Knowledge

Author: Patrick Ball

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Date: 11 December 2020

Covid-19 and the Capital Conundrum

The negative economic repercussions of Covid-19 has not spared the capital structures of Inclusive Financial Institutions (“IFIs”) across Africa. Even top-quartile IFIs who have shown resiliency through Covid-19 with the benefit of sufficient capital and liquidity buffers will mostly either break-even or make losses in 2020, i.e. a one-time loss of retained earnings.

There has been a global response to balance sheet strains faced by financial institutions in the form of deferred Basel III implementation. The Basel Committee’s Oversight body, the Group of Central Bank Governors and Heads of Supervision endorsed in March a number of measures to provide banks and supervisor’s additional operational capacity to respond to the global financial and economic impact caused by Covid-19. One of these measures is deferring implementation of the remaining Basel III standards from January 2022 to one year later in 2023.

Basel standards implementation in Africa are at an comparatively early stage, with only a few jurisdictions having fully implemented Basel III, and most selectively implementing Basel II and III (often in concurrence and in a deliberately gradual timeframe). Nonetheless, this deferment will trickle back to easing the prudential burden on banks and MFIs in jurisdictions across Africa as they navigate through the uncertainty of the post-Covid environment.

Notwithstanding some regulatory easing, many IFIs are left with the conundrum of having lower equity bases at the time of expected upticks in demand for credit from MSMEs. This credit demand is driven mainly by IFI restocking, weaker IFIs leaving the market or existing specific products, and larger banks exiting certain SME products. Some IFIs in markets with strict lockdowns, such as in South Africa, saw sharp growth in credit volumes to SMEs post lockdown.

The Covid-19 crisis has therefore created an ever-greater need for hybrid capital instruments, both for regulated and unregulated institutions alike. For regulated IFIs, raising Basel-compliant capital sooner sets a higher standard for prudential compliance in their jurisdictions. For all IFIs, recapitalization strengthens balance sheets to allow for accessing more senior leverage that can meet essential credit demand from MSMEs. Now more than ever, better access to hybrid capital for IFIs can directly increase financial inclusion in Africa.

Source: 

https://www.odi.org/blogs/17013-impact-covid-19-africa-s-banking-system

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