Equity Bank CEO James Mwangi: Transforming Lives with Access to Credit

BRIAN KENNY: Welcome to Cold Call. I’m your host Brian Kenny. Our weeklong celebration for the 200th episode of Cold Call continues today with another case that’s part of a new course at Harvard Business School focused on the Social Purpose of the Firm. Today’s case takes us to sub-Saharan Africa with a protagonist who has spent decades finding ways to bring banking to millions of people on the financial margins who would likely never have had access to traditional banks. And I’m excited today to welcome Professor Caroline Elkins to discuss her case, “A Marshall Plan for Africa, James Mwangi and Equity Group Holdings.” Welcome, Carrie.

CARRIE ELKINS: Thanks so much for having me. Brian. What a thrill.

BRIAN KENNY: And so, this case, I think, just hits the nail in so many different ways on how firms, even in traditional industries like finance, can make a big impact in the world. So I’m looking forward to hearing you talk more about it. And I guess we’ll start just by asking you to tell us what the central theme is of the case and what your cold call is when you start the discussion.

CARRIE ELKINS: Thank you so much for this, Brian. Look, central theme is how is it that we can have both purpose and profit in a firm? And when we think about James Mwangi, we think about the ways in which James and his bank, Equity Bank, for which he’s CEO, has really transformed lives and livelihoods, not just in Kenya, but throughout Eastern Central Africa. And so when I open up this case, I will open up to say, in 2020, Forbes coined the term the Mwangi model. What is that? How is it that model has now become something that people are seeking to replicate throughout Africa and throughout the world.

BRIAN KENNY: And I’m curious about how you heard about James and did you write this case specifically for the course, or was this a case that you had already written that you thought this would work really well in this context? And why?

CARRIE ELKINS: Careful here, Brian, because I’m an historian. I’m going to take you way back. I’ve known James, I’ve known of James for quite some time. In fact, I came in contact with Equity thirty plus years ago when I was doing field work as a graduate student driving up through Central Province, Kenya. And there was the old Equity Building Society logo, a little house, and I was always intrigued by what that was. And then suddenly the cult of James Mwangi was evolving as I was doing my work in Kenya. And that cult is a man who took a 94% pay cut, came in, took over a technically insolvent equity building society and transformed it into the biggest, by many metrics, banks in East and Central Africa. And then this case I’ve been toying with, I’ve become friends with Sue and James over the years. I’ve been toying with writing a case. And then Deb Spahr kindly invited me to participate in this new course, Social Purpose of the Firm. And I said, “I’ve got a case for you.”

BRIAN KENNY: That’s great. That’s great. And we’re going to talk more about James as we get along in the discussion, but I thought it would be good to start by talking about the African Recovery and Resilience Plan, that factors in early in the case, and it’s a good backdrop for people to think about as they hear about the journey that got James to that part of his career. So maybe you can tell us a little bit, what are they trying to achieve with this plan? What’s the scope of it?

CARRIE ELKINS: Yeah, it’s a plan that arises out of the vicissitudes of COVID. COVID threw into relief all of these supply chain issues that we’ve known have been there for many, many years. And James was in charge of an element within the Kenyan government of PPEs, and he couldn’t import them. He had all this money, he couldn’t import them, and they decided to manufacture themselves. And that gave him that spark, that inspiration to say, “Wait a minute.” Once we’re moving out of COVID, we’ve got to figure out how we as Africans first in Kenya, then in East Africa, then throughout the continent, can in effect be self-sufficient. Certainly tied into global supply chains, tied into global finance, but that we are going to lead our own recovery in some ways, liken to, if you will, the Marshall Plan post World War II. That this was a moment, a new era for Africa, but the difference here is it’s going to be led by private industry and led in this case by Equity Bank.

BRIAN KENNY: And that’s important for our listeners to think about as they hear about James’ story because he really starts from the very beginnings early on. Maybe you can describe a little bit about his background. What was his upbringing like? How would people describe him?

CARRIE ELKINS: Oh, impoverished, impoverished. The highlands where I have done my field work for my other research no sanitation, no running water, no electricity. His father fell victim during the independent struggle in Kenya. His mother, Grace, raised James and all of his siblings on her own. And he’ll say today, back then he was selling vegetables and a little bit of firewood and this kind of stuff. And he was an entrepreneur, but he didn’t understand the academic science behind that except for the fact that he was an excellent student. And he went on to earn scholarship after scholarship. And this man literally went from being a poor, impoverished young boy from a village to getting to high school. And he finally got his first pair of shoes, to eventually to Nairobi, and then into the banking industry when he’s making, by his standards, huge sums of money, able to support his home, able to support his family. And that’s when Peter Munga from Equity Building Society comes to see James. He knew James from the village, from the highlands, because he thought that James was one of the few honest and trustworthy bankers that he knew who could take this over and pull it out of insolvency. And ultimately, James says yes to doing it thinking that he can use this Building Society as a way to implement his notion about transforming lives and livelihoods through banking accounts. But he takes a 94% pay cut to do it.

BRIAN KENNY: And just remarkable, unbelievable. So what was the political climate like in Kenya at the time as he’s beginning with the Equity Banking?

CARRIE ELKINS: It was a one party state. It went from, frankly, from bad to worse to worse. So James is really operating both with the challenges of a failed state. And this failed state sees poverty levels go up, and up, and up, to the point to almost 60%. And at the same time, James sees that and something that we talk about in the case and something that the students learn later on as well in strategy about institutional voids. That the government is failing to provide some basic services, and this is where he provides an opportunity for private business to come in. And that’s precisely what James does.

BRIAN KENNY: How much of this is a legacy hangover from colonialism?

CARRIE ELKINS: A decent chunk. I think it’s one of those ones where it’s like, “Ask me that question. Do we have five hours, Brian? I can give you a long…” But I think we have to understand that Kenya is not unique in the post-colonial world, in the global south. Of the legacies of colonialism, of things like divide and rule, where ethnic groups simply don’t get along and are each trying to capture the state for their own purposes and the failure of financial systems. These colonies, were not, the governments, were not set up the economies, were not set up to benefit the ordinary citizen. And so when independence comes, the basic banking services are absent.

BRIAN KENNY: But there are international agencies that are supposed to be filling some of these voids?

CARRIE ELKINS: This really tends to be private-driven first. The international agencies do pick up on it later. But in many ways what we see, this is something that the students wrestle with. How do we think about private business coming in to alleviate poverty through micro? There’s a huge amount of critique around microfinance, and there’s a huge amount of applause for it. Some people go on to win Nobel Prizes, so the development agencies are in the game, but in some ways, they’re both leading and being pulled along. There’s kind of this push and pull factor, and people, visionaries like James are helping that process.

BRIAN KENNY: This might be a good moment to just tell our listeners, just to give them a definition, a way to think about microfinance in this context.

CARRIE ELKINS: It’s just very small micro loans, tiny. $10, $15, and it begins, if we take the example of Yunus in Bangladesh, or we could take James would be another one, where the idea that growth, that pulling oneself, bootstrapping oneself out of poverty is going to happen through entrepreneurship, is going to happen from you take the little vegetable grower and you give him or her or them a small amount of money and they’re able to scale their business or maybe employ somebody and so on and so on. And that sort of extends beyond to people in artisanship and the rest of it. And it’s been an incredibly successful, at the same time, some of the critique around that is that the interest rates being charged are extraordinary. That’s the case for some, but not all. We can chat about that some more. And certainly as we’ve gotten more and more into FinTech, into the ability for anybody to take a small loan out in the palm of their hand, on a phone, they’re not necessarily taking out for entrepreneurship, they’re taking to cover something else, and suddenly they’re taking it, what’s the equivalent of a $10 loan for a hundred percent interest, 300% interest. That’s a different set of circumstances in part than what we’re talking about here.

BRIAN KENNY: So, there are financial services institutions in Kenya at the time, but as you mentioned, there’s a big void there. They’re servicing very little of the population. What’s the day-to-day existence for somebody who is unbanked in Kenya at this time?

CARRIE ELKINS: You simply, Brian, cannot pull yourself out of poverty. It’s very, very hard. If we look at, we call James, the Horatio Alger story in Kenya. He is unique to your average citizen who simply cannot get out of that cycle. And we describe it in the case for the students, not just in terms of financially what that means, but how that feels and the lack of dignity, the lack of hope. And this is one of the things that we really drive home in the classroom and have the students tease out. It’s not just life on a balance sheet. It’s how emotionally, physically, psychologically it feels not to have a bank account, which means you cannot in any way transact, which means you cannot borrow a whole host of things. And what that means for your average person living in the developing world, or frankly even here in the United States.

BRIAN KENNY: So James has a vision for how to get at this problem and to make a real difference. What were some of the things that he had to do at EGS as he got started to even make it possible to address some of these larger issues?

CARRIE ELKINS: He was built, no pun intended, he was rebuilding the Building Society. And he was taking it from this technically insolvent institution. He had to do several things. One, he had to raise some capital. Two, he had to get customers. And they were both moving in parallel. And when we think about it, and we say this quite clearly, or James does within the case itself, which is not unlike learning algebra, or history, or political science, you just can’t take a villager who’s never been in the market economy and expect them to understand finance. So he went out with some of the other early people in the banking project with him, and they would go out every weekend to the marketplaces and teach people about finance, teach people why their bank account mattered. And they would go from getting a couple of hundred customers every weekend to, there were up to 7, 8,000 new customers a day by the time this bank is really taking off.

BRIAN KENNY: And it wasn’t easy to become a customer. There were some hurdles that people who would become customers had to get through in order to qualify for that. Can you describe that a little bit?

CARRIE ELKINS: Absolutely, Brian. It was another, if we think about the 12 tasks of Hercules within this, and that was one of the dragons he had to slay, the know your customer. And the know your customer laws in Kenya required a minimum balance, transaction fees, delays in taking funds out of the account, all of which absolutely prohibited. The bar was so high that your average person, James’ biggest competition, he would say in what we call sort of equity 1.0, was the mattress. That’s where people kept their money. And he talks often about the impact of his mother, Grace, in his vision, in his journey. And she would keep her money under the mattress. And when she felt those particular risks, she would take it out from under the mattress and put it in a little tin can and bury it by the stem of banana tree. That was the only option that so many had. And by virtue of also getting rid of those many of know your customer laws, he was able to make it even possible based upon banking regulations for these individuals to open bank accounts with him.

BRIAN KENNY: And he looked far afield to find examples of other places that had done this and done it well. What were some of the things that he learned when he looked at places like Bangladesh and Indonesia?

CARRIE ELKINS: These were terrific models, and I think there’s so much borrowing that’s going on between them all. And if we go back to, I mentioned Yunus, and then there’s the organization called BRAC. He really went more towards the BRAC sort of model, which is a very holistic model. It’s not just about giving them a little bit of a loan, it’s teaching them how to save. It’s offering possibilities of insurance policies. It’s having foundation that compliments this for education and environmental concerns. It’s really a giant, in some ways amorphous, but very well-planned approach to alleviating poverty. And I should just add to that, in more recent years, Esther Duflo and others, big economists have looked at this and said, “Yes, it’s this holistic approach that really works well.” And so James, while he didn’t know that at the time, he just had that gut instinct. But those folks who came before him were very important. And now people coming after James are looking at this model to say, “What can we learn from this? What can we borrow from this for our own part of the world?”

BRIAN KENNY: And I think it seems like once he starts to figure that part of it out, things take off in an amazing way. They start to grow their customer base at an astonishing rate. And I’m just wondering how were they able to scale to meet that demand? All of a sudden they’ve got hundreds of thousands of customers.

CARRIE ELKINS: Yeah, I think this is a great segue into the other part of his equation, which this is, we started our conversation with purpose. We’ve covered purpose, we’re on profit now. And he brings in this fabulous woman named Mary Wamae, who is a lawyer, and she becomes his partner in all of this. And they start raising money, and they start doing this first by creating investment shares, convincing early customers to set aside 30% and to loan that back to the bank. They do a $10 million private placement. And then eventually the really big hit is when Helios comes in, buys 25% of the company, approximately 25%, for about $180 million. And keep in mind, Brian, at that point, if you hadn’t had one of those original investment shares after bonuses and splits and the rest of it 25,000%, did your value go up. So that’s the kind of profit this guy is making on relatively small margins.

BRIAN KENNY: Yeah. Is it hard then, do you think, to sustain the vision that he has for the firm and for the purpose of the firm when now he’s a player, the firm really matters in the ecosystem, and you’re in a fraught political environment, now you’ve got investors that have their own expectations for what you’re going to do.

CARRIE ELKINS: It’s a vexing question, is something like this precisely came up when I taught this in Social Purpose of the Firm. And look, his bread and butter is trust. And let’s take an example. So during COVID, many of the banks lost anywhere between 10, 15, 20% of their customers. James gained another 20%. They all went to James because they trusted him. They trusted him. So another example, the Central Bank of Kenya said, “Three months,” that they were going to give a relief to loan repayment that was with the Central Bank. And no more than that, not good for the economy. James gave his borrowers two years. And so you give a sense that he’s committed while it’s at the same time. Make no mistake, and this is the wrestle in the class. He’s still 25,000 percent, should he be making that much profit? Is this okay? And these are the kinds of things that we think about in terms of social purpose of the firm, but at the same time, this is not an NGO. He’s out there and he’s maintaining, and sustaining this scale, and he moves beyond Kenya into East Africa to different markets within East Africa one to hedge the sovereign risk, but also because he’s taking himself into new markets within the East African region.

BRIAN KENNY: We discuss a lot of cases on Cold Call that get at that tension between why is it important for firms to do the right thing? It’s important because it’s good for business at the end of the day, and if it’s just about altruism, it’s not sustainable. So he’s found a really interesting model here. And maybe that’s a good moment to talk about the Mwangi model. What is it exactly?

CARRIE ELKINS: Yeah, I think the Mwangi model it’s purpose and profit, and I think Forbes is really getting at this tremendous transformation. It’s the transformation. And when I think of the Mwangi, I think of transformation. It’s the transformation of individual lives and lives livelihoods. It’s the transformation of understanding what a bank can be In East Africa, we touched on this already at the time of independence, there was no bank that serviced your ordinary citizen. And transformation is also on a more geopolitical global scale. Thinking about, and the segues into this idea of the Marshall Plan for Africa. That private-led revolution, if you will, not to be too hyperbolic about it, but a kind of private-led transformation of how Africa wants and for can sort of escape, if you will, the nature of the global south. The last line constantly when it comes to investment, when it comes to supply chain and this belief in themselves, this belief that it’s Africa’s moment and nobody’s going to help us if we don’t do this for ourselves. And when I think about that transformation, and we talk about with the students, the 1.0 is James’ biggest competition is the mattress, and 2.0 is the other banks, and 3.0 are the telcos. He gets in a big skirmishes with Safaricom over who has the customers and mobile banking. And 4.0 is this. 4.0 is what is the role? Is the role of this bank, at this moment in time greater than simply, if you will, and simply is no small matter, transforming live and livelihoods through bank accounts? But is it playing that role of being the galvanizer to bring everybody together to take East Africa and Africa more generally into a different place?

BRIAN KENNY: How does the foundation fit into that grand picture that he has for the firm?

CARRIE ELKINS: Very much so, and it’s a genius foundation, insofar as what he’s managed to do is he has six pillars to the foundation, things that you would imagine. Education and environment, et cetera, et cetera, entrepreneurship. But what he does is he taps directly into the infrastructure of the bank. So each employee at the bank typically gives, and it’s volunteer, you get paid for this, two to three days a month to whether it’s mentoring people in their educational wings to fly program, whether it’s planting trees, they’ve planted millions of them. But also the genius with this is another two elements. The first of which is he takes advantage, entirely the bank’s infrastructure. So everything for the foundation and leverages off of whether it’s back office, accounting, or human resources, whatever the case may be. And the last part is that this is not a donor foundation, it’s a recipient foundation. So people are donating to, there’s a certain percentage of their profits they give to the foundation every year. But places like for example, MasterCard Foundation and Reeta Roy, they have hundreds of millions of dollars a year to give specifically to Africa. She funds James consistently. Why? For the same reason that individual customers took their money from another bank, or out from the banana tree stem and gave it to James during COVID, because she trusts him. And at this point, she’s given him several hundred million dollars to enact a whole series of programs, particularly around education. And he’s been wildly successful.

BRIAN KENNY: So, he’s got this base of trust now with customers, with people who are investing in the firm and in his vision. And now he takes the stage and unveils this vision for the Africa Recovery and Resiliency Plan. What does he have to do to push that forward? How does he have to think about mobilizing on that bigger stage now?

CARRIE ELKINS: Yes, the first thing that he’s done is to be very clear that he’s not trying to be a shadow government. And he’s not trying to be, because folks can get nervous around this, but rather he’s seeing himself as playing a convening role, if you will. And in that role, he has signed MOUs with a who’s who’s list. Every national government, the Bill and Melinda Gates Foundation, the World Bank, the Commonwealth, you name it. And the idea is that he is contributing several billion dollars off of his own balance sheet, and inviting others, including many development banks, to do similar kinds of things, such that they’re providing the capital. And then also Equity is helping in assisting with other banks, with other development agencies to be identifying different things, whether it’s from pharmaceutical plants, to mining in, with best practices, in places like the DRC. I tend to think of it as James is the quarterback and he’s got… I love sports analogies. He’s the quarterback. He’s got a big team out there and everybody’s contributing. And really his job is to use both to his conferred status and his clout to see what he can do to move this ball forward in terms of really having a private led development, if you will, revolution. And frankly, there is a bit of a critique here saying, “You know what? Thanks so much folks, but a lot of you haven’t helped us like we thought you would. And we don’t necessarily want your help. We want to trade with you, we want business with you.” And I think that’s where we’re finding ourselves with the Marshall Plan for Africa.

BRIAN KENNY: Do you see this as a model that could be replicable in other places, or is it all James, is he the driving force behind this?

CARRIE ELKINS: I think first of all, the jury’s out whether or not. The students, we had a great discussion on this. Some people, some of the students, “Oh yeah, this is great.” Others thought this was just James being a little bit of a megalomaniac out there. But look, I think if we step back and ask that very big question of what’s next in terms of development, how do we think about this? Is it government led? Is it private business led? What James is really saying is this is one big PPP, private-public partnership, but the private side is taking the lead on some of this. And I think for my own self, I’ve spent decades of my life studying Africa, studying the post-colonial world. Earlier question you asked me about the legacies of colonialism. And one of the reasons I find myself here sitting across from you is I do believe in the role of private business and development. I think we’ve seen failure, after failure, after failure in many ways. And the question becomes now, how can business people, like James, who really does understand the relationship between purpose and profit, what role do people, individuals like that have to play in terms of the next steps of pulling society out of poverty to having us see more, more equitable distribution of income, which isn’t just about being, if you were woke, it’s good for business. We know this from Michael Porter, we know this from Jan Rivkin. We know about the relationship between shared prosperity and sustained growth, and we need to have more of that. And so insofar as James can be a model, I think just like all these different microfinancing credit, I think we’re going to see borrowing and learning, and we’re going to have folks see how he succeeds and where he stumbles, and they’re going to learn from that and experiment in their own parts of the world.

BRIAN KENNY: Carrie, this has been a great conversation. I normally ask my guests if there’s one thing they want people to remember about a case, what is it, but I wonder if you just might have just said it?

CARRIE ELKINS: It’s been such a fabulous conversation, Brian, and that’s it. I think, look, we have to understand, and this is a point that we get across with the students in this intensive two days of social purpose of the firm, which is right now, based on multiple different surveys, the number one trusted institution in the world is business. And that means both, that’s wonderful news in some ways, but it’s also news that comes with a great deal of responsibility. And so I put the question to my students, is there any cause out there for which you would give up 95% of your salary to step up and lead? And I had a couple hands go up, and then I asked the question of, would you like to find it in yourself, or a purpose out there that compelled you to do that? In the whole, nearly the entire hands went up in the classroom. So I think in that sense, that sense of why do we get out of the bed in the morning? What is our purpose in life? What is our purpose in business? And also what is expected of us right now? And how do we think about that in ways that are sensible, and profitable, and frankly, good for society?

BRIAN KENNY: The course is timely. The case is timely. Thanks for coming on to talk about it.

CARRIE ELKINS: Thank you so much for having me.

BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR podcast network.