Improving Access to Banking: Evidence from Kenya

April 27, 2021

Improving Access to Banking: Evidence from Kenya
Franklin Allen, Elena Carletti, Robert Cull, Jun QJ Qian, Lemma Senbet, Patricio Valenzuela
Review of Finance, Volume 25, Issue 2, March 2021, Pages 403–447,

Many Sub-Saharan African countries still face severe financial development gaps in terms of access to financial services. The understanding of which specific policies and institutions best promote financial inclusion in environments plagued by asymmetric information, weak institutions and the absence of basic infrastructures necessary for banking is still limited. One important question is the role played by financial institutions in spurring access to finance, through their expansion strategies. We study the relationship between bank branch penetration policies, financial inclusion and bank profitability by examining the case of Equity Bank, a pioneering institution locally founded and operated by Kenyans. Equity Bank devised a banking service strategy targeting low income clients and underserved geographic areas, and its record in improving financial inclusion has been impressive. In 2006, it had 1 million customers, representing 5 percent of the population aged 15 and over. By 2015 the number of customers had risen to 10 million representing 36 percent of the adult population.

We investigate three related questions. Did Equity Bank pursue a branching strategy that placed greater emphasis on serving the economically disadvantaged? If so, what effect did this expansion strategy have on households’ usage of banking services? Finally, was Equity Bank’s branch expansion and emphasis on underserved clienteles profitable?

In our first set of results, we find that Equity Bank pursued a different branching strategy from other banks. While banks of all ownership types, including foreign and government owned banks, opened a greater number of branches in urban, highly populated and English-speaking districts, Equity Bank expanded significantly more to underserved districts between 2006 and 2009 than other banks. In our second set of results, we find that the presence of Equity Bank branches is strongly and positively linked to the likelihood of residents having both bank accounts and loans, especially for Kenyans who are less educated, do not own their own home and live in rural and arid (semi-arid) areas. In our third set of results, we find that the business model of Equity Bank was profitable at both the bank and branch levels. In particular, our branch level analysis shows that the expansion of Equity Bank into arid and semi-arid areas, characterized by a lower number of bank branches, was more profitable than its expansion into urban and rural areas, as it allowed the bank to pursue an aggressive pricing schedule, reduce its delinquency rates and secure stable, inexpensive funding from retail deposits in those areas.

These findings suggest that the business model followed by Equity Bank played a key role in the provision of basic financial services to population segments typically ignored by traditional banks while generating higher profits than those of other banks operating in Kenya. From August 2006 to December 2015, Equity’s stock price increased by 900 percent compared to 160 percent for Kenya Commercial Bank, and 27 percent for Barclays Bank of Kenya.