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IN
1993, Equity Building Society in Kenya was declared technically
insolvent; in 2010 it is a fully fledged bank, listed on the Nairobi
Stock Exchange and claims more than half of Kenya’s banked population
as its customers.

In 2006 alone, its
customer base grew 82,5% and its deposits grow 80% a year. What is the
secret of its success? The innovative and efficient provision of
financial services to low- and middle- income groups at a good price.

While the large
local and international banks were doing what banks generally prefer to
do — courting wealthy elites and multinationals — Equity ditched its
unsuccessful mortgage financing business and focused its efforts on the
“missing middle” of the market.

Another big success
story in Kenya also focuses on that missing middle — the mobile banking
system M-Pesa, which is soon to be launched in South Africa. M- Pesa,
in partnership with mobile operator Safaricom, allows people to move
money without a bank account, using only mobile phones. The product
struck a chord in the market — less than three years after its launch,
it has almost 10-million customers.

Banking low- to
middle-income earners, particularly those outside the cities, has
traditionally been shunned by large African and foreign banks because
it was complex terrain that didn’t seem to have much profit upside.

But, almost under
the radar, there has been a steady shift into this market, with mobile
telephony playing a crucial role in enabling new ways of doing
financial transactions. Even poor people don’t keep their money under
the mattress anymore, which presents a big business opportunity for
banks.

As financial analyst Mark Napier points out, the fact that people are unbanked in Africa doesn’t mean they don’t want to be.

Napier is the
editor of an interesting book launched in SA last week, Real Money, New
Frontiers — a collection of case studies and essays on financial
innovation in Africa, which also looks at why some succeed and some
don’t.

The case studies
focus on the success stories across the continent, of which there are a
surprising number. It also includes some of the more unusual
innovations such as the relationship Barclays Bank in Ghana developed
with susu collectors — informal money traders who collect daily the
profits from small informal businesses and keep them safe for a fee.

Barclays lured the
susu collectors to deposit the money with the bank and it cultivated
them as middlemen to lend money back into the community. Now, more than
700 susu collectors have grown their businesses, traders have more
access to finance, and Barclays grew its new deposits in one year from
2m (2007) to 10,2m.

It has taken time
for South African institutions to get into lower-income finance, mostly
because of concerns about profitability and the complexity of
addressing this segment. Unsuccessful government microfinance
initiatives also dented confidence.

But this market is
now growing rapidly, largely because of mobile phone tie-ups, and South
Africa has a significant place in the book. Case studies include
initiatives by the big banks in conjunction with cellphone operators
and off- the-shelf insurance products.

The commonly held
view that poor people are bad debtors is quickly being debunked. Bad
debt ratios of microfinance banks can be extremely low and, in some
cases in Africa, loan repayments have been 100%.

But many
microfinance schemes fail. This is partly because of the difficulty of
doing business on the continent. According to the World Bank, 27 of the
35 least business-friendly countries in the world are in Africa.

Not only are
African governments not moving quickly enough to improve the business
environment, they are diverted in their quest to address poverty by the
tendency to focus on redistributing wealth, rather than creating it.

There is also an
inordinate focus on the resources and agriculture sectors as being
wealth creators for Africa’s future. This does not recognise that
consumer spending on goods and services has been a consistent and
dependable driver of growth in Africa over the past decade. The
cellphone revolution is one manifestation of that.

If there is one
message that emerges from all of this, it is that the best way of
creating sustainable growth is to do so from the ground up rather than
from the top down.

– Games is CE of Africa @ Work, a business information consultancy