‘The greed that sometimes drives capitalism must be tamed’ – James Mwangi
If any banker was going to have an epiphany about capitalism during the pandemic, it was James Mwangi. “The bottom line [...] is no longer a central focus,” he said, during a long video call in late August, in his capacious but empty office in central Nairobi.
Instead, the chief executive of Equity Bank has realised that the interests of the wealthy must be better aligned with the less well-off to avoid global calamity – in essence, inclusivity is self-interest. It has been a punishing year for Kenya’s biggest bank. “Up to June we are down 24% after tax,” says Mwangi. Waiving the fees to use its mobile platform forfeits $2m per month in revenue.
Whole teams have been set up to work from home, with all the security and equipment costs this entails. “We have a 200-member call centre working from home, our debt-collection unit – another 200 people – working from home.” Most expensive is the extra money set aside in case customers are unable to pay back loans. “Our provisions have gone up 15-fold up to June to take the heightened risk that we perceive. We are insulating our customers from shocks.”
While the government has “been very generous” with supplementary budgets, Mwangi diplomatically points at an administration that has been perhaps a little too keen to throw the banks into the front line.
“The [government’s] headroom is pretty low,” he says, referencing its debt levels. Ratings agency Fitch downgraded Kenya in June, saying: ‘We forecast Kenya’s government debt to revenue ratio will reach 350% in FY20.’ Mwangi adds: “Consequently [the government has] looked to the private sector to subsidise. The central bank is encouraging and almost going public to make our customers feel all the restructuring or accommodation is an entitlement.”
This could have repercussions down the road, argues Mwangi. “The biggest worry is that then we are staring at a situation where a health crisis has become a social and human crisis, that has quickly mutated into an economic crisis, which might eventually migrate and become a financial crisis.” Equity Bank has built up its resilience over the past few decades.
The article continues below
Get your free PDF: COVID-19. How Africa can navigate the pandemic
Leaders of all stripes are scrambling to contain the fallout.
Complete the form and download, for free, The Africa Report’s COVID-19 How Africa can navigate the pandemic. Get your free PDF by completing the following form
Back in the 1990s, “they called us a fly-by-night operation,” he recalls, barely better than a Ponzi scheme. Such was the establishment view on a bank that wanted to focus on those “considered unbankable”. “[Customers] were coming to the bank not to get a banking product, they were coming to get tools that empower them to change their lives,” says Mwangi.
“That’s how we ended up with 60% of all bank accounts in Kenya, and today Equity enjoys fanatical trust. What [the establishment] underestimated was the commitment of those who had been condemned as unbankable to live up their obligations.”
That legacy endures – non-performing loans are on average 13.1% in Kenya, but at Equity Bank they are 10.7%. The wisdom of agency banking Mwangi’s insight was that a volume model in banking in Africa could work, rather than the traditional focus on high-margin customers. And this strategy relies on Equity’s agency banking model. Akin to the service provided by your local shop that takes delivery of your Amazon parcel on your behalf, the system allows Equity to leverage hundreds of thousands of small retailers who offer limited banking services on its behalf.
With the advent of mobile phones, the transfer of credit across Kenya became second nature. Today’s economic turbulence has reduced the bank’s appetite for expansion. In June, it walked away from a deal for Atlas Mara’s operations in Mozambique, Zambia, Rwanda and Tanzania. It was partly because of the timing, partly because of “the state of the asset”, says Mwangi, pointing to how Zambia’s economic woes will cap any upside. But it may also be because of the group’s desire to double down on its acquisitions in the Democratic Republic of Congo (DRC), which Mwangi says will have a transformational effect.
In 2015, Equity bought microfinance institution ProCredit Bank. It has grown the balance sheet from $150m to $950m in five years, and signed up one million customers, using the techniques that have become essential to the bank: carefully segmenting the market from the lowly micro-enterprise to strong corporate and helping them graduate into higher segments by getting involved with their business plans and offering them the appropriate services.
Over time, as Equity has developed a deep knowledge of Kenya’s industrial fabric, it has been able to play the role of matchmaker – for instance, helping delivery company X to bank into the logistics chain of large corporate Y. In consultant speak: Equity excels at integrating the bottom of the pyramid into the rest of the pyramid. In the DRC, Equity Bank is trying to accelerate this process.
In August, Equity bought a majority stake in Banque Commerciale du Congo (BCDC), which has a small number of accounts but banks the mining sector and its executives. “Congo has both extremes,” says Mwangi. “We can grow very rapidly by going to the corporates [banked by BCDC] and saying, ‘Can you give us your employees? Can you give us your mining workers? Can you give us all the SMEs that make up your value chain?’ We are very confident that by the end of this year we’ll be the biggest bank in DRC by far, and Equity Bank DRC will be bigger than Equity Bank Kenya in five years.”
This is a big ask. But Mwangi sees huge potential in the DRC – a population double the size of Kenya’s, rich in minerals critical for smartphones and the green economy, plus gold, and no big competitors in the market.
“The country is hungry to transform itself,” he says. He adds that he hopes that Equity’s activities in the DRC will also precipitate regional economic integration.
COVID-19, the great leveller
One could say that Mwangi has cracked the volume model for banking in Africa. He believes he is on the way to cracking the DRC by repeating his trick of integrating the lowliest trader into the value chains of multinationals.
So can he crack capitalism? A friend told Mwangi that the haze around Everest has cleared, as pollution emissions ground to a halt in April.
Brought up near Mount Kenya, Mwangi says: “Now I am able to see the peak of Mount Kenya, the snow as I used to see it when I was a child. And I’ve missed seeing that for 40 years.”
In August, Mwangi was a signatory to a global letter signed by 14 CEOs that pledged to ‘Build Back Better’. When Covid closed the airspace, wealthy Kenyans had no choice.
“We [were] all together going to our national hospitals, rich or poor. For once we are equal,” says Mwangi. “And I have seen people wake up to the reality that we had better create better institutions for all. That realisation that class has not shielded any of us, wealth has not shielded any of us, has really brought to the fore the need for a more equal world where the basics of health, the basics of education and the basics of food should be something that none of us should be struggling with.”
It is rare to get intimations from top executives that inequality can spark revolution. Mwangi talks of the “social stability” that a more equal society would bring, nodding to the uprisings in North Africa from 2015 onwards.
“I think all of us need, then, to ask ourselves a little bit deeper questions about the essence of business, the purpose of business in making the world more sustainable, sustainable through inclusion. And it’s not just financial inclusion – economic inclusion, digital inclusion, inclusion in everything,” says Mwangi. “And if we all became included, then we would have a skin in the game in the world and we would care about the world, all of us.” More bluntly, he says that “the greed that sometimes drives capitalism must be tamed.”
So what solutions are there? Mwangi discounts the South Korean and Japanese models of strong state regulation of capital to better share the fruits of industry.
He points to Scandinavian countries as having a better balance between regulation and innovation. “If it’s regulation to avoid market failures, I would subscribe to that level of regulation, as long as it balances off with a reward mechanism that stimulates innovation, entrepreneurship and risk-taking because it’s a mechanism that has worked and is proven.”
But he remains unconvinced that the current international architecture is enough to deliver this. “We need to check whether there are reforms that may be required at the UN and Bretton Woods levels.”
Mwangi argues that globalisation has “helped the world enjoy economies of scale”, but, at the same time, “it concentrated power too much”. “This came to the fore during the pandemic when the issue of personal protective equipment (PPE) came up, and it became apparent that the entire world was dependent on China.” Mwangi was appointed to Kenya’s Covid-19 Emergency Fund Board tasked by President Uhuru Kenyatta with finding solutions.
“We quickly realised that the global supply chains have been disrupted, and nobody would listen to our small national order relative to the orders coming in from big countries.”
Eventually, the task force managed to pull together local manufacturers in Kenya, and now the country is exporting PPE. But the broader problem remains: how to swim in a global economy where scale matters because national borders are becoming less relevant. It is keeping Mwangi up at night.
Especially when ‘big tech’ players like Alibaba, Facebook and Amazon are becoming ever more interested in providing financial services globally. “It is the disruptive effect of concentrated power. And if that power […] doesn’t care about shared prosperity, then we will accelerate the concentration of wealth into a few hands.”
The globalisation of the payments segment is what preoccupies Mwangi most, given ‘big tech’ companies’ massive economies of scale. “The unit cost for them may be negligible, and I may never keep up. They don’t require a [banking] licence. They are not regulated. We are creating a tilted playing field.”
He is not disconsolate – pointing, for example, to what happened when Facebook tried to create digital money and was immediately rebuffed by the US Federal Reserve.
But he is not expecting protection from the Kenyan government: “It can only protect me within its boundaries. What is going to hurt me is what is happening in Beijing and in California.”
His solution is to look to growing a culture and morality, however flimsy that sounds. “I know how difficult it is, but given the vacuum in regulation and [lack of] a global regulator, I think the regulator must be human conscience.”
AI gives results
While technology can have its negative impacts, it has transformed Equity Bank. For its CEO, the skillset requirements are the biggest change of all.
“I never thought I would have six data scientists in the bank!” says Mwangi. “We are surrendering the entire bank to artificial intelligence, which seems to be giving better results.”
Reconciliation is automated, credit profiling is automated, credit decisions are automated … the list goes on, to the point where he decided to combine the IT and operations departments into one unit.
“I thought customer deposits, capital were my biggest assets,” says Mwangi, “but today what I value most is the big data we have accumulated over the last 18 years.”
Change has outpaced the ability for teams to acquire knowledge, too. Mwangi has been forced to sideline many executives from the world of pre-digital banking and “create an entirely different team to lead the bank”.
He sees a future dependent on “high-performance teams” rather than on individuals. “Whoever has the skills and the competence is the leader for the day or the leader for the project.”
These are hot-button issues in the bank, as Mwangi’s own final furlong comes into view. So what skills should his successor have? “I’ve retired my operational infrastructure of brick and mortar, and replaced that with a very intelligent IT platform, driven by big data, artificial intelligence, analytics and robotics and machine learning,” says Mwangi. “And that tells me that the skill set that might be required is somebody who can provide leadership to an IT installation.”
Beyond tech knowhow, Mwangi wants his successor to have the emotional intelligence to inspire colleagues and attract talent. And, critically, the person should share his vision of Equity as “a subset of a larger society that understands that while the central bank may give us the banking licence, it is the customers who give us operational licence by choosing to bank with us.”
To manage his succession, Mwangi has set up five directorates in his office, with senior leaders in business transformation, strategy, communications, IT and operations, and risk. All eyes are now on them. “I can’t wait to take my new job,” concludes Mwangi, who will become head of the Equity Group Foundation.
“I will not be creating money. I will get the joy of giving what I’ve spent 30 years creating.”
This article was originally published in the print edition of The Africa Report magazine: ‘Where is Nigeria (really) heading?’