The Covid-19 crisis has led to a contraction in economic activity across the world. Africa, which has not been spared by the pandemic, has also felt its effects, both in the public and private sectors, therefore in the banking sector. To lessen the impact, central banks, including the Central Bank of West African States (BCEAO), have taken measures to encourage banks to support the private sector. But they do not include the solvency of bank financing and deserve to be expanded, according to specialists.

Like many structures, banks had to adopt the barrier measures enacted by the World Health Organization (WHO), following the Covid-19 pandemic. Access to the premises was conditioned on washing hands and taking the temperature. In particular, the reinforcement of the cleaning systems for the premises has been adopted, to protect not only the health of the workers but also that of the users.

Immediate effects

Respect for social distancing, as well as wearing a mask, have been made compulsory, both for staff and for customers in all structures. Staff have also been provided with kits to reinforce their protection. The organization of work has also undergone changes, in order to respect the barrier measures and to avoid large groups of people. The staff has been divided into teams that work alternately remotely and then in the office. These provisions have resulted in additional, “unbudgeted” charges for the banks, which are already faced with a decline in economic activity which has considerably reduced their room for manoeuvre.

Even if it is difficult to quantify it at present, the impact of the crisis on the banking sector will be significant, agree the actors.

Insufficient measures?

To curb the effects of the crisis, the banking sector, like the others, had to adapt. Adopt new ways of operating to deal not only with the health crisis but above all to lessen the economic effects. Certain measures, such as the postponement of deadlines for companies and the reduction of costs for certain loans, have been implemented. As well as provisions to facilitate refinancing at the central bank level.

Adopted by the Council of Ministers in September 2002, the set of rules for the implementation of the Classification Agreements Mechanism was one of the first affected by the measures envisaged by the Central Bank of East African States West as part of the response to Covid-19. This system is a tool for assessing the quality of the portfolio of WAEMU credit institutions. According to Opinion No. 001-03-2020, relating to the revision of its terms and conditions, it is with a view to facilitating their implementation that the central bank has decided to revise the terms and conditions for issuing classification agreements to the benefit of non-financial companies, with the exception of those eligible for the support mechanism for the financing of small and medium-sized enterprises / industries (SMEs / SMIs) in WAEMU. There is now an assessment by the BCEAO of the credit quality of non-financial companies, based on financial information collected from the tax authorities of the countries of the Union.

The BCEAO has issued a total of 8 opinions, enacting measures to respond to the effects of the crisis. These measures relate in particular to the BCEAO's decision to lower interest rates to their minimum of 2.5%, with sufficient liquidity. A decision that increases the ability of banks to grant credit to private companies at lower costs. But this aid remains limited in scope in the absence of visibility on the end of the crisis and its consequences, analyzes Jean K. Tchangai, bank executive, on Financial Afrik.

In addition, "given the regulatory standards for risk division (limit of commitment on the same signature, limit of internal sectoral concentration of banks, (…), the financing required to ensure the survival of certain key economic sectors, such as air transport, for example, can exceed the ability of the banking sector to cope,” he continues.

Anticipating the post-crisis

This period of crisis has led to a deterioration of banking portfolios and a drop in profitability, recognize the players. In this context, explains Mr. Tchangai, increasing the volume of financing to the private sector can expose the banking sector to a high risk of insolvency. This therefore entails the need to take into account the counterparty or credit risk in the financing decision, in the same way as the liquidity risk.

Consequently, the action of the monetary authorities should therefore also consist in easing the refinancing mechanisms of banks, but also in considering measures to make it possible to contain the counterparty risk. And the action of the authorities could be carried out on 3 levels, specifies the banker.

Firstly, and in addition to the measures already taken, they could postpone the provisioning of receivables whose downgrading is linked to the impact of Covid-19, or failing that, exceptionally redefine them as non-performing receivables. A measure that the majority of WAEMU bank managers would support, according to a survey, because in the absence of such a decision they fear the questioning of the soundness of the banking system.

The monetary authorities should also consider setting up a common fund, financed equitably by the central bank and commercial banks, for the purchase of all or part of the debts of companies affected by the pandemic. This could improve the ability of banks to finance the recovery of the private sector.

Also, an additional reduction in the interest rate at auctions on calls for tenders and in regulated remuneration (savings, term deposits, etc.) would make it possible to reduce the impact on banks' balance sheets.

At the same time, measures aimed at the private sector should also be considered. They could concern the cancellation of late penalties and default interest in the performance of public contracts and also the acceleration of payments for the benefit of these companies, in order to reduce cash flow tensions.

It would also be wise, in the context of the pandemic, to consider a community guarantee fund for VSEs and SMEs, in order to guarantee their additional credit needs up to 75%.

Even if the banking reforms implemented in 2018, with in particular the transposition of the Basel I and II prudential standards in WAEMU, have strengthened the soundness of the banking system, it is important to extend for one year the transitional provisions relating to the requirements minimum capital requirements, initially set for 2022, and to temporarily consider measures to reduce capital requirements, in order to devote itself fully to the activity. This would make it possible to maintain the financing of economic activity in the Union and to mitigate the effects of Covid-19.