Editor’s note:
This story has been edited and republished to include Equity Bank’s recent milestone to become the first bank in Eastern and Central Africa to achieve the trillion-shilling [about $10 billion] balance sheet after migrating Banque Commercial Du Congo (BCDC) to Equity’s core banking platform.
The bank is also the most capitalized in East and Central Africa with over Ksh.142 billion [$1.3 billion] giving it a single lending obligor of Ksh.35 billion [$320 billion]. Equity banking subsidiaries will now be in a position to leverage the Group’s strength to extend large corporate loans across all the countries where Equity operates.
Speaking when announcing this milestone from Kinshasa Congo where he was witnessing the migration of BCDC to Equity’s core banking platform, Dr. Mwangi said, “We are delighted to witness this milestone that has shattered the psychological barrier of a trillion-shilling balance sheet. ” He added, “The benefits to our customers will be immense.”
NAIROBI, Kenya — James Mwangi has transformed Equity, from a broke building society, into one of the most respected banks in Kenya and Africa. Right from when he joined the bank as a junior employee, for three decades, his undying entrepreneurial spirit, business instincts, and team work have guided the financial institution to an immense success story.
Dr. Mwangi, now Equity bank group managing director and CEO, in an interview with Harvard Business School (HBS) professors Tarun Khanna and Jorge Paulo Lemann – in creating emerging markets, oral history collection, recollects his journey, of how, against all odds, he made Equity a success story.
From a building society in the 1980s, Equity Bank is now a financial powerhouse. As of 31 December 2017, its assets exceeded Sh524. 5 billion ($5.243 billion). At the time, total group customers were 12.1 million in Kenya, and regional subsidiaries in Tanzania, Rwanda, Uganda, South Sudan and DR Congo, with Sh373 billion in deposits, and over 9,000 employees.
In 2019, the regional lender announced a net profit of Sh19.8 billion. Dr Mwangi took home Sh416 million in dividend. In his own words: “That’s why Equity was credited with democratization of financial access in Kenya – it disrupted the banking environment from the top side down.”
In 2012, Forbes Africa feted him as CEO of the year.
According to Dr Mwangi, it all started when he got his first job in banking when it dawned on him that 96 percent of the population of Kenya was excluded from having a bank account.
“It became my desire to change that, in part because of my own personal experience. My late mother, was never allowed to get a bank account. Everybody in my village was not eligible for a bank account. But, by that time, I really understood that exclusion from the financial system was exclusion from resource allocation. That was a turning point.
The second turning point was when I set foot in Equity—a building society then—and realized how devastated it had been by 11 years of operations, without reaching breakeven. It was scary to fully appreciate technical insolvency, but inspiring to see the resilience in people that despite 11 years, they still had hope.
The turnaround of Equity was driven by that spirit. It was all about that human spirit, that determination. Then a year later, when we were turning it around, I realized the power of customer satisfaction, the power of customer experience. I realized that while all of the factors for production are essential in an entrepreneurial journey, it’s the fulfillment and satisfaction of the customers that allows progress to be achieved.
DEMOCRATIZING FINANCIAL ACCESS
Back in 1989, there were so many barriers how to access to a bank account. The first one was the Know Your Customer (KYC), compliance requirements. They were so rigorous that an ordinary person could not meet the specification. The second one was the hefty charges.
It was the issue of minimum balance, ledger fee, standing orders that essentially became a part of the fixed cost of operating a bank account. Of course, there were other non-financial barriers, like liquidity—access to liquidity.
People were only allowed to access their liquidity once every seven days, and they had to keep a minimum of Sh10,000 ($100). If you had to withdraw more than Sh10,000 ($100), you had to give 14 days’ notice.
Lastly, was the way the customers were treated. You were made to feel that your value to the bank was based on your account balance. So, the issue of human dignity; the issue of esteem of people—somehow, people felt—it was abused.
And, the government was not involved in addressing this obvious, big inequity.
After independence back in the mid- ‘60s, the country was dominated by international banks. When the government rose to the challenge, it formed three government banks, but they all focused on serving state corporations. They didn’t realize that serving the citizenry was most important. So that is where the government failed.
I think, also, that the government didn’t have a mechanism of altering or adjusting the market forces. It was like capitalism without regulation—the government just watched as the market forces shaped the environment and determined who could get access to financial services, without really realizing that access to financial services is fundamental to the development of a society or a community.
So, you could think of it as a market failure with the government not being able to find mechanisms of regulating or adjusting the market forces.
That is why, he said, Equity was credited with the democratizing of financial access in Kenya. It disrupted the banking environment from the top down. “Simply, what we did was remove all the barriers—including the legal barriers—of opening an account. We assumed anybody who had a national ID was well-known to the government. That was a sufficient condition.”
The second aspect was to remove all these fees— minimum operating balance, ledger fees—and then remove, most importantly, the barriers to access to liquidity and allow customers to
withdraw as many times as they needed and as much as they needed, or allow full access to liquidity.
Eventually, a country that had four percent of the population banked, grew to having 86 percent of the population with access to financial services—with Equity Bank serving 56 percent of that population. That is why it is said to have democratized banking.
Lastly, we give banking a human face. Essentially, it was the dignity. It was the way you treated
customers when they walked in. They were not treated based on the balances of their bank accounts.
HIGH VOLUME, LOW MARGIN
Equity Building Society was started back in 1984 and I came on board in 1991. By that time—while it had been started with a capital base of one Sh1 million—it had accumulated losses of Sh33 million.
So, it was technically insolvent to the tune of Sh32 million. It had only a deposit base of Sh22 million —much lower than the accumulated losses—and had a loan book of Sh9million. When you looked at the total payout of the building society, it was Sh101,000, while at my previous employer I was earning Sh360,000.
That was when I came in and said, “Let’s try a business model that is high volume, low margin—to differentiate ourselves from the other banks; to bring in affordability, and to be able to meet the cost of removing the barriers because the barriers were the basis of income”.
So, the fact that we removed all these barriers that really generated the revenue, we had to operate a very low-cost model. Eventually, this meant that—to be able to have high volume—we needed to computerize the bank so that we could increase productivity.
So, that was really the turnaround—it was the customers’ experience of suddenly finding themselves in an environment where they’re treated with dignity; where they could see a bank with a human face; a bank with a soul.
Its microfinance model, he said, was an offshoot from microcredit after realizing that people needed more than credit—realizing that truly, transformation could never be driven by credit alone. You needed people to build their savings. It’s complementing their savings for investment.
So, microfinance entailed small savings transactions, small payments transactions, small credit transactions, eventually, a small micro-insurance transaction, all embedded in one, such that one could have access to the whole range of financial services, but tailored to their economic lifestyle— small salaries, small remittances, small withdrawals, small deposits, small loans. Essentially, because they plan for the day.
So, that is when we realized, these are micro-transactions that happen with a huge frequency. So, we had to create a financial system that overlapped with their lifestyle, and their lifestyle was without much long-term planning. It was daily plans.
What I’ve come to respect most about low-income household is the discipline of work, because if there’s no food on the table unless they work.
What I realized is, because of that, the discipline of repayment— repaying borrowed funds—is much higher in the low-income households, because they want to maintain their relations.
MARKET INFORMED – NOT BOARDROOM
There was a lot of influence from the customers themselves. We learnt a lot and so today, the processes and procedures of Equity have been reshaped by the customer experiences.
The bank, he said, learned a lot from India, and southeastern Asia when it came to computerization. The West had very solid systems, but they were more for corporate banking. When it came to innovations, there was also a lot that we learnt from the telecoms industry, particularly the initial setups.
Today, you’ll find almost 97 percent of the transactions at Equity happen on the mobile phone. So that ability to learn from other sectors, not necessarily banking, has also been critical.
When it came to insurance, we realized that they kept on hedging most of the risk—particularly from social groups, sometimes diversification of their asset portfolio. We could see them with chickens, with goats, with cows, with bananas, and the rest. It was a diversified portfolio of assets that withstood shocks differently and produced streams of income at different seasons.
Lastly, reflecting on the fact that only four percent of the population was banked, we asked ourselves, “Where is the other 96 percent of the population banking?” We realized they were banking with little shops.
That’s also where they were getting their credit. That led us to formalize that little banking system—in the form of taking savings and providing credit—by appointing the little shops as agents of the bank.
Today, we have 35,000 little shops (agents). We just formalized what they had been doing for years. Today, that is the bedrock of Equity Bank. The bulk of transactions happen on third-party infrastructure, rather than brick and mortar —either with an agent or on the phone.
So, all that innovation was shaped by studying the market. So many influences were
not boardroom knowledge, it was market-informed.
We now have 12 million customers. We have about 208 branches spread over six countries.
It’s when you demonstrate your value that others buy into your value, and you don’t have to persuade them. That is how we have been able to grow.”
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