Healthy banks essential for Covid-19 economic recovery

African banks have weathered the Covid-19 crisis better than many expected but will they be able to provide the loans at lower rates that are needed to help economies recover?

While Africa has thankfully not been as badly hit by the coronavirus pandemic as probably feared by many, the same cannot be said of its various economies. Preventive measures to curb the spread of the virus shut a lot of Africans out of their predominantly informal means of livelihood.

Palliative measures to soften the negative income effects have not been strong or far-reaching enough in most countries – many complain they are yet to receive anything from their governments.

Those who did get something, had to suffer the toil of long queues or the humiliation of being seen to be needy. There have also been tales of corruption around the procurement and distribution of these welfare packages.

For the very poor, incomes have literally disappeared. Even those still with jobs worry about how long they will have them. Many have exhausted their savings, and as lockdowns are being eased, are emerging from weeks in isolation at home to news of job losses.

Firms are not entirely to blame. As they have not been able to do much business, with lockdowns meaning no custom in most cases, a lot are having a hard time fulfilling their obligations. Cost-cutting has become a necessity.

Many companies are also not able to make payments on their bank loans. Some governments are intervening, but hardly be able to do much with their own means constrained as well. Banks can help. But they would need the support of their respective governments.

Tough times

African banks, like others elsewhere around the world, are caught in the crossfire. While able to still service their customers through online channels during the various lockdown periods, the rush to bank venues as restrictions were eased in many African countries points to the necessity of their bricks-and-mortar infrastructure.

So even as the pandemic has forced global banks to lean more on technology, with indications that the changes will endure, it is precisely the hard infrastructure of African banks that will be crucial to a post-pandemic recovery on the continent.

It is not an entirely bad period for African banks. The large ones are recording increases in deposits. This is not surprising. Predominantly cash-backed welfare initiatives around the continent are being channelled through banks, with some recipients choosing to put them in their savings accounts instead.

Still, there is almost a consensus that banks will not be able to make as many loans as they did during normal times for a little while. Except in a few cases, almost all are expected to maximise their exposure limits on government securities.

In countries where there are regulatory caps on such exposures, it would not be at all surprising if they are relaxed, as governments look to the markets for much-needed cash.

Sympathetic approach

Like elsewhere around the world, the continent’s banks will likely spend a great deal of the remainder of the year restructuring existing loans. KCB Bank, Kenya’s biggest, had already restructured about $1bn-worth of loans by mid-May.

Some are also being surprisingly empathetic towards their customers. South Africa’s ABSA Bank is allowing a significant number of its customers some leeway on their loan repayments, for instance and from Nigeria, Kenya to South Africa, banks are holding off on lay-off plans, opting to cut salaries instead.

Some have done this owing to government pressure, however. Some regulators are also being accommodating, dropping minimum capital requirements and reducing the amount of funds banks need to park with them as reserves.

A number of African central banks have also ramped up loan guarantee schemes, adding incentives like a cap on losses for banks, to induce participation and uptake.

Defaults have started to rise. Standard Bank, one of Africa’s largest, is already gearing up for a significant surge. Others around the continent are doing similarly.

The impairment effects would hit them differently. Big ones like South Africa’s Standard Bank, Nigeria’s Access Bank, and Kenya’s KCB Bank should be able to easily shake off the losses. Smaller ones will probably have a hard time. These will need help from their respective governments.

In general, however, there is not much concern that a banking crisis is at hand in any of the continent’s markets. As previous crises instigated stronger capital measures, most are in good stead to weather the current challenges. That said, there are those with peculiar challenges that would probably be exacerbated by the negative economic effects of the pandemic.

That is not to say there should not be cause for concern. The major global credit rating agencies have downgraded most of the key names, in part because of their respective sovereign’s diminished status, with negative outlooks in tow. This is not unique to the continent, however. Almost all sovereigns and banks around the world have either been downgraded or tagged with negative outlooks.

Restructure, accommodate, save jobs

Amidst all these challenges, banks are also the channel through which any recovery in the various African economies would come about. They have to make new loans. They clearly also have to lend at lower rates.

Voices are already becoming louder in this regard. South African banks were recently urged to reduce the interest rates on their loans, for instance. Even in Kenya, where an interest rate cap law was repealed not too long ago, banks are likely to face pressure to take a cue from the prevailing sentiment of the need for greater accommodation. Loan defaults, thinner margins, and greater provisions will almost certainly be the lot of African banks over the next twelve months.

Despite these challenges, they must aid the post Covid-19 economic recovery. Their businesses depend on it. They should target labour-intensive sectors like agriculture, agro-allied industries and manufacturing as Nigeria’s Zenith Bank has announced it would.

They should restructure the loans on their books like Kenya’s KCB Bank and Nigeria’s First City Monument Bank are already doing.

They should not only participate in the loan-guarantee schemes being set up by their governments, but actively promote them to their customers. Difficult as it is, with relatively meagre returns for their troubles, African banks must make a deliberate effort to help small and medium-sized businesses this time around.  

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