Kenya's Equity Bank, one of the region's fastest growing financial institutions, has entered the Ugandan market, in its first crossborder expansion.

Equity recently signed a conditional agreement with Uganda's largest microfinance firm, Microfinance Company of Uganda Ltd (UML) after forking out Ksh1.66 billion ($25.3 million) in a deal that saw it take up 100 per cent of the bank's share capital.

The deal gave Equity's existing shareholders 11,333,333 new ordinary shares of the bank at a price of Ksh147 ($2.3) per new ordinary share. These new shares will amount to 3 per cent of the bank's expanded share capital.

Faced with increasing competition and shrinking margins on lending, Kenyan banks are eyeing the regional market for growth and spreading of risks, with Kenya Commercial Bank, Diamond Trust Bank, Fina Bank and I&M Bank already having operations across the region.

Uganda Microfinance operates 28 branches and has 14 contact offices. Last year, the institution made a net profit of Ush150 million ($85,714). UML is expected to start trading as Equity Bank from July this year.

Equity chief executive James Mwangi said the acquisition fits the bank's growth strategy.

Since the investment by Helios EB in Equity, we have been actively engaged in strategically consolidating our dominant banking position in the country and seeking prudent regional entry points," said Mr Mwangi. The bank's focus will be on the export market and crossborder money transfers.

Moving into Uganda, Mr Mwangi said, was part of an expansion strategy aimed at tapping business opportunities in new markets. Through the acquisition, Equity is targeting a lucrative trade base in Uganda, which sources 56 per cent of its imports from Kenya.

Uganda is infact the single largest destination of Kenya's commodity exports in Africa, accounting for a total of Ksh108 billion ($1.7 billion).

"Equity Bank will tap into the business of issuing letters of credit and guarantees to exporters," said Mr Mwangi. The bank is also targeting the money transfer business, especially by parents sending school fees to Uganda.

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.

The Ministry of Higher Education projects the number will continue to rise because of the limited university admissions in Kenya.

Uganda also offers a natural fit for the bank's microfinance business model, with the sector there having grown by 100 per cent last year. As in Kenya, many Ugandans still cannot afford or have no access to banking services. Equity became Kenya's biggest bank in terms of capitalisation after Helios EB invested Ksh12 billion ($190.47 million) pushing its capital to Ksh21 billion ($333 million) from Ksh2.2 billion ($34.9 million) in 2006.

Some of the proceeds have already been channelled into the acquisition of a 4.9 per cent stake in Housing Finance and there are plans to roll out partnerships in Southern Sudan, Tanzania, and Rwanda. The bank currently has the largest customer base in Kenya, which last year closed at two million accounts.

This number is expected to double with the Safaricom initial public offer for which Equity is a receiving bank.

The bank is providing full financing to buyers of the IPO, - to qualify, the applicant must open an account and a CDS account with the bank. The requirement has seen Equity open the largest number of accounts per day since its inception, according to a bank official.

The Equity-UML deal is pending regulatory approvals from both countries and the Bank of Uganda, under the Microfinance Deposit-Taking Institutions Act 2003, the Central Bank of Kenya under the Banking Act and the Capital Markets Authority under the Capital Markets Act will scrutinise the acquisition.

In addition, the agreement will require approval from the bank's 7,000 shareholders.