Covid-19 impact on banking sector
THE Covid-19 virus has caused a convulsive shock to the global economy. ere remains considerable uncertainty around the pathway of the pandemic, the means and speed of any economic recovery and what structural changes — particularly to the globalisation of trade and capital — it will bring in the longer-term.
e pandemic is already radically worsening the economic outlook for Africa, with growth expected to collapse to a negative 1,6% and a real per capita fall of 3,9%, making 2020 the worst year since records began in 1970 for the continent’s economic growth.
Poverty is also expected to increase by 2% of the regional population, with 26 million people falling under the poverty line, erasing five years of progress in poverty reduction.
Half of the new poor will live in just five countries: the Democratic Republic of Congo, Ethiopia, Kenya, Nigeria and South Africa — with Nigeria contributing the most with 6,6 million according to unpublished World Bank material.
Implications for banking system
From the implementation of Basel III to strengthening the capital base of systemically important institutions and lowering the base rate, fortunately, regulation in the region has improved over the last decade.
(Basel III is a 2009 international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector, by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand.)
Regulators have taken immediate steps to manage financial stability in response to the Covid-19 crisis, which should reduce the risks of systemic failure in banking systems.
Policy measures have included lowering the base rate — which has positive effects on aggregate demand and household abilities to service debts — lowering bank cash reserve ratios, government bond buying programmes and debt moratorium for banks.
However, the stability of the banking sector in Africa is threatened by the likelihood that there will be a sharp increase in non-performing loans, from the already high levels of 11% in 2019.
Borrowers across sectors and scales of business will be affected, as declines in income and revenue mean that they will be unable to meet their obligations.
Individual institutions also remain vulnerable to failure. For example, microfinance financial institution (MFI) portfolios will come under