Can Linkage Work? A Tale of Two Banks

There has been plenty of discussion in recent years about the effectiveness of linking informal Savings Groups with formal Financial Service Providers. Some people will tell you that they are very effective in expanding the capabilities of savings groups to further benefit economic growth in the community. Others will tell you that SGs and FSPs have such radically different goals and priorities that linking them together can never work.

Why is there such a great disparity of opinion and experience? In my paper “Where Next After VSLA” I’ve suggested some important prerequisites for both SGs and FSPs to make linkage work. But that was admittedly based on secondary research and theory. As the report suggests, there is a shortage of systematic primary research on the impact of linkage under different circumstances.

However, the World Renew Kenya team and I recently spent a little time with two banks in Nairobi, exploring with them their approach to savings groups, how they interact with them, the products offered and ongoing support. What we found was a remarkable difference in attitude that could go a long way toward explaining the very different results experienced to date.

Several banks in Kenya offer services specifically targeted toward savings groups or (as they are typically known in Kenya) chamas. One of the most prominent early entrants was Postbank (the government-owned Kenya Post Office Savings Bank), which has a government mandate to increase financial inclusion. The bank started to offer its M-Chama group products in 2017. Postbank’s web presence, and limited experience to date, suggest more of a focus on savings group management through the M-Chama software developed by Safaricom, than tailoring of products, training and customer experience to the needs of groups. We decided instead to focus on two banks specifically known to World Renew Kenya from account experience and personal relationships.

We visited Co-operative Bank and Equity Bank, two of Kenya’s largest banks, to compare their approaches. Note that acquisition of savings group deposits is a very significant goal in Kenya, since it is estimated that over 60% of Kenyans have savings in one or more of the country’s 1 million chamas.

Co-operative Bank

Co-operative Bank was, until 2008, registered under the Co-operatives Societies Act. Then it was re-registered under the Companies Act as a commercial bank, and is listed on the Nairobi Securities Exchange. It has a standard banking for-profit motivation: its vision is “to be the dominant bank in Kenya and the region, riding on the unique Co-operative Model providing innovative financial solutions for distinctive customer experience.” The bank has gone some way toward its vision, and now has the second-largest customer base of all Kenyan banks (after Equity Bank).

For Co-operative Bank, it appears that provision of banking services to chamas is a legitimate and practical way to acquire more low-cost deposits. For such groups to be profitable, services need to be standardized and highly automated, and transaction fee income needs to cover the cost of payments, transfers, etc.

Services offered include:

• A deposit account specifically for registered groups (Mshriki current account) with no fees and no minimum operating balance
• Loans for individuals at the legal maximum of 13% on the total amount owned
• Access to group loans after 6 months of saving, with loan amounts up to 5 times group savings to a maximum 50 million KSh (about $500,000). For groups, interest rates are still at the legal maximum of 13% on the total amount owned but on the outstanding balance rather than total loan. In addition they charge an industry-standard 2% origination fee and mandatory insurance. Collateral is required, in the form of real property or financial instruments
• Initial financial literacy training (2 community visits)
• Mobile payment collection system called M-Collection with some record-keeping capabilities
• Individual insurance products

Essentially, in a mobile-focused country like Kenya, these are the minimum requirements to offer to savings groups.

A note on interest rates: currently Kenyan interest rates are capped by law at 4% above central bank lending rate (currently 9%, allowing banks to lend at 13%). Under bank pressure, the Kenyan government is currently trying to remove this cap.

Equity Bank

Equity Bank on the other hand started its life with a focus on mortgage lending in low income communities, and then went through some financial and reputational challenges as it moved into more of a profit-first focus. However, it has recently (2014) reinvented itself as a commercial bank with a revitalized community focus and a vision “to be the champion of the socio-economic prosperity of the people of Africa.” Its purpose says it even more clearly: “We exist to transform the lives and livelihoods of our people, socially and economically, by availing them modern and inclusive financial services that maximize their opportunities.”

This vision and purpose are supported by the formation in 2010 of the Equity Bank Foundation, which has six social thematic areas of focus: education and leadership development; financial literacy and access; entrepreneurship; agriculture; health; innovations and environment.

Equity’s approach to chamas is not so much about maximizing low-cost deposits, as providing extensions to the capabilities of the groups. So specific products and services offered to each chama are based on the culture and needs of the group. Products offered are mostly no different from those of Co-Op:

• Group savings
• Individual lending, and group lending such as a group property purchase. The group fund would provide a down payment from the group fund, with the balance funded by Equity. Interest again is the legal maximum of 13% reducing balance, but a smaller origination fee 5% of monthly payment amount. There is also not normally an insurance requirement (for individuals it is a relatively low 0.65% of loan amount).
• Individual members all have accounts and can bank surplus cash, etc, for their businesses
• EazzyChama group recording software (desktop or mobile) with treasurer reporting, and individual views into group transactions, individual statements, etc
• Extensive range of individual and group insurance products

Equity has subsidiaries in several other East African countries as it pursues its expansion ultimately across Africa. It plans to roll out its Kenyan savings group linkage model to all of the countries in which it works.

What’s the Difference?

The difference in philosophy and approach can be summarized as follows:

1. The initial approach to groups is far more hands-on with Equity. They assign a relationship officer to each group (nowhere in Kenya is more than 30 Km from a relationship officer, ensuring universal reach). These officers and other staff make several visits to the community, and continue to visit throughout the relationship. Initial focus is on learning about local needs and goals, and carrying out extensive financial literacy education.
2. Products from Cooperative are barely adjusted for groups, whereas Equity has designed products very specifically to address the needs of groups and their members, including a great deal of flexibility depending on particular group needs.
3. Cooperative provides training but primarily only at the start. Equity expects a long-term relationship (hence the assignment of a specific relationship manager). Equity also provides training well beyond financial literacy, and includes early stage business set-up and management, business development, and even digitization of businesses.
4. Customer service for Equity is about relationship. The relationship officer we met with had just visited one of her client groups, and showed us her file for the group. What was most remarkable is that half of the file consisted of photographs of groups members and families, and successful group projects. She clearly took pride in Equity’s role in improving economic livelihoods in the communities they serve.
5. Both banks offer insurance policies, but Equity includes group-specific offerings, including group health policies that cover members and their families.
6. Interest rates are similar for the groups, but Equity may be less expensive for individuals (13% reducing balance rather than fixed). In addition, loan origination fees are lower than Co-op. Access to loans also appears to be more flexible with Equity.

It’s All in the Mission

A bank’s success is not simply about sustained financial growth. Rather it is defined in terms of advancement of the organization’s mission and achievement of its vision.

There’s nothing inherently wrong with a bank having a vision for industry dominance and ever-growing profits for its shareholders (assuming reasonable ethics). However, for savings group linkage to work, the vision and mission of the bank must overlap considerably with those of the savings group. This is simply not going to be the case with a normal profit-centric commercial bank.

For Co-operative Bank to be successful, it makes sense to offer savings group products that will allow it to tap into the vast volume of savings in chamas. However, with the savings groups having community development and economic growth goals, and the bank focused on its return on shareholder equity, there is insufficient common interest for extensive impact on the communities it purports to serve.

For Equity Bank to be successful, in addition to meeting target ROEs, communities must be benefiting and financial inclusion must be increasing. This provides an area of commonality that allows for Equity staff to speak in terms the savings groups understand, to tailor product offerings to the needs of the community, and to offer extensive financial literacy and business training that will contribute to the capabilities of the community. In return, it is reasonable to expe4ct that Equity will capture a disproportionate share of chama savings.

World Renew Kenya plans to pilot and learn with Equity Bank, building a relationship with them that will allow World Renew to further empower and equip Kenyan NGOs and churches in their local community development work, as they seek to expand economic livelihoods in their communities.