Financial sector: The soft underbelly of the Covid-19 pandemic

BY ANTONY MUTUNGA

Joining the long list of losses the Coronavirus pandemic has dealt on humanity is a chocked financial sector. Resultantly, investors around the globe are in a state of panic as stock markets all over suffer losses in the trillions of dollars. 

It is no different for Kenya where investors rushed to sell-off their shares at the beginning of the epidemic in favour of asset classes such as gold, causing the Nairobi Securities Exchange (NSE) to lose in the billions and halt trading.

Shares that were most affected when the NSE took a massive hit included Safaricom, KCB and Equity Bank whose value shed by Sh86 billion, Sh11 billion and Sh11 billion respectively in a single day according to data from the NSE. The total Sh125b value shed marked one of the largest declines the bourse has ever recorded in a single day in its history. It was mainly due to foreign investors, who make up about 70% of daily trading at the NSE, selling off and shifting to the likes of gold.

According to Churchill Ogutu, Genghis Capital senior research analyst, the heavy plunge in prices is linked to events in the global market as foreign investors exit and consolidate their holdings in domestic markets. As a result of the uncertainty caused by stunned profits and economic growth, the pandemic has wiped equity values. 

“Had we been in ordinary times, we could expect a bit of accumulation of shares by investors just before the dividend payouts are done. Most of the payouts will be in April, May and thereabouts but investors are not buying this,” he said.

Some digital lenders, members of the Digital Lenders Association have decided to waive late repayment fees in a bid to cushion customers who are under distress following the slowdown in the economy

The plunge of the NSE also saw Kenya’s retirement benefits take a hit as well as a percentage of the retirees’ money is invested in different securities at the bourse. The percentage, which amounted to Sh225b ($2.1b) as of December 2019, is expected to reduce as a result of COVID-19 thus affecting the growth of the retirement benefits sector.

Far from the NSE, COVID-19 has affected financial institutions such as banks as well, causing them to further reduce access to credit for a majority of the public. Since the interest rate cap, was passed in 2016 was scrapped off last year, banks were preparing to recover by opening up access to credit to the majority. During the period of the interest rate cap, many could not access credit especially small and medium enterprises (SMEs) leading to a slowdown in terms of economic growth.

However, with the spread of the Coronavirus still expanding, banks have once again increased caution when it comes to lending. With the end not in sight, they have resorted to limit access to credit by asking for evidence on how one has been affected by the pandemic thus leaving a majority stranded. A majority of businesses especially SMEs are already citing raising capital as one of their leading challenges in the period. For instance, businesses that rely on imports have been greatly affected thus affecting private sector growth as well.

As a result, banks are holding on to large amounts of money as is evident by data from the Central Bank of Kenya (CBK) which indicates that in April, commercial banks held Sh50.3 billion in excess cash over statutory requirements as compared to a week before where the total stood at Sh41.3 billion. 

Besides, digital lenders have also frozen services. Those who relied on these platforms found themselves locked out or distribution of their credit taking a longer period. As a result of the interest rate cap, millions of Kenyans had shifted reliance on digital lenders and shylocks for access to quick loans. 

With the negative impacts of the pandemic still being felt throughout the country, the financial sector has received some assistance as the government has come up with a relief fund to help those who have been affected by the pandemic and are not in a position to fend for themselves. The fund is dubbed Covid-19 Emergency Response Fund. Apart from this, other organizations are also coming up with their own funds aimed at helping those in different countries.

Boehringer Ingelheim, one of the largest pharmaceuticals in the world launched a Sh63.9 million relief fund to support the Making More Health (MMH) network of social entrepreneurs in Kenya and India. It is to assist social enterprises and SMEs such as Access Afya, Healthy Entrepreneurs and Jacaranda Health to sustain a longer period of low economic activity and to invest towards coming up with new ideas to curb the spread of COVID-19.

KCB and Safaricom also put aside funds for lending to their KCB M-Pesa customers during the period. Some digital lenders, members of the Digital Lenders Association (DLAK) have decided to waive late repayment fees. According to DLAK, the move will cushion customers who are under distress following the slowdown in the economy after disruptions to their day-to-day operations that could have had an effect on regular income flow.

As the coronavirus continues its expansion, there is a need to come up with measures to reduce its effect on the financial sector in the long run. Relief funds will only help to cushion those who cannot fend for themselves and help businesses stay afloat.   

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