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contentSexhibits 6

suppLementary materiaL 8

editor’s note 11

introduCing the engagement 14

Cast of CharaCters 18

proLogue 19

week 0

Week before the engagement 24

week 1 Days 1 & 2 First Week at the Client 30Day 2 Engagement Charter 36Day 2 Work Plan 42Day 3 Building a loan default value tree 46Day 3 Developing the business case structure 51Day 3 Sketching out a microfinance operation 60Day 4 Drafts of Week One Planning Documents 69Days 4 & 5 Wrapping Up Week One 81

week 2 Day 1 A day in the lives of a borrower and loan officer 87Day 2 First significant team debrief and planning session 93Day 2 Meeting the client: tea with the CEO 97Day 4 Designing the hypotheses 103Days 4 & 5 Designing the tests for the hypotheses 115Day 5 Running the tests 121

week 3 Day 1 What does the data tell us, and storyboarding 128Day 1 First major client update 128Day 2 Building the model 142Day 5 Output from the financial analyses 153


week 4 Day 1 Finding additional data 163Day 1 Pre-presenting to client executives 175Day 2 Identifying quick wins 180Days 4 & 5 Developing the strategy 184

week 5 Day 1 Mid-engagement reviews 190Day 4 Briefing the Minister of Finance 194

week 6 Day 1 Big picture thinking 203Day 3 Client executive management workshop 212Day 5 Implications of the strategy 216

week 7 Day 2 Finalizing the business case 229Day 3 Finalizing the strategy 233Day 4 Changing the organizational structure 250

week 8 Day 4 Planning for implementation 257Day 5 What should the client do on Monday morning? 268

2 years Later: assessing the strategy 280

books in this series 290

epiLogue 291

tooLs & teChniques used in this book 295


eXHiBitSExhibit 0 Proposed Equity Research Note 24Exhibit 1 Structure of the South African Finance Landscape 27Exhibit 2 Structure of the South African Microfinance Sector 28Exhibit 3 UFBA’s Financials 31Exhibit 4 Legislation & Governance of Microfinance in South Africa 33Exhibit 5 Competitor Profiles 36Exhibit 6 Customer Segments and Economics 40Exhibit 7 ROE Tree Analyses 45Exhibit 9 Issue Analyses 46Exhibit 10 Charter Template 48Exhibit 11 Draft Work Plan 55Exhibit 12 Building Value Trees 56Exhibit 13 Building the Hypotheses 66Exhibit 14 Building the Market Analyses 71Exhibit 15 Building the Business Case Analyses 72Exhibit 16 Developing an Activity Model 74Exhibit 17 Draft Work Plan 75Exhibit 18 Revenue and Cost Drivers 76Exhibit 19 High-level Storyboard 77Exhibit 20 Designing a DILO 80Exhibit 21 Developing a Focus Interview Questionnaire 85Exhibit 22 Extracting the Key Themes 90Exhibit 23 A Strategy to Manage the Client 91Exhibit 24 Analysing Best Practice 92Exhibit 25 Selecting and Conducting Benchmarks 97Exhibit 26 Pre-presentation Strategy 104Exhibit 27 Using Prior Work 110Exhibit 28 Finding Linkages between Work Streams 112Exhibit 29 Testing Early Recommendations 115Exhibit 30 Thinking Through Quick Wins 117Exhibit 31 A Complete Value Tree 118Exhibit 32 Value Chain 119Exhibit 33 Opportunity Chart 126Exhibit 34 Opportunity Chart Calculation 127


Exhibit 35 Overall Presentation 130Exhibit 36 Headlines 131Exhibit 37 Where are We in the Story? 132Exhibit 38 Channel Economics 133Exhibit 39 Understanding the Loan Book 135Exhibit 40 Product Economics 137Exhibit 41 Stakeholder Needs 139Exhibit 42 Sector Performance 141Exhibit 43 The Job Creation Versus Wealth Creation Trade-off 145Exhibit 44 Writing Headlines 147Exhibit 45 Strategy to Communicate the Key Findings 149Exhibit 46 Organizational Implications 151Exhibit 47 Managing & Quantifying Risk 152Exhibit 48 Government Expectations 154Exhibit 49 Bottom-up Versus Top-down Analyses 155Exhibit 50 Business Case Storyboard 157Exhibit 51 Model Structure 159Exhibit 52 Worksheet Structure 160Exhibit 53 UFBA Board Feedback 161Exhibit 54 Draft Options for UFBA 166Exhibit 55 Overall Focus Interview Feedback 167Exhibit 56 Economic Analyses of Options 168Exhibit 57 Organizational Analyses of Options 169Exhibit 58 Implications on Loan Structuring 170Exhibit 59 Changing Loan Officer Behaviour 175Exhibit 60 Incentivizing the Sales Force 177Exhibit 61 Morale in the Division 179Exhibit 62 Rating Senior Management 181Exhibit 63 Employee Feedback 182Exhibit 64 Employee Advice 188Exhibit 65 Planning Final Executive Workshop 198Exhibit 66 Final Executive Workshop 199Exhibit 67 Decisions Made at Workshop 200Exhibit 68 Implications of the Decisions 201Exhibit 69 Timeline to Roll Out Changes 218Exhibit 70 Measuring the Impact of the Engagement 219Exhibit 71 Capturing Value from the Engagement 220Exhibit 72 Is UFBA More Successful? 221


SuPPleMentaRY MateRialSubscribers to the book receive 24-hour access to the following material, which can be downloaded and edited. All documents are housed in a forum allowing subscribers to interact with the editors directly. Updates to the models and other mate-rial are also posted into the forum, which sends automatic notifications to subscribers.

exCeL finanCiaL & market modeLs

• Complete business case model • Market analyses model• Value chain model• Geographic analyses model• All models available in four versions, each in

different stages of development• There are 30 excel models

powerpoint

• Proposal to client• Project outline• Objectives and deliverables• Project management charter and timelines• Rationale for the project structure• Structure for first CEO meeting• Critical issues and hypotheses• Extended proposal issue pack for

engagement team• Flash reports per stream per week• Initial briefing pack for UFBA board• Overview of global microfinance• Overview of microfinance in South Africa• Microfinance case study: Mexico• Microfinance case study: Russia• Microfinance case study: Bangladesh• Microfinance case study: Thailand• Microfinance case study: Colombia• Microfinance case study: Indonesia• Microfinance case study: India• Microfinance case study: China• Microfinance case study: Kenya• Microfinance case study: Dominican Republic• Client dashboard (assessing the client’s

motivations)• Business analyses of banking channel• Workshop with banking channel• DILO visit to site 1• DILO visit to site 2• DILO visit to site 3• DILO visit to site 4• State of entrepreneurship in Sub-Saharan Africa


• Business case structure• Business case planning• Benchmarking• Model drivers and levers• Business case analysis• Business case storyboard• Templates for each document above• Organizational structure recommendations• Overview of microfinance market• Technology in microfinance• Market analysis planning• Market analysis by region• Value chain analysis• Sector analysis• Segment analysis• Strategy planning• Organizational analysis• Final recommendation• Executive update 1 to client• Executive update 2 to client• Executive update 3 to client• Executive update 4 to client• Executive update 5 to client

editor’s podCasts

• Engaging the client for the first time• Managing an engagement in an emerging market• The unique challenges of public sector

engagements, particularly in Nigeria and South Africa

• Assembling the appropriate engagement team with the relevant skills

• Designing a strategy engagement in the financial services sector, and microfinance

• Managing client and team expectations• Week 0 and Week 1 challenges on an engagement• Best practice for engaging client employees• Owning, developing and managing a work stream• Best practice in analyses design and conducting

analyses• Best practice storyboarding and PowerPoint

development• Developing a business case• Structuring Excel models• Communicating to ensure the team provides

input to your work• How to manage workshops with clients• How to get clients to validate data• How to pre-present• Developing, managing and delivering milestone

updates• How to develop insights after conducting

analyses• Managing upwards (engagement manager),

downwards (business analysts) and laterally (associates and client)

• Typical mistakes consultants face


• Benchmarking your performance against best practice

• Managing personal difficulties while staffed• Managing performance issues• Understanding the attributes of outstanding

consultants and engagements

data sheets & tempLates

• 40 data sheets for the Excel model and reports

video guides

• Setting expectations with the case leader/client• Designing an engagement structure• Developing the project timelines• Developing a work-stream charter• Developing an issue tree and hypothesis• Designing the analyses to test a hypothesis• Executing the analyses to test a hypothesis• Developing a storyboard• Conducting a client workshop• Conducting a client meeting• Developing a focus interview• Conducting a focus interview• Developing a flash report• Conducting a weekly project team meeting• Conducting a client update meeting• Pre-presenting do’s and don’ts• Structuring and executing qualitative analyses• Developing financial models• Developing a model description• Developing the financial activity model• Developing model drivers and levers• Developing the model architecture

• Testing a financial model• Using a model to support the rest of the

engagement• Preparing and presenting an executive update• Testing the recommendations• Gaining client support• Wrapping up an engagement• Engagement best practices

staged video interviews

• Prof George Stinson, US microfinance expert who disagrees with the approach of the consulting team

• Sipho Mbandla, CEO of UFBA, and the architect of the microfinance strategy

• Precious Mbanza, Director General of the Department of Trade & Industry

• Viktor Petkov, Associate on the engagement team leading the market analyses work stream

• Doris Jacobs, 32-year-old mother of four, living on $100/month and a UFBA micro-loan recipient

• Edward Smit, 30-year-old manager, and member of the original UFBA start-up team


editoR’S note This is the “book” we had always hoped to pro-duce. When we released the mining version of the book in 2010, we were actually working on two books and debating which should be released: one, set in the Brazilian mining sector, which we released, and this book, set in the South Af-rican retail banking sector. In July 2010, when we released the mining book, the retail banking book was more developed in its storyline, data and plot. Yet, the mining book was written in a more conventional manner as a “book” and we chose to release it to gain feedback on our style of writing. We believed we still had much work to do in order to bring our idea to life for the retail banking book.

While the mining book was very popular, it was in many ways the prototype. We had significantly more ambitious plans for the retail banking book. We wanted to fix some of the problems plaguing so many business books today; many of these books are written to the authors’ preferred style and not written for the audience’s needs. We wanted the book to be truly interactive, engaging and as realistic as possible. Over the next year and a half, we worked through numerous revi-sions of this book and its supporting material. In reviewing the first draft back in June 2010, we vividly recalled the challenges we had as associ-ates when reading books by Ohmae, Henderson, etc. One particular book stood out, “The Finan-cial Times Guide to Strategy,” by Richard Koch. It was meant to be a narrative on a management-consulting problem. The idea of a personalized narrative with a strong plotline was appropriate, and popularised by “The Goal.” Koch’s book, however, struggled to accomplish this. The

plotline was introduced as an afterthought and the book lacked even the most basic supporting material. Moreover, to make the narrative easy to follow, Koch overly simplified the problem, which reduced the book’s usefulness due to its failure to mimic a real engagement. I vividly recall the questions that came up when we tried to replicate the concepts in the book:

• Why do our numbers differ from the book?• How does one build a mincer?• How should my ROI model look?• What would happen if I changed the numbers?• How do I present this to a client?• What does he mean by segmentation?• Just 40 pages dedicated to the analyses and 150

pages to theory! Really?• How do I contact Koch?

Like most books, we tossed it aside after one reading and moved on to, what we thought, would be better books. Those were hard to find.

A similar problem occurred during internal con-sulting training. We attended very elaborate and costly training sessions lasting a week at a time in exotic locales around the world. Despite the pomp and grandeur, no one was able, nor expect-ed, to gain the skills to do the work. It was pri-marily a networking event and a chance to “read” about new areas. In fact, many training sessions were marketing exercises in which a fledgling practice could showcase some interesting engage-ments and encourage interest across the firm. Training should never be a marketing exercise.

In writing this book, we changed our focus and


tried to avoid these two traps. Rather than think-ing about how to write a book on management consulting, we changed the question to, “How can we best train management consultants and aspiring consultants to understand and replicate a consulting engagement from start to finish?” In answering this question, we built what became the “book” and materials you will now use. Maybe the phrase “consulting ecosystem” would be a better choice? You can judge and let us know.

Podcasts with editors’ notes. We wanted the reader to unambiguously understand the author’s thinking and motivation behind the concepts in the book. In most books, these important supple-mentary notes are usually excluded or added as ridiculously summarized footnotes, which lose their impact through the process of being sum-marized. Why a decision was made is, usually, far more important than the actual decision itself. It is crucial to hear the rationale in the author’s voice as he/she provides the behind-the-scenes narrative. Therefore, each chapter is supported by a ~30 minute podcast in which the authors explain the decisions made, thought-process ap-plied, consulting tools used, and crucially, how to apply these techniques to your own engagements or training needs.

Authentic regional information. In the Brazilian mining book, we felt the characters, issues and settings were well developed, but lacked authenticity. It is important for readers to visualize the context as much as possible. Con-text, after all, plays an equal if not greater role than the analyses in determining the strategy. The reader should feel as if they are physically

experiencing the challenges of the local market. In updating the book, we went to great lengths to ensure the characters, story and richness of the data is correct. We wanted readers to appreciate South Africa’s unique challenges. We used South African editors to help us build in data accuracy and descriptiveness.

Extensive, robust and editable financial models. Corporate finance, strategy or opera-tions books usually slot neatly into one of two categories: text-heavy with no Excel models, or text-heavy with flimsy Excel models. We disliked the flimsy and unrealistic models used. We usu-ally found they were unable to be used in a real engagement and lacked the detail and robustness required of a management consulting engage-ment. In the world of management consulting, financial models are vital and ignoring them is like learning to play the piano by merely reading a book. Moreover, many engagements require several models of different sizes and complexi-ties for the different work streams. This book is supported by over 30 Excel models, which can be completely edited to explain the decisions and numbers used in the book. We also built the models to be user friendly. They are black screened. The background is black and the num-bers are all in light green. This is the only way to prevent eye-strain when staring at Excel models for extended periods – a problem we have faced all too often in our consulting careers.

Detailed PowerPoints. The PowerPoint slides created for this book are much more detailed and are divided by the work streams on the engage-ment. Moreover, templates like interview guides

“In the world of management consulting, financial models are vital and ignoring them is like learning to play the piano by merely reading a book.”


and even sample interview notes mock-ups for the book have been included. There are over 50 PowerPoint decks provided, covering all ele-ments of the study, including the analyses, plan-ning, data collection and client presentations. In addition, there are approximately 45 supporting documents to lend authenticity to the book. The reader can now understand how data is extracted from documents to create the complete Excel model. Each document is categorized and la-belled so the reader may use them seamlessly. By following the book and PowerPoint slides, you can see how this engagement was built over time and the message crafted for the client.

Training videos. Each significant PowerPoint deck or Excel model is supported by a video guiding the user through the information and providing helpful hints to ease understanding and usage. While the podcasts explain the man-agement consulting rationale and application to real engagements, the video guides focus on the technical elements of the engagement, like why and how to estimate the weighted-average-cost-of-capital. We feel this will make an important difference to the user.

Client videos. To increase the authenticity of the book, we have included video-recorded discussions with the “CEO” and key characters in the book as they describe the issues and chal-lenges they face. It is vital to understand the emotional considerations under which the case was developed, and the videos play a crucial role in accomplishing this. Before an engagement be-gins, the initial discussions with the client usually play the primary role in shaping the consultant’s

thinking. These videos outline exactly what the consultant experiences just as the engagement begins. This emotional setting and the client’s behaviour play a significant role in the evolution of an engagement. Along with the numbers and strategic analyses, the client culture will dictate the success of the engagement. The actors, from South Africa, were fully briefed and trained to en-sure the reader sees exactly what the consultants saw when they arrived onto the engagement.

Updates available online 24/7. The book and supporting material are housed on an online system to be accessed at your convenience. This gives us the opportunity to update the “book” with more material, videos and financial models as needed. In other words, we want to build on the base we have created. This ensures we keep the ecosystem “fresh” and relevant to everyone. Users can leave questions behind and the authors and editors will respond in real time.

In total, the “book” consists of the 325 page book itself, 25 podcasts, 29 video guides, 50 Power-Point decks, 45 supporting documents with data, 30 financial models, and 6 client and consulting video interviews. With the exception of the videos, all the material can be downloaded and edited.

We hope you enjoy the book as much as we en-joyed preparing it.

Toronto, Ontario

December 2011


intRoducing tHe engageMentA team of four ex-management consultants from BCG and McKinsey, led by the Firmsconsult-ing team out of our Capability Center1, worked on this book to develop the PowerPoint slides and Excel models. We are grateful to those MBA students who spent their summer internships assisting us. In essence, we conducted a full consulting engagement over a 12-week period. The analysis is based on issues faced by South Africa’s actual retail banks and uses extensive financial information from their annual reports to construct models that mimic South Africa’s banking environment. We held numerous discus-sions with analysts covering the banks and the microfinance sector, as well as employees at the banks and analysts at the South African Reserve Bank, to understand the sector. Estimations on regional economic growth, employment creation, new businesses started per sector, etc., are all factual. When the models and reports reference a data source, that source does exist and you could reference it yourself. That said, the client and en-gagement is fictitious, and any references to this data are merely for completeness.

Three of our four books are set in emerging markets: Brazil, Mexico and now South Africa. Many have asked why we have avoided the typical locations of the USA, England or Germany. As the emerging markets continue growing, more consulting work will be done in these increasingly important markets. Brazil, Mexico, South Africa, Russia, Indonesia, Chile, China, India, Turkey and many similar countries are already home to

some of the world’s largest companies, fastest-growing consulting offices and most significant consulting engagements. We select our stories based on where we think significant work will be done in the near future. Moreover, the majority of modern business books are set in the UK, US and Europe. We wanted to produce a book that would help fill the void in emerging markets strategy. Our choice of storylines has also been prescient. About a year before microfinance fell out of vogue and the business models began straining, we con-ceived the South African storyline. Well before anyone knew what was to come in Europe with the current austerity measures, we predicted and wrote the Swedish Post Office storyline. We think the stories are relevant, authoritative and timely.

Retail banking, and in particular microfinance, was a theme we had wanted to pursue for a long time. Beyond the complexity of analysing the market, if the emerging markets are to succeed in the long term, they will have to find ways to engage and support all classes of the economy. The bottom-of-the-pyramid remains one of the most attractive and risky playing fields. Given its sheer size, even marginal success in this market could lead to significant profits. Moreover, as these bottom-of-the-pyramid citizens become successful, buy furniture, clothing, fix their homes and buy financial services products, they will become a significant source of revenue for financial institutions. This has not been lost on companies eyeing this market. In researching the

1 www.capabilitycenter.com


book, we discovered that at any given time, per a significant emerging market, there are at least three management consulting studies, eight NGO studies, one World Bank study and three govern-ment studies being conducted simultaneously on microfinance. We believe this book could help many of the consultants currently engaged in these studies.

We picked South Africa because it is an anomaly. Apartheid wrecked the economy and created a dual class system: wealthy elite numbering less than 4 million, whose tax receipts are driving the growth of a country with a population of 45 mil-lion. A member of the so-called BRICS, it has a GDP about the size of Colombia. A gateway to Af-rica, it has been getting less attention, and invest-

ment, than Nigeria. A stock exchange smaller than Toronto’s, the Johannesburg McKinsey office is larger than the Toronto McKinsey office. A ma-ture consulting market with multi-million dollar strategy engagements, yet BCG and Bain are just entering the market. Africa’s largest economy, yet about 35 million citizens remain in poverty while unemployment reaches 45% on a good year. It is a

sufficiently compact economy to be researched by our team and written about, yet containing all the challenges present in the larger economies, like In-dia and Brazil, for the book to be widely relevant.

For consistency we will be using the same team of intrepid consultants we have used in all our books. This allows us to build character profiles and expand on them throughout each book. Hen-drik, Luther, Max and Klaus will continue to play central roles in this book. You will not need to read the previous book to follow the story or un-derstand the character profiles. We have simply built on them further in this book. As well, we will be introducing new characters in this book, whom we have developed further in the Swedish version of the book, as well as the forthcoming books.

To make the story realistic and useful we have worked with one client engagement throughout the book. Using different examples and different clients to explain concepts would have made it dif-ficult for readers to see the data linkages and de-velopment of the final recommendations. This has allowed us to build a very elaborate set of support-ing material, files and documentation to mimic a real consulting engagement as much as possible.

That said, any similarities are purely coinciden-tal and not intended. The book’s ecosystem was created so the reader may follow, understand, in-teract with and replicate a strategic engagement using the same techniques used by the leading firms like McKinsey, Bain and the BCG.

“The book’s ecosystem was created so the reader may follow, understand, interact with and replicate a strategic engagement.”


the CLient

The client is the United Federated Bank of Af-rica (UFBA), one of a triumvirate of megabanks sprawled across the South African investment, retail, commercial, corporate, private and micro-banking sectors. Among the most stable in the world, the three banks all have triple-A credit ratings, and were untouched by the post-Lehman global lurches that affected the banking sector worldwide. A booming South African economy has helped keep growth on track, while the coun-try still struggles to tame inflation, unemploy-ment and surging crime. Established fault-lines of competition created over many years, which others may simply call this laziness, have led to the banks maintaining roughly the same market shares in all their core markets.

UFBA is a gritty bank, run by the investment banking side of the business, and known for be-ing extraordinarily creative and willing to take risks to capture profits and market share. Since 2005, a brilliant (some would say ruthless) and young CEO has positioned the bank for success in key growth areas like insurance, infrastructure finance, internet banking, and now, microfinance. On the back of huge successes in insurance and internet banking, the company is expected to make a spectacular push into microfinance across the South African rural regions. Initial pilots in Kwa-Zulu Natal, Polokwane Province and the North West Province have generated tremen-dous praise for the microfinance team. No less than strategy guru Michael Porter of the Harvard

Business School personally flew down to the last group board meeting to discuss the microfinance strategy and express his admiration for the “up-ending of the pyramid.” It is notable to remember that the bank funds Porter’s institute at Harvard.

With almost no significant growth expected in the rest of the business, and with a successful, yet tiny, insurance and internet banking business, Sipho Mbandla, the CEO, knew that microfinance could be the most meaningful opportunity to shift the market shares in UFBA’s favour.

With inflation roaring at 11% and the Reserve Bank Governor threatening to raise rates again, Mbandla believed the time was right to make the push. A new integrated IT system rolled out by Accenture and IBM over the last three years was expected to place the bank in the unusual position of reporting and closing out its microfi-nance books on a daily rolling basis. Moreover, a stunningly unexpected alliance with Banco Azteca of Mexico led to an infusion of microfi-nance best-practice, which UFBA was hoping would give them an edge in a notoriously difficult market. Despite Mbandla’s optimism, many had tried and failed to capture the profits from South

“The company is expected to make a spectacular push into microfinance across the South African rural regions.”


Africa’s emerging market. Lacking access to bank accounts and even mobile phones, the market intricacies have resulted in many well-meaning NGO’s pitching inspired but ludicrous ideas. In the last such scheme, Portlandia, a Washington, US-based NGO pitched the idea of providing lenders with mobile phones thereby allowing them to make their payments via mobile banking. Of the 50,000 phones earmarked for the Alexan-dra Township next to the wealthy city of Sandton, 20,000 were distributed, although 70% of the recipients simply disappeared with their new toys, while 30,000 phones were stolen while in transit to their distribution points.

Hoping for a better outcome, UFBA took a dif-ferent tack and pursued niche segments of the market. They targeted rural entrepreneurs seek-ing loans between R2,000 (R8 = US$1) and R50,000. Backed by the blessing of the national government, UFBA quickly produced a portfolio of tailored loans catering to all types of business ventures. If you needed a loan to build a shop, they could provide it. What about a loan to set up a clothing business? They could do that as well. As

profits and revenue boomed, the next phase called for a significant amount of capital to fund the new branch rollout. In a critical move, UFBA, sensing a massively profitable sector, had decided to go it alone and end its partnership with the state banks that had provided office space in the rural regions. On the eve of this monumental change in strat-egy, which Financial Week of South Africa was calling “Titanic Sinks an Iceberg,” the board had appointed a firm of international management consultants to conduct a business review, and give what was expected to be an approval of the plan.

The consultants have been retained to understand if the microfinance sector was attractive and as-sess UFBA’s market entry strategy. The book is written from the engagement manager’s view-point. This is the engagement team’s experience.

“The consultants have been retained to understand if the microfinance sector was attractive and assess UFBA’s market entry strategy.”


caSt oF cHaRacteRSufba exeCutives

The engagement team will primarily interact with the following executives at UFBA:

• CEO: Sipho Mbandla• COO: Wickus De Jager• CFO: Annemarie Schoonmaker• Board Chairman: Dr Percy Cyrus• MD - Microfinance: Ralph Niewoudt• Finance Manager: Dawie van Heerden• Branch Manager: Portia Pieterse• Field Agent: Sasha Philips

engagement team

The engagement team consists of five business analysts and associates, along with the engage-ment manager, engagement partner and director:

• Director & Senior Partner: Hendrik Lotke• Engagement Partner: Jacob Goldberg• Engagement Manager: Luther Matthau• Associate (Business Case): Viktor Petrov• Associate (Operations): Klaus van Hertzog• Associate (Services): Alfred Mtunzi• Business Analyst (Business Case): Shay Naidoo• Business Analyst (Operations): Deshi

Padyachee

investment bank & equity anaLysts

• CEO: Aldus Steenkamp• MD Research: Mark Fibert• Lead Analyst: Paul Fine• Analyst: Indresan Naidoo

south afriCan government

offiCiaLs

• Director General of the Department of Trade and Industry: Precious Mbaza

• Director General of Treasury: Stella Mzibande• Minister of Finance: Dorothy Lekota• Minister of Trade and Industry: Raymond

Lekaukau

miCro finanCe Customers of

the bank

• Loan Recipient: Victor Marogoyo• Eldest son: Jacob Marogoyo• Wife: Ruth Marogoyo


PRologue6am: poLokwane provinCe,

south afriCa

Jacob Marogoyo looked ahead with a worried expression cresting his dirty brows. Waiting on a dusty street as commuters made their way to the taxi rank three kilometres away, the line outside the wholesaler snaked back as far as he could see. He tried squinting to block out the rising sun. He could now see much further and the line was even longer. “This would never work,” he thought to himself. He knew it would take him about one hour to walk back to school. Today, the last Friday of every month, the wholesaler opened earlier, at 7am; when employees were paid their salaries. Even if he had been the first customer in the line, it would still take him about 20 minutes to pick up the supplies of bread, milk, canned meat, sweets, chocolates and other items his fa-ther needed for the little shop they ran out of his younger brother’s room.

It had been a tragic few years for the Marogoyo family and the shop was supposed to turn it all around. It was called Hope Shop. Four years ago, Victor Marogoyo, his father, lost his janitor position at the platinum mines due to an acci-dent that blinded him in one eye and cleanly cut off one leg at the ankle. Compensation was still winding its way through the creaky, corrupt and overburdened South African legal system when the recession hit and the price of commodities collapsed. At this time, Victor started the shop, but fell on hard times as limited overtime meant

fewer workers looking to stock up on items. In their latest attempt to survive in a region with 56% unemployment, Victor wanted to expand the shop by preparing lunch parcels and delivering them to workers. Thankfully, he had qualified for a R10,000 microfinance loan.

Jacob knew they were far away from paying off the loan. He had heard his parents whispering at night about the difficulties they had had with the payments. More than once, his parents had decided to “visit” friends at the same time a loan officer was scheduled to visit. It probably would not get any better. If anything, they needed an-other R10,000 just to buy a delivery cart for the sandwiches. With their livelihoods on the line, Jacob resigned himself to another day of missed schooling. He was not doing well anyway, and at least he was now helping his family. Learning about the Anglo-Boer War and a man who wrote plays in 16th century England was not a path to success. Of that he was sure.

9am: morningside, south afriCa

“Curse the Gautrain!” thought Indresan Naidoo as he sat in Sandton’s horrendous early-morning traffic. A glittering array of luxury German sedans clogged up Rivonia Road where it merged into a single lane alongside the Codfather restaurant. The road was backed up all the way to the edge of Morningside while a huge bosom stared down at him from a Teazer’s billboard. He fidgeted with the controls on his new BMW 3-series hoping to find a traffic update. 5FM was discussing the


latest Lady Gaga antics while High Veld Stereo seemed to be playing a dial-in prank on another unsuspecting victim. 702 would be dead boring at this time so he decided it was not worth the effort.

He decided to call his wife, Kalinda, who had recently quit her marketing career since the birth of their firstborn, Neelesh. He did not want to disrupt her yoga sessions, but thought he could get some better traffic information from her and possibly her thoughts about his 9:30 am meeting scheduled for that very same morning.

“Hey Babe, am I disturbing you?” asked Indre-san, as he searched for his hands-free controls.

“Nope,” replied Kalinda, “I am at Woolies getting some stuff for dinner. I hope you don’t mind eat-ing pasta again tonight?”

“Not at all, Babe. I suppose asking you for traffic advice is out... Did you have any further sugges-tions for my presentation today?” asked Indresan, knowing full well that his wife hated discussing confidential information in such a public place.

“Well, I cannot talk much here, but I would say that if you have the evidence to support what you are doing and you are sure of this, then you should go ahead,” replied Kalinda, “If you have time, maybe ask someone else for their advice as well. Just do not present more than you really...”

“Damn Vodacom network,” exclaimed Indresan as the call cut. He tried calling back but the net-work seemed overloaded – again.

Should he go ahead and recommend that South Africa’s largest bank receive a credit downgrade due to its aggressive push into unstable microfi-nance loans? That indeed was the question that would make or break his career. He could play it safe. Should he?

12pm: department of trade &

industry Campus, south afriCa

Precious Mbaza called her parents every day at 7am sharp. She never missed a day. She even moved back meetings and flights to keep to her schedule. It was her way of thanking her parents for the enormous sacrifices they made to pay for her economics degree at the prestigious Universi-ty of Cape Town. She was, furthermore, the only person in the university’s history to be admitted directly into the MBA program, the country’s most elite, straight from her undergraduate program. She recalled her father, a proud man, getting up every day at 5am to boil water for the family, put on his doorman’s uniform and take a taxi to the Mount Nelson Hotel where he worked: a routine that lasted 20 years. She never forgot.

As the first person in her family to receive a university degree, Precious was determined to make the most of her career. She joined the South African Reserve Bank as an analyst and quickly made her mark by analysing the impact of the infrastructure program on employment creation. Her views, though controversial at the time, proved correct and she quickly caught the eye of the bank’s leadership. She rapidly vaulted


6pm: 23rd fLoor of bank City,

Johannesburg, south afriCa

Dawie Van Heerden did not usually stay in so late. A Blue Bulls fan and a family man, he al-ways left the office at 4pm. This gave him a full two hours on the road as he navigated the traffic to Pretoria North, getting him home in time for dinner at 6:30pm and giving him enough time to spend with his newborn daughter. He used the driving time to call each of his analysts or sched-ule meetings where he could dial-in. It was a great arrangement – except for having to navigate the traffic in every morning just to get in at 8am.

Today Dawie had a gnawing feeling in his stom-ach as he looked at the first business planning documents for the newly created microfinance division. It reminded him of the first time he ate spicy Indian food. His analysts chose the venue and the unsettling feeling started in the pit of his stomach before working its way through his body. It was not a pleasant feeling. If that was any indication of what was to come, the heart-burn and sweats would soon follow. He suspected this would be much worse. For two years, the bank had treated the microfinance team as the resident stars – they had even been trotted out at shareholder meetings. At the annual company meetings at Gallagher Estates, they regularly headlined the bank’s performance discussions. Incubated in the bank’s innovation centre in the suburb of Randburg, the unit had been treated with kid gloves until it was supposedly posting eye-popping revenue and profit numbers. As a

“Should he go ahead and recommend that South Africa’s largest bank receive a credit downgrade due to its aggressive push into unstable microfinance loans?”

through the ranks before serving as senior advi-sor to the Governor. At the age of just 38, she was asked to step in and serve as Director General of the Department of Trade & Industry (DTI), re-sponsible directly under the Minister for running the government department.

Precious’s signature move was the creation of a new state-owned bank, which provided mi-crofinance funding to struggling low-income entrepreneurs in rural areas. The South African President had heralded her work in his state of the union address, and used its expansion as a campaign platform that captured the rural vote. Job creation never failed as an effective platform when unemployment was estimated at 50%. Us-ing pressure from her department, and her allies in the Ministry of Finance, Precious had corralled the local banks, amongst the most stable in the world, to offer microfinance loans and products. Before long, Harvard business school profes-sors were beating a path to South Africa to case study her progress. Rumour had it that she was a potential Vice-Presidential candidate in the next general election.

Sadly, none of this was on Precious’s mind as she read the latest reports on microfinance defaults. The numbers were sobering. She had been told the night before to fly down to Cape Town and brief the Minister of Finance in person.

For the first time ever, she would miss her 7am call with her parents.


pet “project” of the CEO, they had no real profit and loss center. Yet they seemed to have a fairly loose expense account. They continued to grow aggressively. Their activities were “carried” all over the bank and no one had been able to get a consolidated view. Until now, that is.

The CEO had recently divisionalised the mi-crofinance business and the analysts had spent the last three months creating a consolidated business plan. It was not pretty. Despite all the hoopla, the unit had a 55% default rate and only made a profit, huge profits, since the govern-ment agreed to guarantee 90% of the value of the loans. With new legislation potentially coming into effect in 12 months, that guarantee could disappear just as the bank was planning an ambi-tious push into the rural markets: an expansion which had already started.

Dawie wondered how he would break the news. An “Afrikaner” risk officer telling the bank’s “African” CEO that they should not be lending to predominantly poverty-stricken Africans would not come across well. Did messengers literally get shot?

Dawie made a mental note to update his re-sume and invite a former head-hunting col-league to lunch.

9pm: turtLe Creek, sandton,

south afriCa

The horrible cast-iron garden furniture chairs were starting to hurt him. It did not help that he

needed to lean forward to listen to the conver-sation over the loud din. Alfred Mtunzi looked around. Turtle Creek was definitely the place where all the gorgeous people of Sandton congre-gated. It had to be place he visited. He looked at his Tag Heur watch; still about two hours to go while he could savour his freedom. The chatty blond next to him did not seem affected by the alcohol. He probably needed to wait her out another hour. It was worth it. He would not get many more nights out in the coming weeks.

On Sunday evening he was having dinner with the German/Bulgarian team arriving in South Africa to work on a banking strategy review engagement for a “crown jewel” client. The South African office did not have the skills or experience for this kind of work, and the team would be largely European, with the exception of a few South Africans and a mix of specialists from other offices. Alfred was one of the lucky ones chosen. Or so his mentor said. He was not sure if he should consider himself lucky just yet. The hours were brutal and workload demanding. The German partners were not known for their work-life balance philosophy so this would likely get worse.

The blond seemed to be a social butterfly. She kept talking about her new law associate position at Werksman’s. Chatter, chatter, chatter.

Feigning interest, Alfred thought about the upcoming engagement. He had a stack of docu-ments to read, including a 180-page annual


report, along with plenty of analyst reports, news clippings and some prior engagement briefs.

He caught the eye of a gorgeous Indian lady and decided to hedge his bet. The blond did not notice him slipping away. She seemed occupied with the Maude Street bankers in their pinstripe suits.

12pm: or tambo internationaL

airport, Johannesburg, south

afriCa

“Wake up, Sir,” said the air hostess as she gently nudged Viktor Petkov awake. She flashed him a trademark smile and explained they were about to begin the descent in Johannesburg and he should take some time to freshen up or order any beverages if he would like to.

Dishevelled and marginally awake. Petkov’s mind was not on beverages, or food for that matter. He was dead tired. He had spent the entire previous week holed up in the office finalising the recom-mendations for a report to the City of London on maintaining its status as a (some would say “the”) preeminent financial services center. He had come into the office to finish cleaning, capturing and archiving all his material. The expected four-

hour diversion turned into a 13-hour marathon as his shoddy recordkeeping on the engagement came back to haunt him. That led to his having to get up earlier on Sunday morning, rush through his packing and arrive at a congested Heath-row Terminal 5, which was experiencing lots of delays. So here he was experiencing his best sleep for the week on a Virgin Business Class flatbed. Certainly a bad omen for the engagement.

As per firm rules, he was not allowed to read confidential material on the plane, so he resigned himself to reading all the news items he could find on UFBA and microfinance in general. There was a lot. He spent all four hours at the airport while waiting for his flight, and three hours on the flight, reading through the extensive media pieces. As a second year Associate, this was the engagement that could usher in his transition to engagement manager. Not that he had much time to think about that.

Petkov looked at his watch and did a quick mental calculation. Thirty minutes to land and disembark, about 30-50 minutes to go through immigration and collect his rental, followed by possibly another 30 minutes to his hotel. He would likely arrive sometime around 2am and had his first meeting at 8am that morning in San-down, Sandton. He rubbed his eyes and willed himself to push back the need for proper sleep by

another week.

“The German partners were not known for their work-life balance philosophy so this would likely get worse.”


2 State-owned bank responsible for micro finance loans.

WeeK 0 – WeeK BeFoRe tHe engageMent“This is a joke. Right?” asked Mark Fibert, the managing director of equity research, as he peered up at the proposed research note (ex-hibit one) projected onto the whiteboard of Rembrandt’s main boardroom in their sprawl-ing office complex on Maude Avenue. Through the large panel windows he could easily see the Deutsche Bank offices. The first day back from a gruelling series of meetings across Asia and Europe, he was not expecting anything tough for his Monday morning meeting. He wondered how to find headache pills.

Mervin shot Indresan a nervous glance as his colleague prepared to defend the controversial report and sell recommendation. “Are you tell-ing me, that in your first research note, just two months after joining the firm, you are going to recommend we downgrade one of the largest banks in South Africa?” continued Fibert. “Can you back this up? Has your research been veri-fied? Who verified it?”

“Nothing quite like starting the day in the firing range,” responded Indresan with a nervous laugh as he tried to inject some humour into the situ-ation. Fibert, either jet-lagged or genuinely not amused, just stared back. “Mark, we did not have time to brief you on this since you were travel-ling. I went through all the standard protocols for checking the research, and even went one step further by handing the models and research material to other analysts who literally tore into the numbers,” explained Indresan.

“I need to see these backup documents for my-self,” retorted Fibert. “Even so, did you have to be so dramatic in your note? This is not the US!”

“Mark, it is dramatic,” responded Indresan. “The numbers certainly do not make sense. No one is making money from microfinance in South Africa on the scale UFBA is claiming. Only one small bank is profitable, and that is the operative word - small. The recently released Microfinance Bank of South Africa2 (MBSA) filings clearly show that UFBA is the beneficiary of guarantees amounting to 90% of their loan book. Why get funding from the MBSA if they are making money?”

“Let’s look at the facts,” interjected Paul Fine, the head of banking research, slightly annoyed that Indresan had ignored his advice and focused on the drama of the results. “Are we really being that controversial? This is not the US and sub-prime mortgages. All we are saying is that one of the largest and most stable South African banks is on the verge of making a stupid bet. The micro-finance business is just 4% of their profits, and maybe 3% of their asset base.”

A veteran banker of South Africa’s congealed banking sector who once ran the equity research team at UFBA, Paul had an axe to grind. He continued as everyone looked on. “This will never cause a collapse of the South African banking system, but it will cause shockwaves and hammer the share price of UFBA, since the market has already baked in the upside of the microfinance expansion.”


Paul decided to state the obvious as the blank stares continued, “Banking in South Africa has not changed in about 15 years: same players, same market share and same ideas. This infor-mation could cause enough pain for UFBA that they either retreat, giving others room to grow, or they attack in other areas, creating some move-ment in the sector. Either way, extra movement means mandates for our team: the only remain-ing independent investment bank. The numbers make sense and we need this.”

“Are you sure the numbers make sense?” asked Mark again.

“Mark, this is the moment we have been wait-ing for. An opening has been created and we just happen to be out front ready to ride this wave into Camps Bay,” responded Paul.

Mark turned to his assistant, “Louise, see if you can get me Aldus on the line immediately. Tell him it is important and patch him through on the video conference with access to our projector.”

Aldus Steenkamp, the patriarchal head of the firm, was also a refugee of UFBA. He joined the firm straight out of his actuarial studies and rap-idly rose through the ranks. His career came to a swift end, when as head of the investment bank-ing group, he was passed over as CEO. He spent the next 12 years building Rembrandt into South Africa’s largest independent investment bank with offices in South Africa, the UK, the USA, Australia and Hong Kong.

“Let’s look at the numbers,” said Mark as Indre-san projected his proposed research note. “As you can see, as reported by both the MBSA and by UFBA, ninety per cent of UFBA’s microfinance loans are guaranteed by the bank,” said Indre-san. “The MBSA outlined two months ago that approximately fifty-five per cent of its guarantee scheme goes to UFBA. We know from UFBA’s own filings that it generated revenue of R2.3 billion from this business. Which means about R1.81 billion is backed by the MBSA. Moreover, UFBA has no program in place to manage de-faults. They are simply shovelling the loans out and really don’t care about the defaults,” he continued.

He looked around as he planned to deliver his coup de grace. “The share price increases for UFBA are...


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“Partnership” is the descriptive memoir of an ex-BBM partner as he recounts his reasons for entering BBM and progressing through the ranks to a coveted partnership. This book is unusual in that the author recounts engagements in signifi-cant detail, while explaining his learning and development areas in those engagements. The 287-page book is supported by exhibits and tools to help candidates map their own career develop-ment.

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eLeCtriCity seCtorf

Follow Mexico’s integrated (Generation, Trans-mission and Distribution) $6B revenue electric-ity utility monopoly as it prepares to restructure itself and begin a construction program to supply power to a burgeoning industrial and consumer base. The book follows a consulting team as they develop the strategy to refocus the utility and prepare to build new stations. The 280-page book is supported by Excel, Word, Power Point, video, audio files, and access to the discussion forum. + 100 supporting documents.

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n Equity Research Re

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All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Imaginary Investment Bank and subject companies. Imaginary Investment Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objec-vity of this report.

Region Africa!Sector Financial Services! Rembrandt

Investment House

UFBA HOLD RECOMMENDATION

Exchange: Johannesburg Stock Exchange JSE

For how long can government guarantees con8nue to enrich UFBA shareholders? Indresan Naidoo !Mervin Swift!Equity Research Analyst !Equity Research Analyst!+ 27 11 540 3426 !+ 27 11 540 3426 !!

Microfinance defaults exceed 52%!Department of Trade & Industry guarantee data indicate approximately 52% of all UFBA microfinance loans have defaulted or are expected to default. The DTI has allocated a provision of R2.8B to guarantee these loans.!

State guarantees are masking an unprofitable loan book!Without the guarantees, UFBA would need to take a conservative R3.2B provision to their balance sheet per annum, thereby reducing their reported net profit by approximately 23%. This provision would only increase as the microfinance business grew in size.!

Retail branch expansion will cost in excess of R2.45B!The proposed retail branch rollout of 1,500 branches will cost R2.5B once-off with estimated operating costs of R300M. UFBA would need to capture at least 44% of the market and maintain their government guarantees to break even.!

NAV drops by 12% over the next 2 years !We cannot foresee UFBA capturing more than 20% market share and the DTI is unlikely to fund this growth in perpetuity. It is likely that UFBA would need to account for these losses, leading to an estimated 12% drop in NAV.!

Liability and litigation environment is unclear!The experience of Dominion Bank indicates that the legislation governing the termination of loans in the microfinance sector is, at best, open to vast interpretation. At this late stage, it is not at all certain that UFBA can renege on its outstanding obligations.!It is also unlikely that UFBA could find a willing buyer for its loan book. Dominion Bank, the likely buyer, has all but publicly announced its decision to shutter this business and recently fired an additional 245 employees in this division. This brings total division layoffs to 488.!

We feel UFBA does not have a realistic grasp of both the economic and operating realities of their new expansion strategy and recommend clients underweight their portfolios with UFBA.!.!

UFBA cannot defy the laws of economics!

November 2011!

Page 1!

Exhibit 1