02 Apr 2021 / Article

How the Covid-19 crisis is remaking African finance

At the inaugural virtual Africa Financial Industry Summit, Deloitte unveiled the findings of the first African Financial Industry Barometer, prepared in partnership with the AFRICA CEO FORUM. This pan-African survey aims to highlight how the financial industry is driving various transformation efforts and what its ambitions are as business leaders grapple with the economic fallout from the pandemic and the pressing need to kickstart the economic recovery.

In an age of digital transformation and as a growing number of new stakeholders enter the financial industry, Africa’s financial institutions have undertaken efforts to transform their business models, governance practices and risk management capabilities. To meet the needs of the day, they have developed a tremendous appetite for innovation – whether by embracing digitalisation initiatives, open banking, open insurance or partnerships with fintechs and insurtechs – which is also regarded as an accelerator of financial inclusion.

According to this survey of African CEOs, digital transformation and operational efficiency will be top priorities for the next 12 months. A majority of financial institutions indicated that they have already begun digitising their businesses (56%) or plan to do so in the near term (31%), both inside and outside their organisations.

What’s more, the membership of boards of directors seems to be undergoing a transformation of its own, as confirmed by the addition of qualified independent members and the creation of traditional standing and ad hoc committees (such as audit and risk committees) as well as new committees (covering areas like technology, ethics and public relations).

 

Traditional financial institutions’ ability to bring partners into their ecosystems and to deepen their collaboration with new stakeholders is a key driving force behind these shifts. In addition, Africa’s financial institutions have a positive view of open banking and open insurance – innovations that have primarily helped them develop new businesses and products.

Some 59% of leaders surveyed indicated that Africa’s financial industry has grown increasingly attractive despite the recent departure of some major international banks and that, since the Covid-19 crisis, more work is being done pave the way for a sustainable transformation.

 

Convergence with international regulatory standards and the entry into force of the African Continental Free Trade Area (AfCFTA) are additional factors accelerating the pace of financial inclusion. By contrast, restrictive monetary policies and limited access to capital markets continue to hamper the progress of financial digitalisation. That said, leaders welcome regulators’ efforts to transpose international standards, such as financial reporting standards and accounting frameworks, while noting certain shortcomings on issues like digital finance, personal data protection and financial market regulation.

Risk mitigation and monitoring pose key challenges, particularly in the area of cybersecurity, owing to the expansion of digitalisation, as well as in the financial sphere, in a narrow sense (especially credit risk), and in operational matters (notably fraud risk, but also legal and industrial risk). Addressing these emerging risks requires a new, more innovative approach to risk management and a better risk appetite framework, which has come a long way but needs improvement.

The barometer also examined the impact financial institutions are having on sustainable finance in Africa’s economy. Stakeholders reported a slight increase in their impact in this area, while acknowledging that the pace of growth of these initiatives is too slow.

Finally, the standardisation of green and sustainable finance, i.e., factoring environmental, social and governance (ESG) criteria into investments and pursuing socially responsible investments, represents yet another area ripe for growth in the future.

Indeed, 49% of financial institutions incorporate ESG criteria into their investment decisions and 30% have already made socially responsible investments. Respondents acknowledged, however, that they are not adequately informed about certain innovative products in this sphere, such as green bonds and green venture capital investments.

The next edition of the barometer will assess the outcome of these transformation initiatives and the new issues that arise from them. In the meantime, you can delve into the findings of the full report by following the link in this article.

 

Assia Farah BENBAHRIA

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