It remains uncertain – the means and speed of economic recovery for the global economy. Also, the structural changes that will happen in the long term. Granted, the COVID-19 virus has caused a convulsive shock. The pandemic is already worsening economic forecasts for Africa. Growth is expected to collapse to a negative 1.6% and a real per capita fall of 3.9%, making 2020 the worst year on the record for the continent’s economic growth. Meanwhile, Africa’s real GDP growth was 3.4 percent in 2019, exceeding the global average. Countries like Rwanda, Ethiopia, Côte d-Ivoire, Ghana, Tanzania and Benin were among the world’s fastest growers. 

In 2020, poverty is expected to worsen, spreading by 2% of Africa’s population. 26 million people will fall under the poverty line and half of the new poor live in just five countries: the Democratic Republic of Congo, Ethiopia, Kenya, Nigeria and South Africa. Nigeria, the region’s most populous country will contribute the most – 6.6 million, according to unpublished World Bank material. The question we wish to answer is what does this mean for the banking system? 

Our response begins with analysis by McKinsey which suggests that the COVID-19 crisis could result in African banking revenues falling by 23 to 33 percent between 2019 and 2021. Over the same period, African banks’ return on equity (ROE) could fall by between 5% and 15%. According to McKinsey, banking revenues might only return to normal in 2022-2004, depending on whether recovery is rapid or slow. 

Meanwhile, Africa needs its banks now, more than ever. Predictably, they have been the primary conduit for aid during the crisis. Subsequently, they will play a central role in recovery as governments roll out credit programs. Banks are fundamental to the large-scale relief that needs to be distributed to corporates, SMEs and individuals. In South Africa, the government, through the banks, injected a $30 billion stimulus package into the economy. In Morocco, laid-off workers in the formal sector have received $200 a month while those in the informal sector received $100. 

In addition, banks are expected to keep lending. In a recent McKinsey survey of African consumers, Moroccan and Kenyan customers ranked facilitated access to credit as their top expectation from banks during and beyond the COVID-19 crisis. In Nigeria and South Africa, it is among the top five expectations from banks. However, the risk of non-performing loans threatens the stability of the banking sector. Declines in income and revenue mean that borrowers would be increasingly unable to meet debt obligations. 

What are regulators doing in order to manage financial stability and reduce the risks of systemic failures? In Africa, they have taken immediate steps to lower the base rate, lower bank cash reserve ratios, introduce government bond buying programmes and debt moratorium for banks.

Importantly, what are banks doing to ensure that they stay afloat? Mckinsey notes that the crisis is a prompt for banks to reimagine their business models. Overdue reforms must be conducted. The crisis has brought to the fore the possibilities of the digital economy. Afterall, Africa leads the world on telecom infrastructure and innovation in the digital economy. The accelerated adoption of remote services by customers means that banks must upscale their digital capabilities.

Bank customers have increased their usage of online banking, mobile banking and mobile payments by 40 percent, according to McKinsey’s Africa Consumer Sentiment Survey of May, 2020. Predictably, this is linked to the imperative of physical distancing. This trend will not go away soon. The survey suggests that in future, 30 to 40 percent of consumers expect to increase their use of digital channels, while 30 percent expect to reduce their branch visits.

Digital financial services will continue to evolve. According to McKinsey, banks will increasingly face competition from three main non banking competitors: (i) telcos that are expanding their activities into payments; (ii) major global technology players (such as Alibaba) which have already developed a strong activity in financial services, and (iii) FinTechs, which have made inroads both in the consumer services and in corporate services spaces. 

Asides technology, the competition from non-banking players will be enabled by regulation. For example, regulations issued in enabling payment-service providers, mostly telcos, to provide payment services. In 2018, Nigeria’s Central Bank issued the Guidelines for the Licensing and Regulation of Payment Service Banks in Nigeria. In August 2020, 9mobile became the country’s first company (through its subsidiary called 9PSB) to secure a payment service bank license.

Banks that fail to embrace and integrate mobile finance face the threat of losing market share to non banking competitors. They must therefore focus on measures to embrace digital transformation and accelerate financial inclusion. They can achieve this by driving mobile finance and scaling up their offerings to SMEs. Ultimately, by adopting the right operating model to support tech-enabled innovation.