Challenges Facing EQUITY BANK

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CHALLENGES FACING EQUITY BANKS REGIONAL EXPANSION STRATEGY

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CHAPTER ONE

INTRODUCTION

1.1 Background

Organizations exist as open systems and hence they are in continuous interaction with the

environment in which they operate. The environment in which the organizations operate is never

static. All organizations lend themselves to this environment which is highly dynamic, chaotic,

and turbulent that it is not possible to predict what will happen and/or when it will happen.

Consequently, the ever-changing environment continually presents opportunities and challenges.

To ensure survival and success, firms need to develop capability to manage threats and exploit

emerging opportunities promptly. This requires formulation of strategies that constantly match

capabilities to environmental requirements. Success therefore calls for proactive approach to

business (Pearce and Robinson, 2003).

One of the challenges presented by a dynamic environment is increased competition.

Competition is indeed a very complex phenomenon that is manifested not only in other industry

players but also in form of customers, suppliers, potential entrants, and substitute products. It is

therefore necessary for a firm to understand the underlying sources of competitive pressure in its

industry in order to formulate appropriate strategies to respond to competitive forces (Porter,

1989). Porter (1989) further notes that the essence of formulating competitive strategy is relating

a company to its environment. He observes that the intensity of competition in an industry is

neither a matter of coincidence nor bad luck. Rather, competition in an industry is rooted in its

underlying economic structure and goes well beyond the behavior of current competitors.

Due to the changing environment that is fraught with increased competition for the limited

resources, market share, and new competitive challenges; implementation of competitive

strategies within organizations is very important. This is essentially due to the firms quest to

finding less threatening ways to do business, keeping their customers loyal to the firms products

and services and keeping them off those competitors. Firms are in competition with each other

when they try to sell identical products and services to the same group of customers or try to

employ factors from the same group of suppliers.

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Porter (1985) observes that for firms to be able to retain competitive advantage, they need to

examine their environment both internal and external and respond accordingly. Ansoff and

McDonnel (1990) also point out that the success of every organization is determined by the

match between its strategic responsiveness and strategic aggressiveness and how these are

matched to level environmental turbulence. This is because each level of environmental

turbulence has different characteristics, requires different strategy(ies), and requires different

firm capabilities. Therefore, each level of environmental turbulence requires a matching strategy,

and the strategy has to be matched by appropriate organizational capability for survival, growth

and development.

Fundamental forces of change have been experienced in the global business environment

resulting in unprecedented competition. Organizations responding to these changes have realized

that their existing strategies and configurations may no longer serve them well (Ansoff and

McDonnell, 1990). The Kenyan environment is not exempted from what the global scenes are

experiencing. Organizations being environment dependent, they have to constantly adapt their

activities and internal configurations to reflect the new external realities and failure to do this

may put the future of an organization in jeopardy (Aosa, 1998).

1.1.1 Expansion Strategies

Expansion strategies are game plans to grow and position a firm in a competitive manner. Firms

usually apply expansion strategies to grow bigger in size in order to gain from economies of

scale for instance in risk reduction through diversification, increase their market share and

profitability, improve their financial strength and improve technological capacity. As a crucial

driver of success and sustainability, growth allows firms to expand their portfolio by providing

their products and services to a larger number of clients while at the same time fulfilling other

missions. Organizations can use a variety of organizational structures to facilitate expansion,

including: Growing existing operations, legal restructuring, franchising, strategic alliances,

mergers and Acquisitions (Robert, 2000)

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There are two models that help answer this question. These are: Customer-centric approach and

firm-centric approach. In the customer-centric approach, the organizations first seek to

understand customer needs and demands. This includes current and future trends in the

marketplace. Once the organization determines the types of products and services customers are

demanding it must then consider whether it can meet these needs given its internal capabilities

and resources. The organization must also consider how offering these products and services fits

into its overall strategy. If it determines that its internal capabilities cannot meet these customer

needs, yet offering these particular products and services fits into its overall strategy, it should

begin considering various expansion strategies. Furthermore, the organization should consider

which other organizations offer the products and services the customer is demanding then it can

consider opportunities to partner or potentially acquire. (Markusen et al 1995)

In the firm-centric approach, an organization evaluates its internal capabilities (core

competencies, current product offering, legal structure, and available resources). If these internal

capabilities cannot meet external market factors (such as increased competition, increased

commoditization, increased customer demand, etc.), the organization should consider various

expansion strategies (Doyle, Gillian, 2002).

1.1.2 Equity Bank Group

Equity Bank commenced business on registration in 1984. It has evolved from a Building

Society, a Microfinance Institution, to now the all inclusive Nairobi Stock Exchange and Uganda

Securities Exchange public listed Commercial Bank. With over 6.3 million accounts, accounting

for over 57% of all bank accounts in Kenya, Equity Bank is the largest bank in the region in

terms of customer base and operates in Uganda and South Sudan.

Equity Bank continues to receive both local and global accolades for its unique and

transformational business model. The Bank is credited for taking banking services to the people

through its accessible, affordable and flexible service provision.

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Equity Bank Group is a financial services organization in East Africa. The Group's headquarters

are located in Nairobi, Kenya, with subsidiaries in Kenya, Uganda, and South Sudan. The Group

plans to open subsidiaries in Rwanda and Tanzania.

Equity Bank Group is a fast-growing financial services organization in East Africa, with an asset

base valued at over US$1.7 billion (KES:143 billion), as of December 2010, with shareholder's

equity valued at about US$323.5 million (KES:27.2 billion. The group's customer base in the

region it serves is estimated at over 5.9 million companies and individuals.

The companies that comprise of the Equity Bank Group include but are not limited to the

following:

1. Equity Bank - Nairobi, Kenya

2. Equity Bank (South Sudan) - Juba, South Sudan

3. Equity Bank (Uganda) - Kampala, Uganda

4. Equity Consulting Group Limited - Nairobi, Kenya

5. Equity Insurance Agency Limited - Nairobi, Kenya

6. Equity Nominees Limited - Nairobi, Kenya

7. Equity Investment Services Limited - Nairobi, Kenya

8. Finserve Africa Limited - Nairobi, Kenya

9. Equity Group Foundation - Nairobi, Kenya

The stock of Equity Bank Group is traded on the Nairobi Stock Exchange, under the

symbol: EQTY. On Thursday 18 June 2009, the Group's stock cross listed on the Uganda

Securities Exchange and started trading that day, under the symbol: EBL

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Equity offers financial services through its wide network of Branches in Kenya, Uganda and

South Sudan supported by Alternate Delivery Channels which include:

Visa branded ATM's in Kenya

Points of Sale (POS) where customers shop; pay and withdraw cash in leading retail

outlets.

Internet and mobile banking channels The Bank runs on a Global Robust State of the Art

Information Technology Computer System supported by Infosys, HP, Oracle and

Microsoft.

Agency Outlets

As a Bank, Equity is guided by the following Core Values which they uphold in all the activities

they undertake. These are:

Professionalism

Integrity

Creativity and Innovation

Teamwork

Unity of purpose

Respect and dedication to customer care

Effective Corporate Governance

Equity Bank's performance has been improving year from year at a time when the bank has been

feted and recognized globally for its interventions at the bottom of the pyramid, SMEs and in

agriculture. Africa Investor in September 2011 in Washington recognized Equity Bank as the

Best Initiative in Support of SMEs and the Millennium Development Goals while Dr. James

Mwangi the CEO, was named as the African Banker of the Year for the second year running at

the 2011 African Banker Awards during IMF/World Bank annual meetings. The World

Economic Forum recognized Equity Bank as the only financial service provider in the Emerging

markets which meets the threshold of sustainability based on a criteria covering, innovation,

growth and corporate sustainability.

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1.2 The Statement of the problem

Organisations are guided by their vision and mission in order to attain both their short term and

long term objectives. Senior managers have the sole responsibility of formulating and

supervising the implementation of strategies for their organizations through their subordinates.

The vision of a given organisation underlines the strategic direction that the company wants to

take or put in another way, where it wants to be in a given period of time. A mission statement is

a statement of the overriding direction and purpose of an organisation while objectives are

statements of specific outcomes that are to be achieved. (Johnson G. et al, 2006).

When an organisation adopts a strategy to expand its operations beyond its existing boundaries,

it is prudent for managers in charge of corporate strategy to scan the environment with a view to

identifying the expected or potential changes in the environment as the changing variables will

give rise to opportunities and threats for the organisation. Since these variables are likely to

pause great challenges to the strategic capability of the organisation i.e. resources and

competences must be analysed with the sole purpose of the internal influences and constraints on

strategic choices for the future.

The study by Kieti John (2006) addressed the determinants of foreign entry strategies a case of

Kenyan firms venturing into Southern Sudan. Vincent (2005) has looked at challenges to

strategy implementation at CMC Motors group limited and has successfully enumerated the

challenges experienced across all levels within the organisation. It is highly likely that the

authors of these studies have assumed a similar success story in its subsidiaries (Uganda and

Tanzania).

The Kenyan environment has changed largely and the organisation is forced to consolidate itself

as the market leader is largely liberalised and the competition is intense in the banking industry.

Equity bank Group had an uphill task when it entered Uganda and Southern Sudan less than

three years ago. Besides the huge initial investments in the subsidiaries, the impact of the new

branches on the groups profitability must have been a difficult pill for the banks management

and shareholders to swallow.

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The venture forced Equity bank into unfamiliar territory where its profit before tax (PBT) for the

year 2009 grew by a single digit (five per cent) compared to a growth of 111 per cent in the

previous period (2008).

It all began when the bank acquired Ugandas biggest microfinance bank Uganda Microfinance

Limited (UML) in June 2008 and converted it into a fully-fledged bank Equity Bank Uganda

Limited in December 2008. The bank paid out Ksh1.66 billion ($25.3 million) in the deal that

saw it take up 100 per cent of the banks share capital in 2008. Equity inherited 28 branches and

14 contact offices from the deal.

Although Equity Uganda posted a loss of Ksh600 million ($7.414 million) for the first half of

2010, the banks CEO Dr James Mwangi said it is its learning centre, whose experiences will

inform future expansion to complete its plans to venture into at least 10 countries in Africa in the

next five years, and roll out into the COMESA region in ten years.

In the same year the bank opened subsidiaries in Southern Sudan and acquired an investment-

banking license from Juanco investment Bank Limited. The acquisition helped Equity Bank

dispose off excess liquidity, which stood at 77 per cent by the close of 2007, and rose 25 per

cent following the buy-in by Helios EB.

The new entities pulled a combined loss of Sh1 billion in 2009, eroding Equitys bottom-line

and eating into shareholders earnings. The groups total Non Performing Loans (NPLs)

increased 91.1 per cent to Sh4.8 billion on a year-on-year basis, while the level of net NPLs as a

proportion of gross loans and advances surged from 3.9 per cent to 4.7 per cent.

The bank adopted a cautious approach in lending and scaled up provisions for bad debts to stay

afloat, while hoping that the investment banking division, and all of its newly opened branches

in Kenya, Uganda and Southern Sudan would break- even before June last year.

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The banks regional expansion strategy has not been a smooth road to success. A lot of

challenges have been encountered and the management have had to re-think some of the

strategies for sustainable growth. This research aims at investigating the strategies that Equity

group has implemented in its growth and expansion and also identify key challenges

encountered.

1.3 Objectives of the study

1. To identify the strategies Equity bank group has used in its regional expansion

2. To identify the challenges the bank has encountered in its expansion

3. To recommend ways of overcoming the challenges faced

1.4 Importance of the study

The study will be useful to the Senior managers in charge of strategy formulation in the at the

Equity bank group as they will understand the challenges that threaten to blur the organisations

vision and therefore enable them to do adequate environmental scanning before investing in

foreign markets and also come up with practicable solutions to counter the challenges.

The study will also be useful to other companies that have presence in the East African Market

or have plans to pursue regional expansion especially with the first tracking of the East African

community common market. Other banks that would want to venture into the East African

Market will learn the pitfalls and the successes of Equity bank group and ensure that they have a

successful take off and maintain a steady cruise level.

It is also expected that the study will provide policy makers in the East African Countries with an

insight into the problems faced by investors in their respective countries that are likely to

discourage foreign investment. For instance Kenya is the second largest investor in Tanzania

after Britain and it is only logical that investment policies in such an environment should be

more conducive than repulsive.

For the researchers and scholars this project will be useful as a reference material especially in

researching other industries and expansion strategies in other regions.

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CHAPTER TWO

LITERATURE REVIEW

2.1 International Market Entry Modes

International Market Entry Mode is a widely used concept in international management, strategy

and marketing literature, where it has been applied to explain the degree of internationalization,

risk, and the performance of the firm. The present paper explains the inappropriate use of this

concept within current international marketing literature. The comprehensive framework for

looking at the international market entry modes will be presented in order to correctly use the

concept. For explanatory purposes I will divide the concept of International Market Entry Mode

(IMEM) into three parts: international, market and entry mode.

International:

The term international has several meanings and is used differently; generally, it is concerning

or belonging to all (or at least two) nations, and is used as an adjective (examples: international

company, international product, and international affairs). This adjective by nature explains

incidents both moveable and immovable. In their discussion of the international management

domain, Boddewyn (1999) and Boyacigiller and Adler (1997) argued that by definition,

international is contextual. It specifically includes the environment external to the domestic in

which firms conduct business. As Boddewyn stated (1997, 1999) international means the

crossing of national borders.

Market:

In marketing, the term market refers to a group of consumers or organizations interested in a

product, have the resources to purchase the product, and are permitted by law and other

regulations to acquire the product (Kotler & Armstrong 1993, 2010), (McCarthy & Perreault,

1990). Consumer market and business markets are two different types of markets generally

discussed within marketing literature. Consumer markets are the end-users of the product or

service, and include individuals and households that are potential or actual buyers of products

and services.

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Business markets include individuals and organizations that are potential or actual buyers of

goods and services that are used in, or in support of, the production of other products or services

that are supplied to others. The term market by definition covers both buyers and end users. In

essence, a market is a set of actual and potential buyers of a product (Kotler & Armstrong, 2010,

Levens, 2010). Since a market is a collection of human elements, market by definition is a

moveable element.

Entry Modes:

In a broad and general sense, entry modes or operation methods refer to the way of operating in

the foreign market (Welch, Benito, and Petersen, 2007). In reaching strategic objectives, firms

may choose from various entry modes. Typical modes of entry include exporting, licensing, joint

ventures, acquisitions, and green-field investments (Davis, Desai and Francis, 2000). Examining

different types of entry modes, Welch, Benito, and Petersen (2007) classify entry modes into

contractual, exporting and investment modes.

Figure 1: Foreign market entry modes

Source: Welch, Benito, and Petersen, (2007)

Contractual Modes

Investment Modes

Exporting

Franchising

Licensing

Management contracts

Subcontracting

Project operations

Alliances

Indirect

Direct

Own sales

office/subsidiary

Minority Share

50/50

Majority Share

100% owned

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Each mode involves different resource deployment patterns (Agarwal & Ramaswamy, 1992),

levels of control and risk (Kim & Hwang, 1992), and political and cultural awareness (Dalli,

1995).

International market entry mode research has long neglected the meaning of market. Most of

the literature on international markets does not indicate the real meaning of the concept. They

treat the adjective (international), blindly ignoring the real meaning of the concept market. The

literature on international market entry modes or the foreign market operation modes have

adversely hinged on the non-marketing based definition of market; sadly, marketing literature

also borrows this definition.

From initiation of foreign market operation methods by Stephen Hymer (1972), studies on entry

modes discuss two different types of moves, namely capital and product. By international capital

movements Hymer (1972) refers to the direct investment of corporations in their overseas

branches and subsidiaries. In Hymers definition of international capital movements, the author

does not discuss anything related to the market (buyers). It truly depends on what type of market

we are discussing.

Marketing meaning of market refers to a market made up of buyers of products and services.

In finance, there is capital market for money flow. However, while Hymers definition of

market is correct for finance, it is incorrect for marketing. Anderson and Gatignon (1986)

developed a model of market entry choice mode based on transaction cost theory. Focusing

mainly on control considerations, they suggested that the degree of control inherent in a given

operation method is a function of ownership structure. Thus, licensing and various other

contractual arrangements are low-control modes, while a fully- owned subsidiary would allow

the internationalizing firm to enjoy a high degree of control over a foreign operation. When the

firms focus on the entry modes in a binomial choice (full control and shared control), transaction

cost theory is appropriate for explaining why the firms prefer full ownership vs. shared

ownership (Azofra, Bobillo and Martinez, 1999). Nonetheless, although it is an important view

of looking at foreign operation methods, it does not take the customer into account; thus, it is

more of an economic view with less focus on marketing. Product movement in entry mode

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discussion is quite hidden. By definition exporting is this kind of market entry mode, but it is not

the only one.

Franchising and licensing also have some similar characteristics, but movement is only a part of

the product, and it is most likely either one or a very few parts of the core, tangible and

augmented product.

As discussed earlier, one of the properties of the market is its active and alive nature. Since it is a

collection of buyers, a market can be moved, just as humans move one place to another.

Moreover, adjectives such as international or foreign intend to express ownership of the noun to

another country. Thus international market seen from an appropriate marketing view means buys

from another country. International buyers (market) can be served in many ways. The main

property of the prevailing entry mode discussion or the hidden assumption is that market is a

country; this logic goes largely unnoticed but is supported by marketing textbooks and journals.

There are certain situations where this assumption is explicit in certain texts; for example,

Bradley and Gannon (2000) write Foreign market entry (FME) is a complex decision for a firm,

which first involves whether to enter foreign markets. A positive decision leads to the question of

which country or countries to enter and in what sequence.

Illusion of this assumption can be found within the services marketing literature. Although they

do not change the holistic way of looking at prevailing market entry modes, services marketers

such as Lovelock, Yip (2007, 1996, 1999), Ball, Lindsay, Rose (2008), McLaughlin and

Fitzsimmons (1996) treat market based on its real marketing definition. As Lovelock and Yip

(2007) point out, the nature of interaction between the customer and service organization

determines the available options for service delivery. Part of the reason why they detail actual

service delivery options is due to the perishability, variability, inseparability, and intangibility

characteristics of services. The various modes of delivery are as follows: customers visit the

service site, service providers go to their customers and service transactions are conducted

remotely (at arms length). Discussing the differences among the services, Lovelock and Yip

recognise alternative distribution methods for services. People-processing services firms that

require direct contact with the customer have several options: (1) export the service concept (2)

import customers and (3) transport customer to new locations (e.g., new airline routes).

Possession-processing services involve services to physical possessions such as maintenance,

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and require an ongoing local presence. Crew or equipment may need to be flown in to enable

service completion.

Information-based services can be distributed in several ways: (1) export the service to a local

service factory (2) import customers and (3) export the service via telecommunications and

transform it locally. Electronic channels such as virtual stores (e.g., Amazon.com) and online

banking offer an alternative to traditional physical entry modes for reaching buyers of the

information-based services. Although Lovelock and Yip (2005, 2007) consider these to be

international distribution methods, in the tangible goods business we talk about wholesalers and

retailers as well as various logistics/distribution related functions. As implied earlier, entry mode

research usually does not look into downstream wholesaling/retailing issues. In other words, we

should do more research on wholesaling and retailing. Regarded from a marketing viewpoint,

they are methods of reaching international market and thus international market entry modes.

Based on the existing literature, alternative ways of looking at the market entry modes can be

found. The simplified idea of this paper can be presented as in Figure 2. The two- by- two

classifications of entry modes in Figure 2 recognises four different types of market entry modes.

Figure 2: Market Entry Mode Matrix

Mode Matrix Firm or Product

Move to Foreign Country Stay Domestic

Customer

(Market)

Move to

Foreign

Country

Dual Move

target imported customers in a

third country

Type A: Single Move

Importing Customers

Stay

Domestic

Type B: Single Move

target customers of host

country

International Market entry

through channels and employees

Dual Move: In order to support reaching customers of third country/ies, multinational company

or its` product might want to move from a home country to a second country (so, foreign). In this

kind of move, the original firm (through direct investment modes) or its products (market modes)

is sent into the second country, and an emerging type of market entry is known as the dual move.

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The market and the product/firm (later firm) from the original destination are moved to the new,

foreign environment. In order to successfully perform this kind of move, a firm may face more

strategic challenges than any other type of moves. There are few supported market entry modes

that qualify as a dual move type. The most common type is the FDI-based move, where a new

investment is made in the second country to serve third country customers. This type of market

entry mode can be found in international hotel chains, whose main target market is customers

from a third country. Club Med has combined dual move strategies by creating a network of

varied vacation sites around the world. A more simple type is the franchising-based move, where

a domestic business concept is moved to a second country to serve buyers of a third country.

Type A Single Move: A firm that decides to retain its location and attract customers from

around the world or selected third country/ies will be considered as Type A, single move e.g.,

specialized hospital care to foreign customers. It is single since only one element (market) of the

matrix moves. Prevailing classifications may consider these types of firms as domestic since they

operate domestically, but they should be considered as international since they target

international customers.

Type B: Single Move: A firm that decides to move its location and/or products to a second

country in order to serve the host country customers will be considered as Type B, single move.

Almost all past literature on classification of entry modes discusses the entry modes related to

Type B: Single Move. Movement of capital through foreign direct investment modes and

movement of the companys final offer fall under this classification. All market to hierarchical

modes discussed within the transaction cost literature can be considered as Type B Single move,

since its hidden assumption is reaching the host country buyers.

International Market entry through technology and employees: Electronic channels such as

virtual stores (e.g., Amazon.com) and online banking offer an alternative to traditional physical

entry modes without movement of either firm or customer for entering the international market.

Increasing international transportation infrastructure with fast and low cost allows more and

more firms to use traditional door- to- door marketing strategies in which company

representatives visit the host country and perform the selling function.

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Movement in this case happens with the employees. This type of market entry strategy can be

found within services organizations such as engineering and construction.

2.2 The International Market Entry Evaluation Process

The International Marketing Entry Evaluation Process is a five stage process, and its purpose is

to gauge which international market or markets offer the best opportunities for our products or

services to succeed. The five steps are Country Identification, Preliminary Screening, In-Depth

Screening, Final Selection and Direct Experience.

Figure 3: The international market entry evaluation process

Country Identification

Preliminary Screening

In-depth Screening

Final Selection

Direct

Experience

Adapted from J.K Johansson (2000)

Step One - Country Identification

The World is your oyster. You can choose any country to go into. So you conduct country

identification - which means that you undertake a general overview of potential new markets.

There might be a simple match - for example two countries might share a similar heritage e.g.

the United Kingdom and Australia, a similar language e.g. the United States and Australia, or

even a similar culture, political ideology or religion e.g. China and Cuba. Often selection at this

stage is more straightforward.

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For example a country is nearby e.g. Canada and the United States. Alternatively your export

market is in the same trading zone e.g. the European Union. Again at this point it is very early

days and potential export markets could be included or discarded for any number of reasons.

Step Two - Preliminary Screening

At this second stage one takes a more serious look at those countries remaining after undergoing

preliminary screening. Now you begin to score, weight and rank nations based upon macro-

economic factors such as currency stability, exchange rates, level of domestic consumption and

so on. Now you have the basis to start calculating the nature of market entry costs. Some

countries such as China require that some fraction of the company entering the market is owned

domestically - this would need to be taken into account. There are some nations that are

experiencing political instability and any company entering such a market would need to be

rewarded for the risk that they would take. At this point the marketing manager could decide

upon a shorter list of countries that he or she would wish to enter. Now in-depth screening can

begin.

Step Three - In-Depth Screening

The countries that make it to stage three would all be considered feasible for market entry. So it

is vital that detailed information on the target market is obtained so that marketing decision-

making can be accurate. One can deal with not only micro-economic factors but also local

conditions such as marketing research in relation to the marketing mix i.e. what prices can be

charged in the nation? - How does one distribute a product or service such as ours in the nation?

How should we communicate with are target segments in the nation? How does our product or

service need to be adapted for the nation? All of this will information will for the basis of

segmentation, targeting and positioning. One could also take into account the value of the

nation's market, any tariffs or quotas in operation, and similar opportunities or threats to new

entrants.

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Step Four - Final Selection

Now a final shortlist of potential nations is decided upon. Managers would reflect upon strategic

goals and look for a match in the nations at hand. The company could look at close competitors

or similar domestic companies that have already entered the market to get firmer costs in relation

to market entry. Managers could also look at other nations that it has entered to see if there are

any similarities, or learning that can be used to assist with decision-making in this instance. A

final scoring, ranking and weighting can be undertaken based upon more focused criteria. After

this exercise the marketing manager should probably try to visit the final handful of nations

remaining on the short, shortlist.

Step Five - Direct Experience

Personal experience is important. Marketing manager or their representatives should travel to a

particular nation to experience firsthand the nation's culture and business practices. On a first

impressions basis at least one can ascertain in what ways the nation is similar or dissimilar to

your own domestic market or the others in which your company already trades. Now you will

need to be careful in respect of self-referencing. Remember that your experience to date is based

upon your life mainly in your own nation and your expectations will be based upon what your

already know. Try to be flexible and experimental in new nations, and don't be judgemental - it's

about what's best for your company - happy hunting.

2.3 Factors influencing choice of Expansion strategy

By watering down cross-border barriers, globalisation has led to the increased expansion of firms

to foreign markets. Such expansion could benefit the firm in ways such as reducing its

susceptibility to country specific macroeconomic shocks, allowing it to achieve economies of

scale, and presenting new opportunities for value-enhancing growth. In the banking sector, an

opinion attributed to banks expansion to foreign market is that of offering service to customers

who have expanded to these foreign locations, to avoid losing them to home-country institutions

(Aliber 1984). Since foreign banks are also noted to provide credit facilities to domestic

customers in their host countries, the motivation behind a banks expansion to a foreign market

may exceed the follow-your-customer explanation (Berger et al. 2003).

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Cultural factors and Language

Cultural distance determines success of foreign entities in host countries. Various aspects of

culture (e.g. whether cultures are individualistic or not) differ from one country to another

(Nardon & Steers 2009). Such cultural differences between nations are argued to affect

organisational aspects such as management practices e.g. whether to staff top positions in

foreign subsidiaries with home country or host country nationals (Bird & Fang 2009). Although

globalisation tools such as the Internet have weakened traditional nation-based cultural

differences, political cultures remain entrenched within boundaries, making cultural distance a

relevant consideration for foreign-market-entry decisions (Chevrier 2009).

Banks, just like any other corporation, would thus favour expansion to areas that have cultural

similarities with the home countries (Focarelli & Pozzolo 2005). For instance, Banco Santanders

(a Spanish bank) successful expansion into a leading global bank is attributed to a strategy that

followed an incremental plan in a sequence informed by closeness of the host and home country

cultures (Parada, Alemany & Planellas 2009). Secondly, culture may influence bank expansion

via the language similarity or lack thereof (Focarelli & Pozzolo 2005). Sharing a common

language betters communication and interaction of the people, hence could influence decision-

making processes within the organisation.

Regulatory framework

The degree of regulations on foreign firms operations in a particular country is also a critical

determinant of a banks choice of expansion location. A general observation is that foreign banks

would favour expansion to host countries where restrictions on entry and bank activity are

minimal (Clarke, Cull, Peria & Sanchez 2003; Lehner 2009). Developing the CAGE Cultural,

Administrative, Geographical, and Economic distance framework to guide firms appraisal of

international expansion opportunities, Ghemawat (2007) notes that having common aspects such

as membership to a common regional trading block and a common currency lowers the

administrative distance between two countries, thus increasing firms expansion to such trade

partners (Ghemawat 2007). Direct effect of regulation on banks foreign entry may for instance

apply where governments put restrictions on cross-border mergers and acquisition, to protect

domestic firms from foreign competition or foreign ownership (Focarelli & Pozzolo 2005).

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For instance, relative low government barriers to entry of foreign banks in the transition nations

of Eastern Europe, is recognised as the driving factor to the higher foreign bank density in such

countries, when compared to developed nations of continental Europe (Berger 2007). A host

country whose legal and institutional frameworks are similar to those of the home country of a

foreign bank is also could also attract entry of such a bank (Hryckiewicz & Kowalewski 2010).

Further, incentives offered to foreign investments (e.g. on taxation) may influence both the

banks entry mode choice and extent of engagement in the market (Cerutti, DellAriccia & Peria

2007; Petrou 2009).

Economic and Geographical factors

Home and host country economic aspects such as the size of the economy and extent of overseas

trade also drive banks expansion to foreign market (Brealey & Kaplanis 1996). For instance,

integration in economic variables such as the degree of bilateral trade between the host and home

countries, may favour expansion to foreign markets (Focarelli & Pozzolo 2005).In this respect,

Banco Standers expansion-strategy strength was noted to be in its expansion first to regions with

greater economic proximity to the home country (Parada, et al. 2009). The CAGE distance

framework supports such a strategy with a note that rich countries [generally] engage in more

cross-border economic activity...than do their poorer cousins (Ghemawat 2007, p. 45).

Economic factors however may have an opposite effect to that hypothesized under the CAGE

framework. In times of expansion, banks could enter into more risky economies to increase their

profitability, such entry-motivation decreasing with the advent of adverse economic environment

(Hryckiewicz & Kowalewski 2010). When banks enter more risky economies during periods of

expansion in global economy, they could acquire host country institutions at comparatively

cheaper prices, thus increasing their profitability (Hryckiewicz & Kowalewski 2010). The

economic risk attached to a country at a particular period, may thus affect the mode of entry

chosen, where high risk discourages intensive foreign direct investment activities at times of

contraction in global economy (Cerutti et al. 2007).

21

Closely related to economic distance is geographic distance. Sometimes geographic distance is

considered a subset of economic factors (e.g. Focarelli and Pozzolo 2009), but could imply

further aspects such as differences in time zones and lack of a common border, rather than the

physical distance per se (Ghemawat 2007). Hryckiewicz and Kowalewski (2010) demonstrate

that geographic distance between the host and home countries determine foreign banks

performance thus influence the choice of expansion location. Distance for instance may affect

effectiveness of internal control procedures, with suggestions that it dissipates parent

organizations control over its subsidiaries (Berger & DeYoung 2006). Where retaining a high

level of control in the headquarters is a critical business policy, geographic distance could have a

pronounced effect on foreign entry decisions.

2.4 Expansion strategies models

H.I. Ansoff (1957) created a simple model to look at expansion strategies regardless of which

industry the company operates in. Ansoffs product/market growth matrix suggests that a

business attempts to grow depend on whether it markets new or existing products in new or

existing markets. According to (Lynch, 2003) the output from the Ansoffs product/market

matrix is a series of suggested growth strategies that set the direction for the business strategy.

Figure 4: Ansoffs Product - Market Matrix

Products

Existing New

Existing

Markets

New

Source : Kevan Scholes et.al, Exploring Corporate Strategy, (2002, p. 362)

Market penetration

Product development

Market development

Expansion/Diversification

22

Market penetration is a growth strategy where the business focuses on selling existing products

into existing markets. A market penetration marketing strategy is very much about business as

usual. The business is focusing on markets and products it knows well. It is likely to have good

information on competitors and on customer needs. It is therefore unlikely, that this strategy will

require much investment in new market research (Ansoff, 1989)

Market development is a growth strategy where the business seeks to sell its existing products

into new markets. There are many possible ways of approaching this strategy, including: New

geographical markets; for instance exporting the product to a new country; new product

dimensions or packaging: for example; new distribution channels and different pricing policies to

attract different customers or create new market segments (Ansoff, 1989)

Product development is a growth strategy where a business aims to introduce new products into

existing markets. This strategy may require the development of new competencies and requires

the business to develop modified products which can appeal to existing markets (Ansoff, 1989)

Expansion/diversification is the growth strategy where a business markets new products in new

markets. This is an inherently more risky strategy because the business is moving into markets in

which it has little or no experience. For a business to adopt a diversification strategy, therefore, it

must have a clear idea about what it expects to gain from the strategy and an honest assessment

of the risks (Scholes, 2002)

Ansoffs market expansion is same as the extension strategy in the Product Life Cycle because it

is an existing product in a new market. This can also be linked with Bostons question mark or

star because the product being re-launched must be a product that is successful and either in the

introduction or growth stage in the product life cycle. At the growth stage in the Product Life

Cycle, a company should expand market share by trying to get new people to try the product and

existing customers to buy more. The company should therefore use market expansion. In the

decline stage, the company should try to re-launch the product, which would be using product or

market expansion (Stanton, 1994)

23

Market penetration could be used if a successful product was being re-launched to increase the

companys market share. The marketing models can be influenced by other factors and research.

The model is used to analyze the strategic direction of a product, and if a product was placed in

the market expansion, which has medium risk strategy, and competitors also released a similar

product in this section, there will be a higher risk strategy, which will affect the products

performance and position in both the Boston matrix and the product life cycle.

2.5 Reasons for International Expansion

According to Calori and Harvatopoulos (1988), there are two dimensions of rationale for

expansion. The first one relates to strategic objective of the organization. The expansion may be

defensive or offensive. Defensive reasons may be spreading the risk of market contraction, or

being forced to expand when current product or current market orientation seems to provide no

further opportunities for growth. Offensive reasons may be conquering new positions, taking

opportunities that promise greater profitability than expansion opportunities, or using retained

cash that exceeds total expansion needs.

The second dimension involves the expected outcomes of expansion. Management may expect

great economic value (growth, profitability) or first and foremost great coherence and

complementarities with their current activities (exploitation of know-how, more efficient use of

available resources and capacities). In addition, companies may also explore diversification just

to get a valuable comparison between this strategy and expansion.

Expansion strategies are used to expand firms' operations by adding markets, products, services,

or stages of production to the existing business. The purpose of expansion is to allow the

company to enter lines of business that are different from current operations. When the new

venture is strategically related to the existing lines of business, it is called concentric

diversification. Conglomerate expansion occurs when there is no common thread of strategic fit

or relationship between the new and old lines of business; the new and old businesses are

unrelated (Thompson & Strickland, 1993).

24

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design

This study adopted a case study research design where the unit of study was the Equity bank

Group. The design is most appropriate when detailed, in-depth analysis for a single unit of study

is desired. Case study research design provides very focused and valuable insights to phenomena

that may otherwise be vaguely known or understood. This research design was successfully used

by Thuo (2002) in a similar study.

3.2 Population Sampling and Sample Size

The study targeted the two countries that the bank has already ventured into; Uganda and South

Sudan. The respondents were top executives in the company specifically the regional expansion

director.

3.3 Data Collection Methods

The study involved the collection of both primary and secondary data. The focus of the study

was on carrying out an intensive study of the international market entry strategies adopted by the

Equity Bank Group and challenges they have faced in the two countries. To achieve this, a

questionnaire was used to collect the data from the target group (see appendix 2). The

questionnaire was divided into three sections; General information, Reasons for expansion and

strategies adopted and Challenges faced in the international expansion. A five-point Likert scale

was used to determine the extent and importance of variables. Secondary data was obtained

from Equity Bank Groups policy and strategy documentation and from the Groups website.

3.4 Data Analysis

Given the fact that both the primary and secondary data were qualitative in nature, content

analysis was the best suited method of analysis. This is a technique for making inferences by

systematically and objectively identifying specified characteristics of messages and using the

same to relate trends.

25

It is further argued that the method is scientific as the data collected can be developed and be

verified through systematic analysis (Nachmias and Nachmias, 1996; Strauss and Corbin, 1990).

This approach has been used previously in similar research papers like the one by Thuo (2002).

The findings were represented in tables and analysed through percentages, mean scores and

standard deviations. The Five Point Likert Scale was used to determine the various international

market entry strategies and extent of their usage. Mean scores, standard deviation, frequencies

and percentages were used to analyse the data in order to assess the reasons for expansion and

factors that were considered important in the choice of the strategy. Challenges faced by the

bank in expanding into the new regions were also assessed by use of the mean scores and

standard deviation.

26

CHAPTER FOUR

DATA ANLYSIS AND PRESENTATION

4.1 Introduction

The objectives of this study were to identify the strategies Equity bank group has used in its

regional expansion and the challenges the bank has encountered in its expansion mission. Only

two countries were studied as these were the areas the bank had expanded into so far. These

were Uganda and South Sudan. This was considered adequate for the objectives of this study.

In this chapter, the analyzed data is presented together with the relevant interpretations. Findings

have been presented in three parts: General information on the countries, information relating to

the international entry strategies adopted and information relating to the challenges faced by the

bank.

4.2 General Information

4.2.1 Years of operation in each country

Table 1: Years of operation in each country

Years Frequency Percentage

1-5 2 100

6 - 10 0 0

More than 10 0 0

Total 2 100

From the table it is evident that in all the two countries the bank has been operating for less than

five years. In Uganda the bank made its first entry in 2008 while in South Sudan it opened its

first branch later the same year.

27

4.2.2 Number of branches in each country

Table 2: Number of branches in each country

Number of branches Frequency %

2 10 1 50

11 20 0 0

More than 20 1 50

Total 2 100

Table 2 shows that in one country the bank has a branch network of between 2 to 10 while in the

other country it has more than 20 branches. Equity Bank (Uganda) has a total of fifty-five (55)

branches located in the central, eastern, northern and western parts of Uganda. In South Sudan

the bank has eight (8) branches. This information is also represented on the chart below:

Chart 1: Number of branches in each country

28

4.2.3 Categories of customers served

Table 3: Categories of customers served

Categories of customers Frequency %

Corporate 0 0

Retail 0 0

Retail and Corporate 2 100

TOTAL 2 100

From the table above it is clear that the bank serves both retail and corporate clients in both

countries.

4.2.4 Geographical Spread of the bank in each country

Table 4: Geographical Spread of the bank in each country

Geographical Spread of the bank FREQUENCY %

Only in major cities 0 0

In major cities & towns 1 50

In every province 1 50

TOTAL 2 100

The table indicates that the bank operates in major cities and towns only in one country whereas

in the other country it operates in every province. Equity Bank (Uganda) has its headquarters in

Uganda's capital city, Kampala. The bank has a total of fifty-five (55) branches located in the

central, eastern, northern and western parts of Uganda. Its branch network is the third-largest in

Uganda, after Stanbic Bank (Uganda) Limited and Barclays Bank.

The bank has twenty-two

automated teller machines in Uganda, with twelve more planned. It serves a client base of close

to 400,000. Equity Bank (South Sudan) has its headquarters in South Sudan's capital city, Juba.

The bank maintains branches in many of the country's major urban centres.

29

4.3 Reasons for international expansion

Reasons for international expansion that were assessed include; spreading the risk of market

contraction, local market does not provide opportunities for growth, conquering new positions,

taking opportunities that promise greater profitability and using retained cash that exceeds total

expansion needs.

Data was analyzed using mean scores and standard deviations. A mean score of 4.5 implies

most important. Standard deviation of 1 implies that there were significant variations in responses.

Table 5: Reasons for international expansion

Based on strategic objectives Mean Std.

Deviation

Defensive reasons

Spreading the risk of market contraction 5.00 0.00

Local market does not provide opportunities for growth 3.50 0.71

Offensive reasons

Conquering new positions 5.00 0.00

Taking opportunities that promise greater profitability 5.00 0.00

Using retained cash that exceeds total expansion needs 2.00 0.00

Average Mean/Standard 4.10 1.29

Based on expected outcomes of expansion

Growth & Profitability 5.00 0.00

More efficient use of available resources and capacities 4.00 0.00

Explore diversification 5.00 0.00

Enter lines of business that are different from current operations. 2.00 0.00

To seek lower production factor costs 4.00 0.00


30

Reasons based on strategic objectives had the following mean scores; spreading risk of market

contraction (5), local market does not provide opportunities for growth (3.5), conquering new positions

(5), taking opportunities that promise greater profitability (5) and using retained cash that exceeds total

expansion needs (2).

The findings imply that most of the reasons were rated as most important except local market

does not provide opportunities for growth rated as quite important and using retained cash that

exceeds total expansion needs which was rated as least important.

The standard deviation was > 1 implying that there were significant variations in the responses.

Reasons based on expected outcomes of expansion were assessed as follows; growth &

profitability (5), more efficient use of available resources and capacities (4), explore diversification (5),

enter lines of business that are different from current operations (2) and to seek lower production factor

costs (4). This indicates that the bank did not consider entering into new lines of business in its expansion

strategy. The standard deviation was > 1 showing that there were significant variations in the responses.

4.4 International market entry strategies adopted

Strategies for international expansion that were assessed include; Licensing , Franchising, Direct

Exporting, Indirect Exporting, Complementary exporting Piggybacking, Consortia, Foreign Direct

investment, Wholly owned foreign subsidiaries, Providing offshore services Business process

outsourcing and Strategic international alliances (mergers, acquisitions, joint venture).

Data was analyzed using mean scores and standard deviations. A mean score of 4.5 implies greater extent.

Standard deviation of 1 implies that there were significant variations in responses.

31

Table 6: International market entry strategies adopted

Strategy Mean Std Dev

Licensing 3.00 0.00

Franchising 3.00 0.00

Direct Exporting 2.00 0.00

Indirect Exporting 2.00 0.00

Complementary exporting - Piggybacking 2.00 0.00

Consortia 2.00 0.00

Foreign Direct investment 5.00 0.00

Wholly owned foreign subsidiaries 5.00 0.00

Providing offshore services Business process outsourcing 3.00 0.00

Strategic international alliances (mergers, acquisitions, joint venture) 5.00 0.00


International market entry strategies adopted were rated as follows: Licensing (3), Franchising (3),

Direct Exporting (2), Indirect Exporting (2), Complementary exporting Piggybacking (2), Consortia (2),

Foreign Direct investment (5), Wholly owned foreign subsidiaries (5), Providing offshore services

Business process outsourcing (3) and Strategic international alliances (mergers, acquisitions, joint

venture) (5).

Strategies that were rated great extent (5) were foreign direct investment, wholly owned

subsidiaries and strategic international alliances. The other strategies were rated as low extent

(2) and neutral (3). The standard deviation was > 1 indicating there were significant variations in

the responses.

32

4.5 Factors considered in the choice of international expansion strategy

The factors considered in the choice of international expansion strategy were assessed in two

categories; external and internal. The external factors include; market size, market growth,

government regulations, level of competition, physical infrastructure, level of risk (political, economic &

operational) and operational costs. Internal factors included; company objectives, availability of

company resources, level of commitment, international experience and degree of control.

Data was analyzed using mean scores and standard deviations. A mean score of 4.5 implies most important.


Table 7: Factors considered in the choice of strategy

Factors Mean Std Dev

External Factors

Market size 5.00 0.00

Market growth 5.00 0.00

Government regulations 4.50 0.71

Level of competition 4.00 0.00

Physical infrastructure 4.50 0.71

Level of Risk Political, Economic & Operational 4.50 0.71

Operational costs 4.00 0.00


Internal Factors

Company objectives 5 0

Availability of Company resources 5 0

Level of commitment 5 0

International Experience 4.5 0.71

Degree of control 4.5 0.71


33

Factors considered in the choice of strategy assessed were rated as follows; the external factors:

market size (5), market growth (5), government regulations (4.5), level of competition (4), physical

infrastructure (4.5), level of risk (political, economic & operational) (4.5) and operational costs (4).

Internal factors were rated as follows; company objectives (5), availability of company resources (5),

level of commitment (5), international experience (4.5) and degree of control (4.5).

This implies that both external and internal factors were considered most important except level

of competition and operational costs which were rated quite important. There were no

significant variations in the responses as the standard deviation was < 1.

4.6 Challenges faced by the bank in International Expansion Strategy

Challenges faced by the bank that were assessed include; competition with other local banks and

exposure to more volatile external environment, regulatory uncertainties, protective policies in foreign

countries, high investment outlay, less than successful ventures of recent times, finding the right fit and

pricing, lack of management expertise with international experience, loss of focus on local market needs

and lack of understanding of foreign customer preferences.

Data was analyzed using mean scores and standard deviations. A mean score of 4.5 implies greater extent.


34

Table 8: Challenges faced by the bank in International Expansion Strategy

Statement Mean Std Dev

Competition with other local banks and exposure to more volatile external

environment 5.00 0.00

Regulatory uncertainties 5.00 0.00

Protective policies in foreign countries 4.50 0.71

High investment outlay 5.00 0.00

Less than successful ventures of recent times 4.50 0.71

Finding the right fit and pricing 3.50 0.71

Lack of management expertise with international experience 4.00 0.00

Loss of focus on local market needs 3.00 0.00

Lack of understanding of foreign customer preferences 3.50 0.71


The challenges were rated as follows: competition with other local banks and exposure to more

volatile external environment (5), regulatory uncertainties (5), protective policies in foreign countries

(4.5), high investment outlay (5), less than successful ventures of recent times (4.5), finding the right fit

and pricing (3.5), lack of management expertise with international experience (4), loss of focus on local

market needs (3) and lack of understanding of foreign customer preferences (3.5). The findings indicate

that the first four factors were rated as great extent hence considered having a greater impact. Loss of

focus on local market needs was rated as neutral. There were no significant variations in the responses as

the standard deviation was

35

CHAPTER FIVE

DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

The banking industry in Kenya is characterized by foreign owned multinationals, large, medium

sized and small local banks all operating in a very competitive environment. The foreign owned

multinationals enjoy exclusive public confidence acquired through a sustained competitive

advantage, positive corporate image and financial stability demonstrated over the years. The big

indigenous banks have adopted various strategies to motivate customers to use their range of

services in order to remain competitive. This has set a stage for cut-throat competition among

the multinational banks of various sizes employing multiple strategies to enhance their

competitiveness in the market. This has forced the Kenyan-based banks to re-think their growth

strategies in their quest to continue to generate wealth to their shareholders.

The regional market has also created opportunities for the local banks with a large number of

unbanked citizens in the East African market. Equity bank group has been on the leading front to

pursue its mission to be the leading African bank in the region by opening up branches in

Uganda and South Sudan. They also plan to open more branches in these countries and venture

into Rwanda and Tanzania.

The choice of an international market entry strategy is critical for the survival and success of any

company. However, in order to gain competitive advantage, firms need to build and adopt the

right strategy especially in a competitive environment where every bank tries as much as

possible to push their services through the many, more informed customers.

The objectives of this study were to identify the international market entry strategies adopted by

Equity bank group in the region and identify the challenges that they have faced. This chapter

gives a summary of the discussions, conclusions and recommendations drawn after analyzing

data.

36

5.2 Discussions

The first objective of the study was to identify the international market entry strategies used by

Equity bank group in the region.

Strategies that were rated great extent (5) were foreign direct investment, wholly owned

subsidiaries and strategic international alliances. The other strategies were rated as low extent

(2) and neutral (3). The standard deviation was > 1 indicating there were significant variations in

the responses.

Results on the reasons for international expansion indicated that reasons based on strategic

objectives which were rated most important (4.5 5) spreading risk of market contraction,

conquering new positions and taking opportunities that promise greater profitability. The respondents did

rated local market does not provide opportunities for growth as quite important (3.5). Using retained

cash that exceeds total expansion needs was rated as least important. The standard deviation was

> 1 implying that there were significant variations in the responses.

Reasons based on expected outcomes of expansion that were rated as most important (4.5 5)

included growth & profitability and explore diversification. More efficient use of available resources

and capacities and seeking lower production factor costs were considered quite important (3.5 4.5)

whereas entering lines of business that are different from current operations was rated as least important

(1.5 2.5). The standard deviation was > 1 showing that there were significant variations in the

responses.

Findings on the factors considered important in the choice of an international market entry

strategy indicated that most of the external factors assessed were considered most important

(4.5 5). These included market size, market growth, government regulations, physical infrastructure

and level of risk (political, economic & operational). Operational costs and level of competition were

rated as quite important (3.5 4.5). All Internal factors were rated as most important (4.5 5). Factors

assessed include company objectives, availability of company resources, level of commitment,

international experience and degree of control.

37

This implies that both external and internal factors were considered most important except level

of competition and operational costs which were rated quite important. There were no

significant variations in the responses as the standard deviation was < 1.

The second objective was to identify the challenges faced by the bank in its international

expansion strategy. The challenges that were rated as great extent (4.5 5) include competition

with other local banks and exposure to more volatile external environment, regulatory uncertainties,

protective policies in foreign countries, high investment outlay and less than successful ventures of recent

times.

Factors that were rated as moderate extent (3.5 4.5) were finding the right fit and pricing, lack of

management expertise with international experience and lack of understanding of foreign customer

preferences. Loss of focus on local market needs was rated as neutral (2.5 3.5). There were no

significant variations in the responses as the standard deviation was

38

Results on the factors considered in the choice of the international market entry strategy indicated that

both external and internal factors were important. Most important of them all were market size, market

growth, government regulations, physical infrastructure and level of risk (political, economic &

operational). Operational costs and level of competition were considered as quite important.

According to recent data, Kenya provides the highest percentage of foreign students in high

schools and universities in Uganda. There are at least 21,000 Kenyans studying in Uganda.

Uganda also offers a natural fit for the banks microfinance business model. As in Kenya, many

Ugandans still cannot afford or have no access to banking services.

Other factors considered important were company objectives, availability of company resources,

level of commitment, international experience and degree of control. The fact that the group

prefers wholly-owned subsidiaries in its expansion is a clear indication that it desires a high

degree of control over its overseas operations. It is also clear that the markets it is venturing into

are virgin markets with a high growth potential such as the new Republic of South Sudan. In

Uganda some of the factors that were considered included favourable regulations and operational

costs.

With regard to the challenges faced by the bank a lot of factors emerged to have greater impact

on its expansion mission. Key challenges were competition with other local banks, exposure to

more volatile external environment, regulatory uncertainties, and protective policies in foreign

countries, high investment outlay and less than successful ventures of recent times. Kenya

Commercial Bank which is also a local bank has made its entry in Uganda and South Sudan and

is a key competitor to Equity bank in these areas. Regulatory uncertainties have also been a

drawback in the region as the EAC is yet to be fully operational.

39

According to a report published in The Consultative Group to Assist the Poor (CGAP) website

by Kate McKee dated June 2, 2010 the Companys CEO Dr. James Mwangi highlighted the

following challenges:

Culture: The soft factors are hard to replicate. It was difficult to instill the Equity way

when the people who were still there in the institution had their own way already. One of

Equitys striking strengths is its brand but Equity found it hard to capitalize on this in a pre-

existing player in a market new to them.

Leadership and management: If key people stay on, any key adjustments can seem like

personal critiques of the previous regime, especially if were talking about owner-managers.

Capacity: In Uganda, Equity was trying to build their savings-based model on a credit-only

organization. This was a very different and more demanding business model and the capacity

just wasnt there for rapid change. And adjustments cant be accomplished in a week and

they take longer for a savings- than credit-led provider.

Talent: Mwangi described having to pay with your shirt for key staff by buying

experienced bankers; good people demanded a premium to leave an institution with an

established international brand in that market and for the uncertainty of a start-up.

The business environment: This is a euphemism for the real problem noted by the Acting

CEO for Equity-Uganda fraud. Because levels of customer fraud were so high, Equity

couldnt use one of its key success factors in Kenya: decentralization of authority and

decision-making to the branches. Some of the key operational assumptions didnt hold water.

The business model needed major adjustments in the form of centralization and controls.

Needless to say, this didnt come cheap, with both one-off and ongoing expenses being higher

than planned.

Financial identity: Equity discovered the big advantage offered by national identity systems

in Kenya which had to be worked around in Uganda with higher-cost methods like

biometrics.

40

What you promise to get the license: The biggest challenge was expectations, said

Mwangi. Those responsible for granting the license did their homework on Equity and found

that they were offering credit at 18% in Kenya. So thats what they asked for in Uganda.

While the acquired institution was profitable with an interest rate of 48%, it was pretty

challenging to keep it so with an 18% interest rate and a whole lot of new costs.

Legal and regulatory framework: We all know that issues like minimum capital

requirements clearly affect the viability of the business model. But its not just the licensing

requirements. Mwangi pointed out that the rules around specific products were quite different.

Executive management was expected to have four eyes (e.g., a managing director and an

executive director) for adequate controls, making it necessary to identify and prepare a second

individual for this role. Tax regimes were really different . . . and unpredictable.

Mwangi stressed that these challenges can and must be overcome. We can and will make many

business models including greenfielding and South-South replication work. Africa is rich in

resources. What it needs to enhance wealth and pride is entrepreneurship, ownership, capacity

and true empowerment.

5.4 Recommendations

The study revealed that Equity bank group has used the wholly-owned subsidiaries entry mode in

both Uganda and South Sudan. This was a preferred mode as the bank aimed at maintaining a

high degree of control over its operations in these countries. Their branch network is also

growing in these two countries and the bank intends to open new subsidiaries in Rwanda and

Tanzania. From the challenges highlighted it is clear that their expansion mission has not been a

smooth road all the way. In fact in the first two years of operation in these countries its profits

fell quite significantly citing the heavy initial investment outlay.

From the lessons learnt in Uganda and South Sudan the bank endeavours to pursue the same

entry strategy in both Rwanda and Tanzania and also extend its operations even further within

the COMESA region.

41

The acquisition of local banks and microfinance companies seems to be working well for the

company as it has ensured that the bank gets hold of the existing client base and branch network

to start them off. Their target market is mainly the small and medium sized businesses which

have high volume but with low margins.

The bank may however consider using a hybrid of strategies to minimise the heavy capital

investment required to acquire new subsidiaries if it needs to achieve its vision of expanding in at

least 10 countries in Africa in the next five years. These may include licensing, joint venture and

mergers in addition to subsidiaries. The management needs to tackle

Documents

Challenges Facing EQUITY BANK