering a variety of financial services. This company was founded in 1984 as a minor institution, specializing in mortgage financing, which targeted the low income earners. Based on the fact that Kenya is a developing country characterized by majority of citizens earning less than adequate income, the target population acted as strength and thus contributed to the company’s instant growth. However equity bank, which was known as Equity Building Society (EBS) by then, experienced a downfall in growth an aspect that led to its bankruptcy in 1993. The pre-insolvency period totally differed with the period of 1993 to date in terms of equity banks economic progress, with the former showing a great decline and drastic company growth during the latter (Stanford 2007). To date equity bank is rated among the best bank in retail baking in Kenya , offering a variety of banking services as well as collaborating with other firms to improve their services, for instance in mobile banking. It’s worth noting that banking industry in Kenya’s is highly competitive, with more than 40 registered commercial banks. In an effort to overcome this competition, equity bank targeted low income earners who happened to be non-banked. After the 1993 scandal, EBS transformed from a mortgage financier to microfinance. The target group wasn’t changed, but this time a better approach in strategy formulation was adopted. Following a threat by the Central bank of Kenya to dissolve the insolvent bank, the management was reformed as an alternative option. Following porter’s argument that competitive advantage cannot be generated through natural resources (Porter 73), the new management built on the same target population that had caused failure to the company, but this time applying a more innovative strategy. Human resource is a key factor in banking services. Lack of skilled labour in Kenya worked as a disadvantage to equity banks prosperity. However the bank management avoided importation of skilled labour. Top management worked with the semi- skilled staff. Attributed to this success is James Mwangi’s leadership characterized by motivating employees, providing systematic training that not only increases competency and technical skills but also enhanced competency as observed in 2004. Moreover, accepting the importance of technology, equity bank has allowed for innovation, inventing the latest technology. To start with the IT sector has been improving on the banks communication system, and thus reducing the transaction processing period drastically. As a matter of facts, large numbers of customers has been a threat to equity bank, as it results to large queues, with competitors using this as a marketing opportunity (Stanford 2007). In addition to reduced processing time, equity bank has opened several branches to cater for their customers, both permanent and mobile, with most transactions being made either online or through mobile phones. Competition reduces firm’s sales as the market is fully segmented with each firm serving a fraction of the market. Porter discriminated that demand is naturally obtained, holding that a nation can influence demand. According to porter local market trends, which can be artificially influenced, act as a competitive advantage as well as encourage global transactions (Porter 79). It’s from this perspective that equity bank has expanded its business lines. Although restricted to banking services, equity bank puts diversification as a core objective. In 2005, equity bank succeeded to fully transform from a mortgage financing provider to a savings and loans institution (Equity bank). Following the emergence of many microfinance firms that served the poor, equity bank had no option but expand its services to retain its share of the market. This strict and direct competition, made equity bank diversify through innovation. To cater for deposits, equity bank ha maintained a steady increase in the number of accounts opened. Each account type fits a specific group of customers and is in line with the buyer’s incentive to save. For instance, the jijenge1 account enhances self-development motivating customers to save for a certain project, for example a car (Equity Bank Kenya †¢ Jijenge Account). Equity bank was the first to waive minimum account balances. On the lending sector, equity bank has maintained low interest rates, as well as reducing the minimum amount of loans that can be borrowed to Ksh. 500 (approximately equal to 6 US dollars) in 2006. The above strategies aimed at convincing customers that the company minds about their welfare and thus reducing threat of substitutes (Porter 80). In a nutshell, equity banks strategies, differed from most financial institutions, and that’s what made it prosper. While other financial institutions forecasted on improving their performance through collusive decisions, government intervention, the small but rising, equity bank captured the low income earners p. The local conditions of majority being poor worked as an advantage but given that other entrepreneurs had seen the gap and invented microfinance, equity bank had to lift up their game. Moreover, as the banks prosperity attracted high income earners, considered to have a high buyer’s power, the firm invented prestige branches, which were conditioned to fit the targeted class. Through, stiff competition among other challenges, equity bank management has emerged a successful and innovative, and thus attracting demand globally, its due to this that the bank has set branches in several nations across east Africa. In conclusion, it’s worth noting that, equity bank prospered not due to adequate demand for their services (availability of poor community) but through carefully made strategies. All the strategies that have been put in practice by the ban are influenced by external factors. Case Study: Equity Bank’s winning strategies Introduction It’s a common act for the middle and high income earners to have a bank account make savings in form of deposits and taker loans to finance their projects, courtesy of financial institutions. On the other hand, the poor, whose main objective is to secure basic needs, hustling hard on daily basis have been excluded from the banked list. As a matter of fact, a higher percentage of developing countries’ population is categorized in the latter. Kenya’s equity bank, a highly progressing institution in terms of customer base, capital growth and expansion, operational efficiency among other metrics fills this market gap. Background Equity bank was founded in 1984, as a family business as a mortgage financier. Named as equity building society the institutions management failed to accomplish the business’ goal of gradual but long term growth. In contrary the management focused more on building a close relationship with the owners, increasing the firms lending risks through unprofessional projects that lacked standardization and controls. This led to the firm’s deterioration leaving it almost bankrupt in 1993 (Stanford School). On realizing this, the board of directors reformed the management team, recruiting prominent members. Under the new management, the target population was maintained, but new strategies were set forward. This marked Equity bank’s turnaround from a failing institution to a drastically growing business institution. As a matter of fact, equity bank management started expanding its services by transforming the institution from mortgage financier to a loans and savings institution, an objective achieved in 2005. Under the leadership of James Mwangi, the bank has enhanced growth by taking advantage of the ready market of their services, and defeating competition through innovation and technology (Stanford School). To date equity bank is ranked as one of the best performing financial institution, with the highest number of customers in Kenya. Strategies With the main goal of achieving long term growth as well as stable and increasing returns, equity bank only applies winning strategies, which are well researched on and implemented. Operating under strict competition by emerging microfinances and other commercial banks, equity bank focuses on delivering value to consumers, disciplined cost management and increasing productivity all which are aimed at sustaining the momentum of the set growth. Having worked as an assistant branch manager in several branches in based in the marginalized counties in the country, I have seen the strategies work, both in increasing profitability as well as customer relation. Equity bank maintains a unique funding structure as one of their strategies. Contrary to their competitors, equity bank avoids debt financing. To finance its many expansion projects, technological advancement, not excluding IT improvement, equity bank takes advantage of strong saving deposits by customers, shareholders funds with minimal long-term debt financing (Equity Bank Kenya †¢ Equity Bank’s Strategy Increases Profits by 36 percent | Blog. ). To encourage deposits, equity bank maintains specialized accounts that specifically fit several categories of customers. Moreover, many accounts are branded to fit a certain customers’ goal such as school fees account, achievers student account, junior member and teen member accounts and not excluding the general Jijenge account. This motivates customers to deposit as well as delaying withdrawal, hence providing not only operating capital to the bank but also adequate time to invest the capital which increases the firms competition power (Roger 200). Equity bank also issues new shares regularly to finance major projects. The number of shareholders has been increasing with investors being attracted by the stable and raising share price. While other banks issue shares to reduce debt, equity bank issues share capital to expand, opening more branches and improving on IT and overall performance (Fanele Chester). Banks earn their profits by lending at an interest mere than the one they pay to deposits. This makes the loan section a critical. Equity bank capitalizes on incorporating the customers’ needs and objectives to lure them obtain loans. It is the main goal of any client, be it individual or business, to enhance self-growth. Focusing on low income class, equity bank offers loans to Small and Medium sized Enterprise (SME) at interests lower than their competitors(Equity Bank Kenya †¢ Equity Bank’s Strategy Increases Profits by 36 percent | Blog. ). Given that deposits are obtained from the same class of people and at low interests, profit margins are maintained equal to their competitors. However, the number of transactions undertaken by equity bank outdoes their competitors resulting to higher overall profits. Moreover, the loans are also specialized for instance; social covering social needs such as medical, agricultural, private sector, working nation that gives salary advances. In addition loan requirements based on pre-existing property was waived in 2006 increasing the number of viable loan customers. In a nutshell, equity bank has grown amazingly and still sustains its growth rate. Its loans base has been rising with the greatest rise in SME loans of 45% being recorded in 2012(Initiative for Global Development). This goes hand in hand with increased operational efficiency, with emphasis being made on improving the skills of employees as well as upgrading the IT system, not excluding introduction of bank agents to cater for the growing customer base of nearly 8 million. its worthy noting that equity banks observes all professional and business ethics and thus has played a major role in poverty elimination through efficient allocation of capital as well as increasing the countries revenue through high tax payoff.