How Progressive Financial Institutions Can Emerge Triumphant Post-COVID

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By Patricia Andago

The shape of the COVID-19 recession and recovery still looks unclear with economists predicting the possible recession and recovery trends to be  either a steep decline followed by quick recovery (V-shaped), or a long period between decline and recovery (U-shaped), or a decline followed by a quick recovery and then second decline and recovery (W shaped) or an extended downturn (L-shaped). Nobody seems to know for sure what economic recovery will look like. The economic and behavioural changes during the pandemic have led to a global language of the “new normal”, in every sector of every economy and every individual in every household. Those who have been waiting for things to “go back to normal”, are now facing the harsh reality that the current state of things may be here to stay.

Research is being done both historically and in present times, looking at what worked for businesses in previous recessions, and how those strategies can be applied during this pandemic. According to the Harvard Business Review’s study of 4,700 public companies during recession years, 9% of companies flourished after a slowdown, doing better than they had before the recession and outperforming rivals. These were companies that mastered the art of combining optimal defensive and offensive moves, by delicately balancing between cutting costs and investing. As a result, they enjoyed higher profit growth than their rivals which had been either prevention-focused, promotion-focused or pragmatic.

Progressive companies are post-recession leaders in sales and profit growth.
Source: Harvard Business Review

Financial institutions are increasingly unsure about which strategic approach to deploy. Many lenders worry about the high lending risks at this time and have become extremely risk-averse, applying mainly prevention-focused strategies. For example, some financiers have been cutting costs by closing down branches. Standard Chartered Bank has temporarily closed 8 branches. NCBA Bank also closed 14 branches. Both banks cited COVID-19 as the reason for branch closures. Moreover, Standard Chartered bank and NCBA Bank withdrew dividend payments for the year 2019. Some financiers are also trimming their workforce to cut costs.

Alternatively, some financiers are applying mainly promotion strategies, by acquiring smaller fish at a time when they are likely to get better deals. For example, Egypt’s largest private lender Commercial International Bank (CIB) is to enter the Kenyan market by acquiring a controlling stake in Mayfair Bank. Mauritian insurance company, MUA Ltd, has also received the regulatory green light to acquire Nairobi-based Saham Assurance company.

In the Harvard Business Review study on previous recessions, prevention-focused companies cut back on almost every item of cost and investment and reduced expenditures significantly more than their competitors on at least one dimension. These companies had the least profit growth post-recession, three times less than progressive companies. On the other hand, promotion-focused companies tend to deny the gravity of a crisis, and continue to pursue aggressive investment. Consequently, the profit growth of promotion companies is only half of what progressive companies enjoyed.

During COVID-19, the financial institutions that are likely to come out on top after the pandemic are the progressive companies that apply optimal cost-cutting and investment measures. Some financial institutions seem to be following a progressive trend. For example, the Equity Group held back on a deal to acquire Atlas Mara subsidiaries in Rwanda, Tanzania, Mozambique and Zambia, citing COVID-19. They also cancelled their dividend distribution for the year ended 2019, citing the need to preserve liquidity in this pandemic context.

“The Equity Group Board took a conservative approach that recognizes the emerging unquantified risk of the pandemic and opted to preserve capital in the face of the prevailing uncertainty,” Equity Group Managing Director and CEO James Mwangi is quoted saying.

However, the Equity Group is still investing and has managed to secure a USD 10 million discount on the acquisition of Congolese lender Banque Commerciale Du Congo (BCDC) during the pandemic.

Measures taken by the Central bank encourage progressive strategies, including the reduction on the Central Bank rate (CBR*) and the cash reserve ratio (CRR*), making Kenyan banks more liquid.

Dr Habil Olaka, the CEO of the Kenya Bankers Association, insists that the banking industry is still highly liquid and is unlikely to suffer any financial meltdown as a result of this global pandemic. Despite this, some financiers appear to have chosen a “wait and see” approach, while sitting on large piles of cash.

Strategic cost-cutting combined with investment during the pandemic could result in exponential growth for financial institutions post-COVID-19.

CBR*: Central bank rate:the lowest rate of interest that the Central bank charges on loans to banks

CRR*: Cash Reserve ratio: Minimum amount of deposit that the commercial banks have to hold as reserves with the Central Bank

 

Patricia Andago is the product development lead at Odipodev, a data science and analytics firm operating out of Nairobi Kenya.

This work is supported by the Heinrich-Böll Foundation.

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