African banks, including central banks, have been quick to appraise the situation in the wake of the lockdowns induced by Covid-19 and most have put mitigating measures in place. These, writes Neil Ford, will go a long way to reducing the impact of the inevitable loss of business across the board
Central and commercial banks across Africa are working together to increase liquidity and improve access to finance in an effort to keep the economies within which they operate functioning during the Covid-19 lockdown.
Interest rates have tumbled and capital reserve requirements been cut to encourage companies and individuals to keep borrowing and investing. However, the huge uncertainty generated by the pandemic has deterred potential customers from accessing credit, underlining that there is a limit to what banks can do.
Although there will undoubtedly be a deep recession and widespread job losses across the continent, central banks have introduced a range of measures to see banks through the immediate crisis, while cushioning the impact on domestic economies as much as possible.
They have eased capital reserve requirements, many of which were introduced in the aftermath of the 2008 global economic crash. They have also made low interest loans available to help see banks through the crisis, while reducing benchmark lending rates.
The Central Bank of Kenya’s two-pronged stimulus strategy – lowering capital requirements and slashing interest rates, to allow banks to lend more of the reserves that they do hold and encourage them to borrow more from the central bank – has been replicated in other countries.
For instance, the National Bank of Rwanda reduced its reserve requirement ratio by a fifth, from 5% to 4%, and lowered the Central Bank Rate from 5% to 4.5%. The Bank of Tanzania reduced its statutory minimum reserve requirement ratio from 7% to 6% and its discount rate from 7% to 5%.
By contrast, banks in the most developed banking market on the continent, South Africa, must hold just 2.5% of their deposits as reserves.
However, the situation in Nigeria is even more challenging. The Central Bank of Nigeria (CBN) has asked banks to expand lending to support an economy affected by both the coronavirus pandemic and the associated collapse in oil prices. (See pages 52-53.)
The IMF forecasts that the Nigerian economy will contract by 3.4% this year but other sources predict that the fall in GDP will be more than twice as big. Much depends on how quickly oil prices recover.
Yet at the same time, the CBN requires them to hold a massive 27.5% of deposits as reserves, one of the highest rates in the world. The central bank introduced strict protection measures to avoid the bank collapses that plagued the Nigerian banking sector in the past. They have had a big impact in increasing confidence in the industry. Yet such requirements also restrict Nigerian banks’ room for manoeuvre in crises such as the current coronavirus pandemic.
The CBN has devoted its energy to putting a N3.5trn ($9bn) stimulus package together. The money is being passed on to commercial banks, to be lent to businesses at low rates.
There could still be an increase in lending. Zenith Bank expects its loan book to grow by 2% this year, although this is a big fall on last year’s 22%.
The crisis has greatly reduced Nigerian banks’ access to foreign currency but they have been buoyed by a fall in the ratio of non-performing loans (NPLs) from an average of 11% at the start of 2019 to 6.5% this February. This figure is widely expected to increase rapidly over the course of this year but at least it is starting from a lower base.
Multilateral banks are seeking to support African economies through the crisis. In early June, the African Development Bank (AfDB) approved a $288.5m loan for Nigeria to help mitigate the impact on companies and individuals; cushion Abuja’s finances from the oil price crash; and help the government to identify the scale of the outbreak within the country.
Ebrima Faal, the AfDB’s senior director for Nigeria, said: “The proposed programme will ensure that the fiscal position and the economy are sufficiently supported to weather the Covid-19 shocks, thereby limiting its potential adverse impact on livelihoods and the economy more generally.”
Despite central bank supply-side support measures, all the main credit ratings agencies forecast big falls in access to finance in Africa, because demand is likely to remain weak.
Even where commercial banks offer low interest finance, corporations and individuals may be reluctant to take on loans. There is also likely to be an increase in bad loans and it remains to be seen how understanding banks will be over debt renegotiation at a time when they are under severe financial pressure themselves.
In late May, Kenya’s Equity Group increased its bad debt provision from KSh410m ($3.83m) in the first quarter of 2019 to KSh3.12bn ($29m) for the same period this year in order to cope with the expected financial impact of the crisis.
CEO James Mwangi said that the pandemic had “introduced unprecedented uncertainty within the global financial systems, prompting us to adopt a conservative approach – fortifying our balance sheet and assuring ample liquidity to support our customers”.
Other banks have made similar provisions and analysts think even more money may need to be set aside as borrowers’ ability to repay loans weakens further.
The biggest bank in Kenya by assets, KCB Group, has allowed borrowers to suspend debt repayments for three months. However, the impact may not be as great as some fear. The Kenya Bankers Association forecasts that the ratio of bad loans will rise from 12.4% to 14% over the course of the lockdown.
Many central banks, including in Kenya and South Africa, have repeatedly cut their headline interest rates in an effort to maintain access to finance but customers are understandably reluctant to take on more debt at this time.
Kenyan banks already report a big fall in the volume of lending on the back of lower demand and they have already restructured a high proportion of their loans. Demand for sovereign bonds has therefore soared as banks have sought out the lowest risk investments.
This policy does have a downside: Moody’s cut its outlook for Equity Group, KCB and Co-operative Bank of Kenya from stable to negative because of their increased exposure to a single borrower, in the form of the government.
South African measures
Some mitigation measures have had a rapid positive impact on the markets. For instance, under advice from the country’s central bank, South African banks decided to suspend dividends for this year.
This led to an immediate 10% rise in bank stock prices on the Johannesburg Stock Exchange, as investors calculated that the boost to bank finances more than compensated for the loss of dividend income. Other banks across the continent have also opted for a moratorium on dividends for the year.
Banks must prepare for big falls in earnings but current projections feel like guesswork rather than concrete estimates. South Africa’s Absa says that its profits will be at least 20% down but all banks could face much bigger falls, as lower benchmark rates mean lower earnings, exacerbating the fall in transaction volume and higher rates of loan default. However, stress tests carried out by PwC concluded that South Africa’s big five banks would all be able to withstand the crisis, even under the worst-case scenarios.
Changing bank culture
The huge rise in digital banking over the past few years has allowed banks to continue operating and customers to continue accessing services despite the closure of branches. Indeed, many banks have actually increased the level of their digital investment to cope with the anticipated rise in demand.
It may take some time for figures on the scale of the actual increase in demand to be published. Some Ghanaian banks have removed the fees they charged on e-banking transactions to both boost the uptake of e-banking and support their customers during the pandemic.
It was widely reported in Nigeria that Access Bank had decided to permanently close more than 300 branches and make 75% of its 28,000 workforce redundant, but this has been denied by the bank. A spokesperson said that the bank has only closed branches temporarily, as instructed by the CBN, to reduce the risk of Covid-19 infection.
Access Bank has had 29m customers since last year’s acquisition of Diamond Bank, giving it perhaps the biggest customer base of any African bank. Some rationalisation of the bank’s network is possible as the two systems are merged.
In common with many other sectors, African bank employees have worked from home wherever feasible. In many cases, this appears to have worked better than executives had anticipated and some banks say that they may retain higher levels of home working in the long term. This can reduce infrastructure costs and allow employees to integrate work and home life more easily.
The chief executive of South Africa’s Investec, Fani Titi, said: “We have established that we can work very effectively from outside of the building. In the fourth quarter of the year we may see an increase. But I don’t think we’ll ever get back to a situation where you will have approximately 95% of your people in one place.”
How many of the changes, quite a few positive, induced by Covid-19 will remain in place once the lockdowns have been completely lifted? Time will tell but as often happens, changes are often forced by circumstances and Covid-19 may have changed banking culture in Africa to quite an extent.