Building capacity to help Africa trade better

Protecting the vulnerable and excluded in the financial sector


Protecting the vulnerable and excluded in the financial sector

Protecting the vulnerable and excluded in the financial sector

As the global health crisis caused by the COVID-19 pandemic unfolds, it brings with it a global economic crisis. With economies only now beginning to properly recover from the global financial crisis of 2007/08, this economic crisis has potential to decimate Africa’s already fragile financial sector. While impacts will flow throughout the entire economy, it will be felt most by vulnerable members of society, including poorer households and small businesses.

There are many interlinked effects already occurring. Equity markets have crashed, affecting pension savings and investments, workers are being laid off or jobs are being suspended or hours cut, meaning that vital remittances are no longer flowing. Reports of mass bank deposit withdrawals have emerged in places like Egypt and investors are moving towards safer investments.

As smaller lenders go out of business and larger institutions reduce lending activity, small business, often already credit constrained and likely to have turnover affected by the general contraction in economic activity may see credit dry up. The good news is that many countries are already taking measures to shore up the economy through the financial sector and particularly to address a lack of credit. For example, South Africa’s central bank has reduced capital requirements to free up liquidity. Competition regulators have eased restrictions in order to enable financial institutions to coordinate action to support consumers. The IMF’s “Policy Responses to COVID-19” tracker indicates that many other central banks have also lowered capital requirements, provided liquidity, provided guidance or regulation around debt relief, especially for SMEs and introduced measures to encourage the use of digital payments and electronic money.[1] Algeria, for example has reduced capital requirements, while the Central Bank of West African states has taken measures including adding liquidity, increasing concessional loans, refinancing credit given to SMEs and encouraging mobile money usage. Most countries have reduced the policy rate and where interest rates are controlled, in some places, such as Egypt and Mauritania, these are being reduced. In other cases, planned capital requirement increases have been delayed. Nigeria has announced a suspension of repayments for credit given to low-income traders and farmers, and manufacturers and agribusiness.[2] Ghana has also reduced capital requirements for banks and required that overdue microfinance loan repayments be classified as ‘current’.[3]

There are some bright spots for the financial sector arising from the pandemic. The social isolation and concerns about infection from handling cash are accelerating the adoption and use of digital payments in places like Italy where restrictions on movement have been in place for some time.[4] Closer to home, governments have been introducing measures to encourage the use of digital payments. For example, Next Billion reports that the Central Bank of Kenya ordered a reduction in mobile money fees and the Central Bank of Ghana is reported to have done the same, as well as eased ‘know your customer’ requirements for mobile money accounts enabling consumers to access new digital wallets without having to prove their identity in person. [5] The Bank of Zambia has also taken measures to reduce cash usage.[6] Telecommunications providers, such as MTN in Uganda and Safaricom in Kenya have also contributed, reducing or eliminating mobile money charges.[7] Payments fintechs, such as Paga in Lagos are also reported to have dropped fees.[8]

These are positive measures that can help enable access to funds and transactions when many businesses are closed or social isolation measures are imposed. However, the downside is that even with encouragement to use e-money, cash is typically still the main means of transaction for poorer households, and if this method of payment becomes restricted, these households will have less opportunity to access the goods and services they need. To attempt to address this, some measures have been taken, for example, Mauritius has removed ATM fees for the period of social confinement. Banking or transacting at physical branches or agents is also key to the financial access and inclusion of many people and as branches close and distancing measures ramp up, this will become more and more difficult. Increased digitisation also brings with it the increased risk of fraud, and, particularly during this uncertain time, consumers may be more vulnerable to scams. Financial and consumer regulators need to be alert to this and quickly identify and eliminate problems.

This crisis, although markedly different from that earlier this century, will bring with it some of the same problems, as well as a whole raft of new problems. While it is impossible to anticipate all the effects, and therefore to attempt to mitigate them, it is promising to see that African central banks have acted quickly and are already taking steps to ensure businesses can access credit, banks are supported and individuals are not exposed to infection via cash payments. As we move forward in this crisis, it will be crucial to continue to ramp up responses and to ensure that the most vulnerable are not further marginalised by these measures.

[1] https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19

[2] https://www.bloomberg.com/news/articles/2020-03-29/nigeria-imposes-lockdown-on-its-two-main-cities-ogun-state

[3] https://www.bog.gov.gh/wp-content/uploads/2020/03/MPC-Press-Release-March-2020-3.pdf

[4] https://www.wsj.com/articles/digital-payments-soar-amid-coronavirus-restrictions-11585005215

[5] https://nextbillion.net/coronavirus-africa-mobile-money/

[6] https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19

[7] https://www.reuters.com/article/health-coronavirus-uganda-mtn/mtn-uganda-eliminates-mobile-money-charges-amid-coronavirus-outbreak-idUSL8N2BI39N; https://techcrunch.com/2020/03/25/african-turns-to-mobile-payments-as-a-tool-to-curb-covid-19/

[8] https://techcrunch.com/2020/03/25/african-turns-to-mobile-payments-as-a-tool-to-curb-covid-19/

About the Author(s)

Ashly Hope (Volunteer)

Ashly is a professional volunteer with the Australian Government’s Australian Volunteers for International Development Program. She served as Research Coordinator (Trade in Services and Regulation) at tralac. Ashly has experience in policy advice and analysis in financial regulation, international economic governance and international tax. She holds a BA (Political Science)/LLB from the University of Tasmania, and an LLM (Government and Commercial) from the Australian National University.

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