Bottom of the pyramid plan boosts revenues

Illustration by: J. Barasa
Illustration by: J. Barasa 

Family Bank has transformed itself from a building society formed in 1984 to a fully-fledged bank. The indigenous bank has since its conversion in May 2007 been on a growth path in terms of customer outreach and the bottom line.

It boasts of 44 branches spread across the country. Within the last one year the bank has added 11 branches to its network ,indicating its growth momentum. Operating in an increasingly competitive market, the bank has managed to hold its head high among its peers by being innovative and customer driven.

Indeed, it’s the only bank that offers paperless banking — no filling of deposit or withdrawal slips — which has enhanced its service delivery by eliminating an otherwise tedious process.

Business Daily spoke to the CEO, MrPeter Kinyanjui, about the bank, the economic recession and its operating environment.

Family Bank has managed to grow on all its key fronts of branches, customer numbers, deposits and loans within a relatively short period of time. Please explain.


Since our conversion in May 2007 from a building society to a fully fledge commercial bank, we have extended out reach across the country allowing us to reach existing clients and enrol new clients.

As a commercial bank we have increased our branches, to 44 within two years, raised our asset base to Sh11 billion, grown our loan book to Sh6.8 billion and our deposits base to Sh8.6 billion. All these have been achieved through a rapid focused growth strategy that intends to place us among the top ranked banks.

There have been speculation that the bank plans to carry out a listing in the near future as opposed to an initial public offer (IPO). How far have you gone with the preparations and when will the listing be done?

It’s true we are preparing to list the banks shares at the Nairobi Stock Exchange. Our intention is to help current shareholders to realise the true value of their investment.

It’s important to clarify that it will not be an IPO but a listing through introduction, which involves taking the current shares to the market for their true value to be realised. However, after listing our shareholders will be free to trade their shares.

With our ongoing expansion plans to reach more Kenyans and grow our deposit in order to increase our lending ability, the bank still retains the option of carrying out a public offer as one way of raising funds among many other at it disposal. This will be dictated by the prevailing economic conditions and the need for funds.

The bank is in the process of replacing the current core banking system with a new one. What are the key features of the new platform?

We have been implementing the new system for the last three months and hope to have it running in the next couple of months. We expect the new system, which is very robust, to significantly reduce our cost of operation hence increasing our return on asset (ROA) and return on investment (ROI).

Secondly, the system which has a central server will allow us to roll out more branches cost effectively, unlike in the current scenario where we have branches having their own servers. In addition, it will allow us to introduce more products and services and consolidate our operations.

We expect the core banking system to eradicate back office services, releasing our staff to concentrate on their core functions of serving our customers hence increasing their productivity. The bank will integrate some of the critical functionalities such as paperless banking in the current system into the new platform.

With the current economic downturn, financial institutions are facing a challenging time in carrying out their intermediation roles. Profitability is being affected, non-performing loans growing, cost of operation rising and increasingly turning to government risk free securities to hedge against potential losses. How is Family Bank faring on these parameters?

Its true the current depressed economic time has affected businesses and as financial institutions what happens to the overall economy tend to affect as more as we are at the centre of economic wheel.

Given that agriculture contributes over two third of the country Gross Domestic Product (GDP), the current adverse effect due to failed rains in the last 3 seasons is ragging the whole economy down. When the rains are good the economy performs well as people have more disposable income to invest and increase consumption of capital goods.

At Family Bank our gross non-performing loans have gone down due to timely recovery and prudent lending. We intend to continue paying special attention to our loan books, especially now where distress is likely to grow. With rapid expansion comes increased cost of operation attributed to staff increase, capacity building and branch set up cost.

Our cost has been rising in tandem with our growth projection. In the past new branch break even point was achieved within three months.

However, with the current economic meltdown our break even point has been pushed to six months denying us the opportunity to realise return on our investment early enough. But we expect to return to our three months break even point once the economy picks up.

Whereas investing in government papers removes the potential risk of default, we are balancing between investing in these papers and lending to the private sector.

It’s important to note that investment in government Treasury bonds and bills is a “spot” investment realised from the auction. Allocation is determined by the bids placed hence its bound to be cyclic and what is captured in our report is the ‘spot’ investment.

Family Bank has recorded positive growth in loans and advances, deposit, and a decline in gross non-performing loans. However, despite these positive developments the bank recorded a drop in pre-tax profit by 33 per cent compared to June 2008. What are the contributing factors?

The growth in our loan book is an indication that we intend to continue to provide affordable credit to our clients in furtherance of their economic activities. It’s clear the trend in the banking industry is to slow down lending.

However, this can be counterproductive because it amounts to abandoning your clients when they need you most. Such an approach may lead to clients walking away.

We continue to lend though observing all prudent requirements to ensure we do not see a growth in our otherwise sterling performance of the NPL. Indeed, by closely monitoring our loan book we have the lowest delinquency rate of six per cent in an industry with an average of 40 per cent.

In terms of our drop on pretax profit, the last period we had the Safaricom IPO that allowed us to lend on short term. The transactional fees collected and the income from the loans were one –off returns which enabled us to perform well. The performance in the current period is positive when the one-off returns are excluded from last year first half year of operation.

Lastly, the slowdown in our key market segment has also affected our performance. Our main market target is agriculture and small and medium size enterprises (SMEs), which have been adversely affected by poor weather and inflationary pressure.