What are the Prospects for Financial Systems in African Countries Post-COVID-19?

An effective and functional financial sector is essential in speeding up economic growth. However, the ability of Africa's financial sector to perform this crucial role and boost its economic integration plans has been weakened by the impact of the COVID-19 pandemic. Outlined below are possible strategies on what needs to be done to ensure the finance industry thrives despite the current challenges, and will be able to influence and support national and regional economic recovery from the COVID-19 pandemic. 

Current Challenges and Gaps

The pandemic has caused severe disruption of economic activities worldwide. African countries have not been spared, as the International Monetary Fund reported a significant decline in national outputs (-2.6 percent) for the year 2020. Restrictions in physical contact during and after extensive lockdown periods have hindered the volume of activities in the informal economic sector, which makes up a significant part of the continent's economy. The extractive industry, the core of several African economies, has suffered a dip in demand and global trade, resulting in job losses and increasing the risk of more Africans becoming poor. All across Africa, these factors have triggered a delay in loan repayments, less income available for savings and investments, and frantic fund withdrawals by customers. Some African banks have been forced to restructure loan arrangements to allow for greater repayment flexibility, and have had to draw on previously untouched deposits held by central banks.

Therefore, there are fears regarding the resilience and liquidity of Africa's financial institutions. This is particularly relevant in light of planned economic and trade integration under the African Continental Free Trade Area (AfCFTA) Agreement because financial sector support is critical for local firms and industries to benefit from this pact. The African Development Bank reports that unmet demand for trade financing in Africa was about USD$81.8 billion in 2019. This huge gap is due to a number of issues, including limited available funds; underdevelopment of the financial sector; preference for funding low-risk transactions; and non-inclusive behaviors. The gap is expected to have widened by the end of 2020 because of the pandemic, and could further expand if committed efforts are not implemented to boost the capacity of the continent's financial systems.

Future Opportunities and Strategies

• While the pandemic has hit the continent's economy hard, it has also provided an opportunity for reducing bureaucracy in pushing for faster adoption of regulatory reforms given the many COVID-related policy responses being implemented. In addition, Africa's renewed focus on digitization can further expand the adoption of financial technology services, which have proven to be useful in the development of the financial sector.

• Africa's financial service providers have an opportunity to reach a wider customer base, especially due to the inclusion of previously excluded individuals into the financial system as a result of social assistance programs provided to citizens through banking systems to ease pandemic hardships.

• Collaboration, risk-sharing, and coordinated efforts and interventions among stakeholders are key. Development finance institutions and relevant stakeholders need to be strategic in choosing the sectors to support at the moment, in order to generate a positive ripple effect within Africa's economy.

• The pandemic is still evolving, and its future impact is unknown. This suggests the need for Africa's financial sector actors to apply flexible strategies in order to be able to adapt to frequent change. Alternative business operating models need to be considered in order to serve customers effectively.

• Finally, while Africa's immediate focus should be on economic recovery and stabilizing activities, it is also important for the continent's business and political leaders to be pro-active and initiate plans to strengthen the African financial sector's capacity.

Sone Osakwe is a development economist who is committed to understanding how poverty and inequality can be reduced to achieve improved welfare and more inclusive societies. Her expertise includes public policy advisory, domestic revenue mobilization strategies, research, and advocacy, among others.

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