The impact of Covid-19 on African banking has shaken the region and increased the risks of severe economic contraction. In response the regulators started implementing aggressive monetary and fiscal policies.
The pandemic has had a negative impact on the economic outlook on the African economy, with the growth is expected to fall to negative 1.6% and also fall per real capita of 3.9% – making 2020 the worst year since 1970 – when the documentation of the continents economic growth began.
According to Mckinsey, African banking revenues are expected to fall from 23% to 33% between 2019 and 2021. The African banks return on equity (ROE) is expected to fall between 5-15% points which is driven by the rising costs and also the reduced margins.
The pre-crisis levels in the African banks are expected to return in 2022-2024, this depends on how fast or slow the recovery period takes.
Due to the setback in African banking, poverty in Africa is expected to rise by 2% of the population in regional areas whilst 26 million people will fall under the poverty line thereby cancelling out about five years of progress in reducing poverty in Africa.
Nigeria will contribute about 6.6 million people in poverty which is according to the unpublished world bank resource while the remaining half of the new poor population will be from Kenya, Ethiopia, South Africa and Congo.
The economic slowdown in the African banking sector increases the risk of economic contraction, cyber security breaches, the reduction in fees, trading income and also pressure on the net-interest income, higher credit losses with its attendant impact on the overall asset quality.
The operational constraints of keeping employees safe and also meeting customer expectations has added pressure on the IT infrastructure and internal and vendor relationships. Causing further strain on the industry.
The financial and accounting reporting has also been impacted, giving rise to challenges such as measuring the expected credit losses, identifying significant increases in the credit risk, how the interim reporting under ISA 34 will function along with other disclosure considerations.
African regulators have taken immediate steps in response to the Covid-19 crisis to manage both the financial stability and reduce the systematic failure in the banking system.
Many Central Banks, governments and agencies are developing programs to help provide economic support and aid borrowers with the financial consequences caused by Covid-19.
Positive policy measures have been implemented in order to lower the base rate which has favourable impacts on households ability to service their debts and aggregate demands. This also includes additional government buying programs and lowering bank cash reserve requirements as well as the bank debt moratorium.
The African banking sector stability is currently threatened by the risk of a sharp increase in non performing loans which were already at a high level of 11% as of 2019.
Declines in income and revenues will affect lenders of different sizes and shapes as they would not be able to meet their obligations. Individual institutions stand as the most vulnerable. These include institutions that are involved with hard currency, interbank liabilities or with high exposure to sectors that have been impaled by Covid-19.
Recovery may not be rapid for some of the African banks which can leave them at a risk of being a ‘zombie’ bank – which occurred during Japan’s the great recession of in the 1990s.
Banks were basically bankrupt but insolvency had not taken place due to the policy forbearance. This issue suppressed the recovery for decades.
The worst-case scenario for African banks is that the recession in the region could potentially be deeper and longer than anyone had dared to forecast. This could lead to the collapse of the banking system in many countries.