As the recent growth of financial entities like fintechs, telcos and neobanks heap enormous pressure on Africa’s traditional banking system, global rating agency, Fitch, says the 2022 outlook for African banks remains neutral with uncertain business conditions and Covid-19 risk constraining recovery.
Though telecos and banks cooperate in many areas this year, the rise of teleco-led mobile money services in Africa has seen bankers across the continent lean on regulators to try and convince them to limit the growth of the newcomers.
For 2022, Fitch expects there will be a rapid increase in lending with most economies growing and banks slowly loosening their stricter underwriting standards in the face of relatively high commodity prices and favourable external financing conditions.
Fitch, in its report on ‘African Banks – No easy road to recovery’, noted that under the prevailing operating conditions fraught with uncertainties and challenges, African banks will likely make mistakes in their pursuit for growth.
Fitch also sees significant uncertainty with Africa being particularly at risk from new Covid-19 variants, amid very low vaccination rates and governments’ limited fiscal space.
“Our base case also considers risks to global growth, relatively high commodity prices and still favourable external financing conditions. We anticipate a slightly faster rise in lending with most economies growing at the trend rate and banks gradually loosening stricter/pandemic-era underwriting standards,” the report says.
It added, “We see significant uncertainty with Africa being particularly at risk from new Covid-19 variants, amid very low vaccination rates and governments’ limited fiscal space. If this risk materialises, it could change the outlook quite dramatically,” the report says.
Mahin Dissanayake, head, African banks at Fitch, while commenting on the Fitch report, believes a return to normalisation will be beyond 2022. “Even excluding the serious threat of new variants, banks face the prospects of limited earnings growth, and, therefore, limited loss absorption capacity.”
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Fitch says it does not believe asset quality deterioration will be widespread, even with the unwinding of remaining government-support measures.
The report added that the fast rebound in formal and informal economic activity in the second half of 2020 and 2021 respectively, strong commodity prices and the resilience of certain economic sectors and loan restructuring will continue to contain corporate bad debt.
It also mentioned that high unemployment and the consequent impact on retail loans remain a risk, while the fast accumulation of government debt securities by banks presents a key risk as the focus shifts to sovereign debt sustainability.
Digital lending
Despite Fitch’s outlook for 2022 for African banks, most financial experts say Fintech companies across Africa have risen from relative obscurity to some of the continent’s largest and fastest growing firms in the past decade.
Three of Africa’s unicorns (companies that are valued at more than $1bn) are financial technology companies ranging from payments platforms to digital lenders.
In the lending space, fintechs have been able to rapidly onboard customers by offering sleek customer experiences and unsecured algorithm-backed loans that do not require collateral or face-to-face conversations.
This has taken business away from traditional lenders whose services are fare more clunky and difficult to access.
“It is difficult for banks because banks have not changed much in the last 100 years. The one change was the move to card payment but fundamentally nothing in the core business has had to change,” Hervé Manceron, CEO of Skaleet, a Paris-based company says.
However, despite the difficulties banks have attracting customers they should eventually be able to build models that are more profitable than fintech lenders, Manceron says.
According to experts, most fintechs are “burning through cash” as they base rapid growth on unproven business models that require heavy borrowing.
Banks, in contrast, are extremely risk averse and will prioritise not losing money.
If banks decide to adopt Skaleet’s digital lending services, they should be able to provide serious competition to fintechs that have recently disrupted the personal lending space in Africa, Manceron says.
The CEO says that they have recently launched an online lending service in the Democratic Republic of Congo (DRC) with Trust Merchant Bank, one of the country’s largest banks.
He adds that Skaleet will continue to encourage banks across the continent to compete as digital lenders in the years that come.
