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Wednesday, August 15, 2007

Who Wants To Kill Equity Bank?

Even as the price of Equity Bank shares on the Nairobi Stock Exchange appears to be recovering over the last few days, somebody is forwarding nasty emails warning Kenyans to stay away from the bank.

The reason I find this interesting is that I have carefully studied the growth of Equity right from the time it was launched as a building society in the Moi days. I correctly predicting that they would one day be very big, because they did the opposite of what other banks were doing at the time and targeted the ordinary mwananchi. As you read this, the bank has got over one million account-holders, a record in Kenya.

The way to analyze a company is to look at how it makes its' money. As a rule I will never invest in a business that I do not understand. Equity's major profit generator is small loans to ordinary folks. If you understand the principal of compounded interest you will quickly realize just how wildly profitable this activity can be.

So the foundations of Equity are basically sound.

The rapid branch expansion program makes a lot of sense based on the bank's principal activity which it has gained experience and expertise to do.

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And it is because of this reason that the government has chosen Equity Bank as the main bank to disburse loans to budding entrepreneurs. But some very bad people have chosen to politicize this issue. On this one, I defend the government. The government DID NOT choose Equity Bank because it is owned by Kikuyus. Just name me a more experienced bank in Kenya when it comes to giving out loans to small business? There is none. Equity stands alone.

So who is this circulating those nasty emails? Maybe to answer that question we need to ask another one. Who has a motive? Who is bound to gain?

While you chew on the answer to that one, this whole episode reminds me of the mid eighties when some characters within the mainstream banks spread rumors about the collapse of Diners Club Finance a subsidiary of the local Diners Club franchise run by Alnoor Kassam of TradeBank fame. Legend has it that the bank handled it by getting all the cash they could get their hands on and paying all those who came in to close their accounts. After a hectic anxious day of doing this, it is said that the same account holders returned their deposits the next day on realizing that the rumors had to be false since the bank appeared to be so liquid.

If it is true, the Diners Finance tale is indeed unique because the truth is that no bank in the world can stem a run by depositors. Banks always put idle funds to work, it is the way they earn their keep so it is impossible for all depositors to draw out their money at the same time, the bank won't have it.

It seems that somebody is very determined to cause a run on deposits at Equity Bank and it would seem that that person maybe an executive feeling the heat in the most profitable segment for banks at the moment—small short term loans.

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2 comments:

Anonymous said...

Please stick to what you do best, which is political propaganda, and leave equity analysis to the experts.

Co-operative bank surpasses Equity when it comes to loan dispribution to small businesses.

If you really wanted to dissaprove the emails circulating around, you would provide us with counter-arguments.

I bet you dont know the first thing about financial statement analysis so that's why you just go with your gut feeling.

If you want to be a sucker, please dont use your medium to recruit innocent investors. You either give us concrete figures and facts or shut up.

Anonymous said...

This mail has been doing the rounds and if you note we've not responded to it in the press. We've dismissed as we need to direct our energies to more productive areas. The saddest thing is that we've traced the mail to the competition who suddenly have realised there is a bank called Equity Bank. Remember growth in Equity transalate to their loss of Capital(Deposits) and customer base. Just to give you a tip of the statistics, Equity's closest competitor has 500,000 customers (Equity has just hit 1.5 million-37% of all bank accounts in Kenya opening about 4,000 accounts per day while the entire industry combined is opeing 1,800 accounts), The biggest bank in Kenya is growing at about 17% per annum, Equity is growing at 107%. It’s a matter of time before we catch up with them. Equity currently has the highest liquidity in the market (At about 60%), Has the 2nd best loan book, was rated the 3rd best bank in Kenya by Market intelligence last year and posted a pre tax half year profit of 1 billion. With ownership structure consisiting of British America (12%) World bank through Africap(7%) Staff (7%) and the balance of 71% being what is being traded at the NSE, who do you think is about to wind up among these shareholders?

The truth is Equity Bank having existed for 24 years as an institution (2 of those as a fully fledged Bank) is such a force that competition is fealing the heat that they don't know how to react. Anyway rest assured the bank is very solid and just ignore the mail like we did.

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