HomeOpinionBanks’ strategies in a changing environment

Banks’ strategies in a changing environment

By Respect Gwenzi

COVID-19 has exacerbated existing challenges facing the traditional banking business model. Revenue pressure, tight regulation, competition from digital entrants, and a rapidly evolving banking clientele are some of the major obstacles banks are facing today.

What started as a health crisis is now at risk of becoming a long-standing economic crisis. Unlike other past financial crises or business cycle downturns, such as the 2007-2009 Global Financial Crisis and the hyperinflationary period, the Covid-19 crisis poses a unique threat to banking as we know it.

It has manifested the necessity of a digital transformation in the Zimbabwean banking sector. Moreover, the pandemic has amplified issues of capital adequacy and risk management, duly noted by the central bank.

The contraction in the global economy has already resulted in diminished loan growth and payment transaction volumes fuelled by supply chain disruptions due to lockdowns, delayed receivable collections drain in cash flows due to fixed expenses, sectoral impact, and labour constraints.

Banks, as a result, will have to cope with a potential economic slump and a larger share of distressed assets in their books. An overall weak capital position in the banking sector could pose a threat to economic growth as lending channels are abridged.

According to the Reserve Bank of Zimbabwe (RBZ): “The Bank established that banking institutions are making significant progress towards meeting the new 21 minimum capital requirements, which are effective from the 31st of December 2021.

“The strategies being pursued by banking institutions to comply with the new minimum capital requirements are largely based on organic growth and capital injection by the shareholders.”

This level of regulation, coupled with support in terms of non-performing loans (NPL) recognition, management, resolution, and capitalisation could prove to be elementary in continuing to battle the pandemic.

Global interest rates are likely to remain low for a substantial period, which is beneficial in the short-run. During a monetary policy meeting held on August 27, the Reserve Bank of Zimbabwe announced that it would maintain the overnight lending rate at 40%, which has been critical in curbing inflation and fostering monetary and fiscal stability in this unique economy.

However, despite these positive steps, inflation has remained significant in 2021, with the parallel market premium continuing to surge.

As highlighted by the Confederation of Zimbabwe Industries (CZI) report issued on October 10: “There is fear from the government that overreliance on market forces would see powerful firms tilting market outcomes in their favour, resulting in inflationary pressure”.

This has resulted in the deep-rooted idea that the exchange rate cannot float because rather than converging with the parallel market, it will end up chasing it.

The move towards digitalisation and FinTech has increased competition in the market for banks and by new-technology-based service providers such as network operators.

Consequently, banks have to find innovative ways to remain relevant and harness the potential of new electronic payment mechanisms and digital currencies.

For the banks this means:

Accelerated digitalisation with a more cashless society and greater degrees of self-service. A recent World Bank report on Zimbabwe’s Digital Transformation communicated that: “Despite challenges arising from the ongoing pandemic and economic recession, Zimbabwe can forge a path toward digital transformation through careful sequencing and prioritisation of essential reforms”.

An evaluation of branch networks – What purpose are they serving in the age of Covid-19? As reported by Bloomberg news, “Banks in Zimbabwe have shuttered about 17% of their branches as the coronavirus pandemic impacted their operations, prompting them to speed up their digitalisation drive.

An optimal mix of flexible working cultures — Banks have to get used to some employees working from home and implementing the necessary changes to make this possible.  A fundamental shift is needed towards environmental, social and governance issues and forgoing growth and profit as the key success metrics.

Sustainability and environmental awareness are the new standards in every other industry, and the banking sector has to swiftly follow suit and adopt these principles.

Customers will experience:

As a direct consequence of banks embracing digitalisation, customers will experience significantly improved and more efficient customer service;

Enhanced convenience and time-saving as a result of easier banking transactions;

Customers will also experience an enhanced quality of services;

The banking client base will also experience personalised service, and digitalisation continues to advance. Studies have shown that personalised services resonate candidly with customers;

A more established relationship with respective banks. By leveraging social media, banks will have an opportunity to get to know their clients, who will, in turn, benefit from direct, convenient communication with the banks. This also entails consistent feedback proven to be a given in enhancing the overall customer experience; and

A more secure banking experience through both online and offline channels.

Regulators will need to:

Effectively utilise capital and liquidity buffers to mitigate risk and ready the banking sector for another imminent crisis;

Reduce the interconnectedness of large financial institutions by encouraging the diversification of the financial system;

Stimulate financial institutions to provide more credit by using incentives such as capital relief to struggling financial institutions and implicit guarantees to liquidity providers;

Consider lowering the interest rate to boost economic activity as vaccination rates increases, allowing for increased business and social activity; and

Work on providing more stimulus packages to the overall economy.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

 

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