Covid-19 Impact On The Banking Industry

Banks and financial institutions operating across Africa will face challenges for the foreseeable future as they steer through the ill-effects of the coronavirus pandemic which began toward the end of last year.

Economists note that support from governments could help, but their responses are constrained by limited fiscal space and hinge on sources of external support.

Conversely, central banks have been proactive, swiftly cutting interest rates and injecting liquidity. Some African economies are particularly vulnerable to the current crisis because of their reliance on commodity exports, tourism, and remittances, as well as external financing needs.

S&P Global Ratings, an American credit rating agency, that publishes financial research and analysis, rates nearly 30 financial institutions across Africa and highlights three main risks for African banks as the COVID-19-led economic crisis unfolds. These include rising economic imbalances stemming from significant exposures to sectors most affected by pandemic-related shocks and external capital flows. Other factors are higher credit losses, particularly for households and small and medium enterprises (SMEs) and funding and liquidity gaps, exacerbated by capital outflows and lower remittances.

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The pandemic is severely affecting Eswatini’s economy at a time when the country is already facing deep economic and social challenges. Before the pandemic, growth was subdued, the fiscal deficit and public debt were rising, and international reserves declining, amid elevated unemployment and widespread poverty. The pandemic has resulted in a sharp decline in growth and generated large financing needs, magnifying these challenges. The authorities swiftly instituted a response package to contain the spread of the pandemic and mitigate its impact on vulnerable households and businesses.

To curb the impact of COVID-19, at the onset of the pandemic His Majesty’s Government declared a state of national emergency and further announced a partial lockdown.  Despite the changes, banking services continued to be available. The Central Bank of Eswatini Governor Majozi Sithole issued a statement assuring the public of the banking community’s commitment to working with emaSwati to ensure minimal disruption in the financial system.

He announced that all banks are well capitalized with adequate excess liquidity buffers to enable them to withstand the difficult times ahead, adding that the Central Bank would continue to work with banks to ensure adequate availability of notes and coins for access by the public in all bank branches and ATMs. The Governor also encouraged members of the public to make use of contactless modes of payment as far as possible.   He said the Central Bank was working closely with banks to determine the extent of the impact of the pandemic to the financial sector through working out various scenarios which shall inform the most effective intervention or combination of interventions the Central Bank would need to put in place to assist the Banking sector to effectively deliver on their intermediation responsibilities even during this time. He further encouraged banks to consider restructuring loan repayments and where possible avail loan repayment holidays for businesses and individuals that have been directly or indirectly affected by the COVID-19.

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The Internal Monetary Funday (IMF), Deputy Managing Director and Acting Chair Tao Zhang, supported the country’s move to ensure a quick response to the pandemic in a statement that noted that authorities’ immediate actions to respond to the COVID-19 pandemic have been timely and appropriate.  It was noted that the FY20/21 supplementary budget reprioritizes public spending towards health care and support to vulnerable groups to mitigate the impact of the crisis on households and businesses.

The IMF highlighted that the Central Bank of Eswatini had also taken timely action by lowering the policy rate, ensured supportive liquidity conditions, and strengthened its liquidity management framework and monitoring and regulatory standards to safeguard financial stability.

The IMF said once the pandemic subsides, steadfast implementation of the authorities’ multi-year fiscal consolidation strategy and structural reform agenda will be critical to ensure debt sustainability and to support a durable and inclusive recovery and stronger governance.

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Major players in the banking sector have noted that a positive impact of the crisis is the proposed reform of rules of bailouts. New rules will shift the risk of failing banks away from public funds, which would no longer be used for rescue, to shareholders and creditors. What is certain though, is that banking as we knew it, will never be the same again.