How the banking industry can survive virus pandemic

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).

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.