On a chilly morning in early 1993, three bankers sat in the Central Bank of Kenya (CBK) governor’s office, making a last-ditch plea to stave off the closure of Equity Building Society (EBS), which had limped into its ninth year of operation under the weight of insolvency.
The CBK’s decision to chain the doors of the insolvent savings and loans society came after a complaint by one of the three major deposit holders in the society that it was using customer deposits to fund operations, having long exhausted headroom in its capital.
The two founders of Equity, chairman Peter Munga and the managing director John Mwangi Kagema —who passed away on Boxing Day in 2018— had brought along 31-year-old James Mwangi to plead their case with then CBK Governor Eric Kotut.
Former Equity Bank founding CEO John Mwangi Kagema.
Photo credit: File | Nation Media Group
The younger Mwangi, who like Munga hailed from Kangema in Murang’a, had been making a name for himself in banking circles, having risen to become the group financial controller at Trade Bank. He also happened to be one of the top three depositors in Equity.
In a conversation with Harvard Business School Professor Ranjay Gulati on his Deep Purpose podcast, Mr Mwangi, now the chief executive officer of Equity Group, recalled that the CBK governor was adamant that the management of the society had nothing to turn it around, having failed to stem the tide of losses over the preceding years.
Mr Kotut had a tough condition for the renewal of Equity’s licence: Mr Mwangi had to be at the centre of Equity’s restructuring efforts or for the slumping building society to be shut.
“The governor pushed his writing pad to me and told me to write my resignation. He then picked up his phone and called my managing director at Trade Bank over to the CBK, and told him that ‘I have poached James to revive EBS…replace him as your group financial controller’. That was a very simple conversation that ended with me joining Equity,” said Mr Mwangi.
“At that moment I realised I couldn’t abandon them (Munga and Kagema) because I had committed to take them to be given a chance, so I became the vehicle to the opportunity.”
Former Equity founding chairman Peter Munga.
Photo credit: File | Nation Media Group
He would subsequently join Equity as the building society’s finance and strategy director, before eventually taking over as CEO and managing director in 2004 upon the retirement of the late Kagema, the founder of Enashipai Resort and Spa.
He added that the move from Trade Bank, which would itself be shut down by the CBK before the end of 1993, also came with a steep financial pain.
At Trade Bank, Mr Mwangi was being paid Sh360,000 per month, a tidy sum in the early 1990s when the average annual wage in the private sector stood at Sh40,474, as per the Economic Survey of 1993.
On joining Equity, Mr Mwangi’s monthly wage fell to Sh60,000, with no guarantee that the gamble to rescue the ailing society would pay dividends.
“My wife was troubled, I was newly wedded and we had just got our firstborn son. Then here I was, coming from a humble background where I didn’t have a financial support system, and we were dependent on this salary,” said Mr Mwangi.
Today, Mr Mwangi is one of Kenya’s wealthiest CEOs. His average monthly pay in 2022 stood at Sh17.75 million and is set to receive an eye-popping dividend of Sh511 million in the coming weeks from his 3.38 percent direct stake in the lender.
The Equity CEO is also the beneficial owner of another one percent stake through his entitlements in the bank’s employee share ownership plan.
This brings his total shareholding to 4.38 percent, making him the single-largest individual investor in the bank with a stake worth Sh5.5 billion.
His move from Trade Bank to the building society was also fraught with risk amid a worrisome financial fitness in Kenya’s banking sector at the time.
In 1992 and 1993, the CBK amalgamated five institutions namely Kenya Savings and Mortgages, Home Savings and Mortgages, Nationwide Finance, Business Finance and Jimba Credit into the umbrella of Consolidated Bank of Kenya to avoid collapse.
Special audits on several banks and non-bank finance institutions also resulted in closures. Trade Bank Group, which operated three subsidiaries known as Trade Bank, Trade Finance and Diners Finance was placed under statutory management.
Meanwhile, Nairobi Finance Corporation, Central Finance, International Finance, United Trustee Finance and Post Bank Credit were put under liquidation.
It was at this time that the wheels had fallen off for Equity Building Society, which was founded in 1984 to provide rural farmers and merchants with a platform to save money and access credit.
In that period, the Kenyan banking and financial services sector was highly fragmented, with the CBK counting 41 commercial banks, 67 non-bank financial institutions and five building societies under its regulatory watch.
These institutions struggled in an increasingly tough economy, which in 1993 saw currency devaluation, high inflation and retrenchments from the public sector. In that year, the economy grew at 0.4 percent, which was the lowest since independence.
By this time, Equity was ranked the worst performer among the non-bank financial institutions, a far cry from the present day when it is the second largest bank by assets in the country (Sh1.6 trillion), and the most profitable with net earnings of Sh42 billion.
The society held Sh31 million in customer deposits in 1993, and a loan book of Sh12 million. Its net loss for the year stood at Sh5 million.
Accumulated net losses of Sh35 million over eight years had left the entity with a negative shareholder equity position of Sh30 million, hence the CBK decision to add the institution to the list of those earmarked for the shutdown.
A CBK assessment of the society at the end of 1992 had found the lender technically insolvent, suffering from weak and poor management and described its deposit base as volatile and unstable.
The CBK also flagged the institution’s low liquidity, which stood at 5.8 percent against a statutory minimum of 20 percent, and non-performing loans that ran up to 54 percent of the loan book.
To get Equity out of this hole, Mr Mwangi told Prof Gulati, the biggest gamble he took was a decision to buy the institution’s first computerised banking system in 2004, which cost more than the entire capital that it had at the time.
This was, in his words, key in the transformation of the building society into a commercial bank at the end of 2004, paving way for a listing by introduction at the Nairobi Securities Exchange in 2006.
Equity Group chairman Peter Munga (left) and chief executive officer James Mwangi during the bank’s extra-ordinary general meeting in 2014 to pass resolutions to allow reorganisation of the lender.
Photo credit: File | Nation Media Group
Mr Mwangi, 63, has shepherded the transformation to a top lender in Eastern Africa, with one of his biggest accomplishment being its listing at the Nairobi bourse.
He has been credited with the lender’s expansion in the Eastern African region on the back of mergers and acquisitions while rising to be Kenya’s most profitable lender.
During his tenure, few stocks have generated wealth for long-term shareholders like Equity, which has minted a number of billionaires since going public in August 2006.
Equity’s market valuation has risen from Sh8.1 billion in 2006 to Sh126.9 billion at the close of trading Thursday, representing a 1,466 percent growth. Its shareholders have earned Sh91.32 billion in dividends since 2011.
On earnings, Equity’s profit has increased fivefold from Sh7.1 billion in 2010 to Sh41.9 billion last year—making it Kenya’s most profitable lender.