Despite the huge challenges, the African banking sector deserves a great deal of praise for the way it has responded to the crisis. It is unlikely that it would have been in a better position to act at any stage in the past, as banks and regulators have generally become stronger, more adept and more nimble over time. Given how quickly central banks acted to cut rates, lessons also appear to have been learned from the 2008 financial crisis.
Central banks speedily moved to cut interest rates, inject liquidity and ask commercial banks to offer lower interest loans to corporations. The Central Bank of Kenya (CBK) also allowed Kenyan banks to restructure non-performing loans (NPLs) in order to protect customers who may have been struggling in the short-term but who had viable long-term businesses. They recognised that it is not just a case of protecting individual companies but also their suppliers, employees and customers.
Yet while most central banks eased cash reserve limits for commercial banks, the Central Bank of Nigeria (CBN) remained concerned about bank capital requirements.
This has much to do with Nigeria’s history of bank failures and the CBN’s determination to avoid a repeat performance. It insists that Nigerian banks stick to its deadline of April 2021 for submitting to the Internal Capital Adequacy Assessment Process as part of its implementation of the Basel II and III accords.
Although it has come under pressure to slacken its requirements, the central bank has not weakened its capital adequacy rate stipulations of 15% for national banks and 10% for their regional counterparts
In some other markets, benchmark interest rates are already very low and with no precedent for zero or negative interest rates in Africa, central banks are understandably reluctant to further reduce them.
The key lending rate in Mauritius, for instance, was just 1.85% at the end of 2020. Moreover, commercial banks may be reluctant to pass any interest rate cuts on to customers because of high levels of NPLs, calculating that encouraging struggling clients to take on more debt would not be in their best interests.
Demand for personal credit has also increased over the course of the pandemic, so those private citizens with the means to do so have been able to secure access to credit to enable them to make purchases at a time when their finances may have been stretched.
What impact this will have on personal debt remains to be seen. Initial research by the CBK and other banks across the continent highlights a rise in the proportion of both personal and business NPLs.
The big test will come when governments and central banks begin to lift their mitigation measures and call in NPLs, although Africa will not be alone in facing rapidly rising debt levels.
The Institute of International Finance calculates that global debt has increased by more than 25% since the pandemic began. Credit ratings agency Moody’s forecasts that the proportion of African NPLs will double over the two-year period 2019-21, so it may finally be time for Africa to acquire a functioning NPL market, perhaps along the lines of the ‘bad banks’ that were set up in industrialised countries after the 2008 crisis.
Credit ratings agencies
In some ways, the true economic impact of the pandemic has not yet become apparent. Analysing the situation in North Africa, S&P Global reported: “Extraordinary fiscal and monetary measures preserved banks’ credit quality in 2020, but we now expect their gradual phasing-out to reveal the real impact of Covid-19 on banks’ asset quality.”
S&P forecasts a sharp increase in problematic loans and credit losses in North Africa, although it assumes that most rated banks will be able to absorb the shock.
Tunisia could be the big exception as the agency downgraded its credit ratings on Tunisian banks last year, partly because it concluded that the country was lagging behind in terms of regulatory reform. Further west, it also warned that Moroccan banks’ exposure to Sub-Saharan Africa created more risk.
The credit ratings agencies have not, however, been universally negative. For instance, in December, Fitch actually upgraded its long-term rating for five South African banks – Absa, FirstRand, Investec Bank, Nedbank and Standard Bank – from AA to AA+ “to reflect an improvement in their creditworthiness relative to the best credits in the country”.
This was despite its downgrading of South Africa’s sovereign rating from BB to BB- just one month earlier. Similarly, it raised its rating for United Bank of Africa (Ghana) from B- to B in January, reflecting the bank’s improved capitalisation and leverage. Despite such positive assessments of individual banks, it can be assumed that most banks across the continent will see falls in profitability ,over the next couple of years at least.
Taken as a whole, Africa has suffered its first recession this century, so there is bound to be a knock-on effect on the continent’s banks. Governments are being forced to borrow to shore up their finances and also fund badly needed medical treatment, but not all countries are able to make the repayments on the debt that they have already taken out.
Banks’ increased exposure to sovereign debt could pose a problem if more governments seek to default but in some cases it can actually shore up bank finances, as in Egypt, where government bonds have high yields.
It would be wrong to argue that the current economic crisis has had an entirely negative impact on the African banking sector. The pandemic has encouraged both banks and bank customers to speed up the adoption of digital platforms and services.
This has obvious advantages in terms of reducing the cost of bank branches and staff, while allowing customers to access services more quickly once they have the means to utilise online banking or mobile banking apps.
It also offers benefits in relation to the integration of front and back office functions. However, from the customer’s point of view, it is important that those not digitally connected are not disenfranchised and that there will always be an option for face-to-face services – outside the pandemic – on those occasions where it is really necessary.
Despite prompt action in the early part of the pandemic, central banks now have fewer resources with which to act. Foreign exchange reserves have been eroded and it is difficult to cut rates to the same extent as previously, particularly in those markets where inflation is rising.
This is a big problem for Africa’s oil exporters. Inflation in Angola stood at 25.2% at the end of 2020, which in normal times would suggest higher rather than lower interest rates.
Moreover, it takes some time for the impact of interest rate changes and other financial instruments to feed through to the rest of the economy, making it difficult to respond to different pandemic waves. All this underlines the fact that there are limits to what governments, central banks and commercial banks can do.
It is particularly difficult for governments and central banks to know how quickly and how far to respond in such a fluid situation, as they simply do not know how long the crisis will last, not least because the situation in Southern Africa has been complicated by the spread of the virulent South African variant of Covid. No other global recession has had a similar cause in the modern age, so it is possible that recovery could be swift – when it begins.
It is vital the international community does all it can to support African banks and by implication, African economies. While every country will be feeling the strain for some time to come, it is to be hoped that the industrialised world and the multilaterals commit themselves to getting African economies back on their feet.
Apart from anything else, economic recovery in the rest of the world will boost demand for African exports. Although oil prices crashed in the early days of the pandemic, commodity prices have held up more than many expected, particularly as the Chinese appetite for raw materials has rebounded.
The biggest danger to economic development is that banks will become excessively risk-averse over the next few years in an effort to repair their bruised finances.
Yet this will be the time that national economies will most need progressive banks that are prepared to support long-term growth and the repeated mantra of ‘growing back better’, especially at a time when the benefits of the African Continental Free Trade Area (AfCFTA) may become apparent.
Recovery will come. It is just a case of making sure that the African banking sector is well placed to support that recovery when it does arrive. Most economies are expected to move out of recession once lockdown measures are lifted but it is the longevity of the pandemic and the trajectory of the economic recovery that will determine how well banks cope.