{"id":115,"date":"2020-07-06T11:00:00","date_gmt":"2020-07-06T15:00:00","guid":{"rendered":"https:\/\/kurtdavisjr.com\/?p=115"},"modified":"2020-08-10T06:26:16","modified_gmt":"2020-08-10T10:26:16","slug":"coronavirus-chance-to-improve-exposed-weaknesses-of-africas-banking-system","status":"publish","type":"post","link":"https:\/\/kurtdavisjr.com\/coronavirus-chance-to-improve-exposed-weaknesses-of-africas-banking-system\/","title":{"rendered":"Coronavirus: Chance to improve exposed weaknesses of Africa\u2019s banking system"},"content":{"rendered":"\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"587\" src=\"https:\/\/kurtdavisjr.com\/wp-content\/uploads\/2020\/08\/1.jpg\" alt=\"\" class=\"wp-image-116\" srcset=\"https:\/\/kurtdavisjr.com\/wp-content\/uploads\/2020\/08\/1.jpg 1024w, https:\/\/kurtdavisjr.com\/wp-content\/uploads\/2020\/08\/1-300x172.jpg 300w, https:\/\/kurtdavisjr.com\/wp-content\/uploads\/2020\/08\/1-768x440.jpg 768w, https:\/\/kurtdavisjr.com\/wp-content\/uploads\/2020\/08\/1-750x430.jpg 750w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>A customer is served at the teller counter inside the banking hall at Kenya’s Sidian Bank headquarters on the outskirts of Kenya’s capital Nairobi, June 29, 2016. (Photo Credit: REUTERS\/Thomas Mukoya)<\/figcaption><\/figure><\/div>\n\n\n\n<p><strong><em>This originally appeared on TheAfricaReport.com<\/em><\/strong><\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p>COVID-19 has disrupted the global economy with the uprooting of supply chains. The decades-long, single-minded focus on optimising supply chains helped the world minimize costs, reduce inventory, and boost asset utilisation.<\/p>\n\n\n\n<p>Today there is an unprecedented uncertainty in how these supply chains will re-emerge, adapt, and or re-create themselves in the midst of the pandemic. The incessant pursuit of globalization of trade (and capital) feels halted by a destabilizing concoction of fear and uncertainty.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Contradiction explained<\/h3>\n\n\n\n<p>Yet the S&P 500, Dow Jones, and Nasdaq <strong>continue to tick up<\/strong> (with hiccups here and there) while the US still struggles with economic woes including high unemployment and an increasing cases of COVID-19.<\/p>\n\n\n\n<p>Analysts rely on several theories to explain this \u2013 the primary two reasons (on different ends of the spectrum):<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The stock market is a couple months ahead of what is happening on ground (i.e., the rally is investors buying into the theory of a quick recovery).<\/li><li>There is significant dislocation between \u2018Wall Street\u2019 and \u2018Main Street\u2019.<\/li><\/ul>\n\n\n\n<p><strong>Let\u2019s simply say either theory is probably irrelevant for African markets.<\/strong> The pandemic already froze African growth in its footsteps \u2013 the World Bank now expects the African continent\u2019s GDP to shrink 1.6% in 2020.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Implications for the banking system across Africa<\/h3>\n\n\n\n<p><strong>COVID-19 is a problem for the banking system in 2020.<\/strong> That said, the outlook for African banks in 2020 was already negative (down from stable), according to Moody\u2019s report in December 2019. It had indicated that the global economy was \u201csluggish with negative business sentiment and trade uncertainty clouding growth prospects\u201d that hurts African banks which generally have high direct and indirect exposure to their respective sovereigns and consequently have their credit profiles linked to such sovereign outlooks.<\/p>\n\n\n\n<p><strong>The negative outlook for growth on the continent<\/strong> is now effectively amplified by COVID-19. Retail bankers quietly fret about the increasing defaults on personal loans combined with increased withdrawals and slowing deposits.<\/p>\n\n\n\n<p>Retail banking is not necessarily the lifeline of African banking. But the personal banking trends captured at banks (albeit not surprisingly differing across countries) are a good indication of the challenges on the ground for locals.<strong> The pain felt in locals\u2019 pockets<\/strong> will seemingly translate to commercial slowdown as consumers take home less and spend less.<\/p>\n\n\n\n<p><strong>Corporate performance is likely to dip in this pandemic.<\/strong> This would be no surprise as a similar effect has been seen globally but the difference in Africa is that corporate non-performing loans (NPLs) were already north of 10% for many banks in 2019.<\/p>\n\n\n\n<p><strong>NPLs can be expected to rise in the near-term<\/strong> with corporate borrowers either defaulting on payment or covenant obligations. Covenants can be relaxed for a short period (and not be too detrimental to the system) but the missed payments have a tripling effect by eliminating available capital from the system that can be supplied to other corporates during these times.<\/p>\n\n\n\n<p>The decrease of available capital in the banking system will hit small and medium-sized enterprises (SMEs) more than larger corporates and state-owned enterprises (SOEs). In the midst of a pandemic, banks rightfully will support their larger corporate relationships and help to bridge important SOEs through the times.<\/p>\n\n\n\n<p>Thus the existing<strong> \u2018credit deficit\u2019 for SMEs will expand<\/strong> with limited (and likely reduced) lending to the businesses in the SME category. Microfinance institutions sadly have not filled the liquidity gap and cannot be expected to do so in these times.<\/p>\n\n\n\n<p>Lastly, <strong>IFRS 9 create challenges for policymakers and bankers<\/strong>. Regulators have relaxed capital requirements, including the base rate and bank cash reserve ratios, and have increased government bond buying programmes. But these measures cannot solve a prolonged economic slowdown in Africa, which suggests increased NPLs over time can only be ignored (i.e., deflected or not recorded on balance sheets) for so long.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">How to confront these challenges?<\/h3>\n\n\n\n<p>Firstly, retail banking will remain a challenge for the banking system. If anything, the story and solution remains the same in 2020 as it was in 2019. More mobile money is key to transforming banking for retail customers.<\/p>\n\n\n\n<p><strong>Regulators and banks can probably work more in tandem<\/strong> to retool and upgrade their infrastructure to accommodate for the quick technological uptake in the industry \u2013 we can expect both banking and lending problems and solutions will continue to be more digital in Africa.<\/p>\n\n\n\n<p>The relaxing of Basel III requirements is helpful in the short term for many banks. But the reality of the situation will require liquidity as the pandemic persists and\/or the slower the recovery may be over the long term.<\/p>\n\n\n\n<p>Some governments<strong> have capital to inject into the banking system<\/strong> but it\u2019s doubtful the continent will pull together the trillions of dollars being spent in the United States (through direct cash to consumers and corporates and indirectly through market purchases).<\/p>\n\n\n\n<p>Some African markets (or regulators) will have to require consolidation in their banking system \u2013 sadly this process for consolidation is still a slow one in many African markets.<\/p>\n\n\n\n<p>The quicker short-term solutions may include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Local banks selling some NPLs<\/li><li>Partnering with other capital providers to help bridge banks, thereby creating profitable exits from troubled assets.<\/li><\/ul>\n\n\n\n<p>For SMEs, access to capital and solutions will depend on greater support from international institutions, such as the IMF, with a higher risk appetite (or perceived risk runway). That said, these institutions can only provide liquidity but cannot fix some of the structural issues that hamper the SME space.<\/p>\n\n\n\n<p>Lending institutions at the SME level remain a challenge with some inefficiencies (or incompleteness) in reporting provided by the industry (both at a lender and borrower level).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Bottom line<\/h3>\n\n\n\n<p>The current pandemic and economic crisis is not creating new problems for the African banking system but rather amplifying existing inefficiencies and issues. As the theory goes, pandemics expose our greatest weaknesses and offer an opportunity to address those problems we have ignored in the past. Let\u2019s hope that theory rings true in this instance.<\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n","protected":false},"excerpt":{"rendered":"<p>COVID-19 has disrupted the global economy with the uprooting of supply chains. The decades-long, single-minded focus on optimising supply chains helped the world minimize costs, reduce inventory, and boost asset utilisation…<\/p>\n","protected":false},"author":1,"featured_media":116,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[26],"tags":[27,28,14],"class_list":["post-115","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-africa","tag-africa","tag-banking","tag-covid-19","wpcat-26-id"],"cc_featured_image_caption":{"caption_text":"(Photo Credit: REUTERS\/Thomas Mukoya)","source_text":"","source_url":""},"_links":{"self":[{"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/posts\/115","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/comments?post=115"}],"version-history":[{"count":6,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/posts\/115\/revisions"}],"predecessor-version":[{"id":275,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/posts\/115\/revisions\/275"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/media\/116"}],"wp:attachment":[{"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/media?parent=115"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/categories?post=115"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kurtdavisjr.com\/wp-json\/wp\/v2\/tags?post=115"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}