Kenya Bankers Association (KBA) chief executive Habil Olaka. FILE PHOTO | NMG
The world as we knew it is
no longer, and the world that will be, is unknown to many. At the time
of this publication, Covid-19 cases have surpassed 1.9 million globally
with numerous countries in lockdown.
Consequently, we
can no longer hide that the global economy is slowly coming to a halt.
Banks and financial institutions, like other businesses, are concerned
about how they will survive during this uncertain period.
The
Central Bank of Kenya (CBK) recently forecast a slowdown in the Kenyan
economy, revising down the FY20 GDP growth from 6.2 percent (which I
felt was overestimated) to 3.4 percent due to the economic challenges
facing the country.
As of March 21, it was reported
that the central bank’s foreign currency reserves dropped to a 26-month
low, an alarming rate that would see Kenya only be able to hold onto
imports for an estimated 5.04 months if all things remained constant.
It
is important to note that despite the significant drop, the import
cover (as at April 9th 2020) s8ll remained above CBK’s statutory
requirement of at least 4 months of import cover. Due to the Covid-19
and the gradual shutdown of trade, attributable to border control, the
diminishing inflow of foreign exchange reserves as result of limited
exports will see the shilling depreciate (at 105.92 against the USD at
the 8me of publishing).
NEGATIVE GROWTH
The informal
sector in Kenya, estimated to be in the region of 60 percent and where
jobs are not structured, will see negative growth as a result of a
substantial decline in day-to-day trade. According to Kenya National
Bureau of Statistics (KNBS), 4,066,362 or 34.27 percent of the 11.8
million young Kenyans were jobless as of December 2019.
Given
that there has been marginal business conducted as a result of the
Covid-19 outbreak in Kenya since the first case was confirmed in the
country on March 13, those unemployment numbers are bound to rise
significantly. We can safely assume that our economy is in for a rough
patch, at least in the short term.
I do not feel that
this is the government’s burden to bear alone, but Kenya’s opportunity
to rally and flourish post Covid-19. We will get to that another tme.
Digital
lenders and financial institutions have not been spared from the jaws
of this mysterious disease. Digital lending, for starters, has become
one of the most reliable sources of credit for SMEs and entrepreneurs
due to the fast processing of loans.
Reports from a
recently published article show that the uptake of digital loans
increased to 59 percent in 2019 from 1 19.2 percent in 2013, largely due
to borrowing from the informal sector.
In light of
this, Digital Lenders Association of Kenya (DLAK) recently waived all
late payments for mobile lenders in a bid to support and retain their
respective customer base.
Popular mobile lending apps
such as Tala and Branch, who are also a part of DLAK, have also imposed
strict measures on borrowing and access to credit.
Likewise,
banks have not been immune to the effects of Covid-19. They now find
themselves in a position where surveillance, adoption and consolidation
will play a crucial role in their survival and business continuity.
Pressure
on banking is higher now more than ever with increasing rates of
defaults, loan restructuring and payment delays. In assessing potential
and current clients, how will banks now be able to differentiate between
delays in payment and a significant deterioration in business returns? I
feel that in that regard, the three main pillars that will be affected
are:
Regulators: Ensuring that risk mitigation is effective and in line with set policies and crisis averse regulations.
Clients: Assurance
of the financial strength of the institution and the capability to
shield clients’ cash flow from any possible dangers and market
uncertainty.
Employees: Transparency of personal job stability and security during the Covid-19 pandemic.
With that in mind, what are some of the actions that banks and financial ins8tu8ons should take in order to survive?
With that in mind, what are some of the actions that banks and financial institutions should take in order to survive?
Covid-19 taskforce: Create
a team that is up to date on all global, continental and local
information regarding the statistics and effects of Covid-19. This
team's primary focus will be to ensure the banks’ preparedness to any
breaking news and economic events predicted by global players.
Risk analysis and mitigation:
Banks will need to adapt, challenge current models of operation and
restructure the arrangements that were put in place pre-Covid-19.
Strategies will be needed to predict potential disruptions, work
arrangements, credit assessments, partnerships and third-party risk.
Employee layoffs: We
are likely to see a scale down of the general workforces due to profit
protection, reduction in operation costs, redundant positions as a
result of branch closures, and decreased foot traffic.
Loan
restructuring: Re-assessing and modifying of loans in order to protect
clients from defaulting and banks from increasing their non-performing
loans. Focus on complying with government orders to extend loans,
mortgages and payments. Currently, we are seeing a number of
institutions adopt this strategy by giving SMEs a three-month extended
break from payments.
Liquidity management:
Ensure liquidity across the institution is solid. Banks will need to
closely observe and monitor day-to-day liquidity stress. Requirements
should be based on current market conditions and predicted future
scenarios that may play out.
Communication: Transparency
is crucial in stakeholders understanding the current market
environment, strength, and forecast. Banks should tailor different
messages consistently to the different target audiences in order to
maintain, sustain and evolve current and potential relationships. Trust
will be a crucial pillar during the Covid-19 period and safeguarding
financial stability requires well communicated and decisive actions.
Digital Embrace:
Orthodox means to banking are already being tested through this
turbulent period. The need to offer seamless online experiences for
clients while physical locations are closed, should be a welcoming
challenge for Kenyan banks. However, in doing so, banks will need to
shore up their respective online cyber management systems to protect
crucial client data and client funds from cyber criminals.
Work from home policy: Whereas
working from home was previously unheard of, banks will now have to
develop a system under a policy, where employees are seen to be
productive. Banks will need to ensure that technology options are in
place at all times to connect employees working remotely without
compromising company data.
Mitigating Covid-19 and its
impact is essential. The World Bank predicts that growth in sub-Saharan
Africa, which was 2.4 percent in 2019, to be at -2.1 percent to -5.1
percent in 2020. As a result, the World Bank is deploying $160 billion
over the next 15 months to help countries protect the poor and
vulnerable — a category that Kenya unfortunately falls into.
While
the Kenyan government sources for funds to dampen the effects of
Covid-19 on the economy and its people, banks and financial institutions
will now need to understand the change in customer consumerism and
behaviours and in doing so, they must adapt or face the worst.
Whilst
this may be a challenging time for the economy, businesses,
entrepreneurs, and humanity as a whole, it is also a time to reflect,
analyse and innovate new structures of working that can be resolute
enough to stand through the test of 8me and the future challenges of
this magnitude, that await us all.
Kibugu is Senior Relationships Manager, Government, Fintech, Start-Up & Financial Institutions at Equity Bank.
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