South-South Replication in Africa
A special session at the CGAP Annual Meeting explored the phenomenon of Greenfield banks and South-South replications in sub-Saharan Africa. A quick survey by CGAP found more than 20 greenfields in 14 countries. A panel comprised of Dr. James Mwangi (CEO of Equity Bank), John Tucker (UNCDF) and Matthias Adler (KfW) reflected on their different perspectives as replicator, donor, and public investor. Their experiences came from models in countries ranging from relatively nascent markets like Sierra Leone and Southern Sudan to more mature markets like Ghana and Uganda. Tucker and Adler explored the pros and cons of starting afresh vs. reforming an existing financial institution. The challenge of building long-term leadership and capacity was a recurring theme.
On the practitioner side, Mwangi made some pointed and candid observations, reflecting on Equity’s contrasting experience in Uganda, where it acquired a credit-only MFI and converted it into a savings-led bank, and Southern Sudan, where it started a Greenfield bank with UNCDF support. In the former case, the bank has struggled to transform the institution and achieve profitability. In the latter, the bank achieved break-even in well under a year. What explained the differences? Mwangi highlighted the following:
- Culture: The soft factors are hard to replicate. It was difficult to instill “the Equity way” when the people who were still there in the institution had their own way already. One of Equity’s striking strengths is its brand but Equity found it hard to capitalize on this in a pre-existing player in a market new to them.
- Leadership and management: If key people stay on, any key adjustments can seem like personal critiques of the previous regime, especially if we’re talking about owner-managers.
- Capacity: In Uganda, Equity was trying to build their savings-based model on a credit-only organization. This was a very different and more demanding business model and the capacity just wasn’t there for rapid change. And adjustments can’t be accomplished in a week – and they take longer for a savings- than credit-led provider.
- Talent: Mwangi described having to “pay with your shirt” for key staff by buying experienced bankers; good people demanded a premium to leave an institution with an established international brand in that market and for the uncertainty of a start-up.
- The “business environment:” This is a euphemism for the real problem noted by the Acting CEO for Equity-Uganda – fraud. Because levels of customer fraud were so high, Equity couldn’t use one of its key success factors in Kenya: decentralization of authority and decision-making to the branches. Some of the key operational assumptions didn’t hold water. The business model needed major adjustments in the form of centralization and controls. Needless to say, this didn’t come cheap, with both one-off and ongoing expenses being higher than planned.
- Financial identity: Equity discovered the big advantage offered by national identity systems in Kenya which had to be worked around in Uganda with higher-cost methods like biometrics.
- What you promise to get the license: “The biggest challenge was expectations,” said Mwangi. Those responsible for granting the license did their homework on Equity and found that they were offering credit at 18% in Kenya. So that’s what they asked for in Uganda. While the acquired institution was profitable with an interest rate of 48%, it was pretty challenging to keep it so with an 18% interest rate and a whole lot of new costs.
- Legal and regulatory framework: We all know that issues like minimum capital requirements clearly affect the viability of the business model. But it’s not just the licensing requirements. Mwangi pointed out that the rules around specific products were quite different. Executive management was expected to have “four eyes” (e.g., a managing director and an executive director) for adequate controls, making it necessary to identify and prepare a second individual for this role. Tax regimes were really different . . . and unpredictable.
Mwangi stressed that these challenges can and must be overcome. We can and will make many business models – including greenfielding and South-South replication — work. “Africa is rich in resources. What it needs to enhance wealth and pride is entrepreneurship, ownership, capacity and true empowerment.”