How banks can build back amid Covid, digital waves

We are at critical juncture, firstly, having struggled globally with the ravages of the coronavirus pandemic for one and a half years.

Secondly, we are at the cusp of the Fourth Industrial Revolution, whose transformative powers are already evident in the financial sector, and will transform the way we live, work, and relate.

In the words of Prof Klaus Schwab, who popularised this label: “It is characterised by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

Both these elements portend stormy times, for our way of life, society, families, and the institutions that we represent. But how should we react? We can attempt to stand firm, unyielding against these perils, and fully aware that they may destroy us.

Or we can accommodate some of the pressures with the grace of a palm tree, and build back better—bend, but don’t break.

First, the entrenchment of globalisation. This product of the third industrial revolution has redefined the terrain for governments, businesses and citizens, shortening distances and brought together disparate people in common markets. Global supply chains have overhauled the traditional manufacturing and production processes with resultant efficiency gains.

Markets have increasingly opened up allowing businesses to expand their global footprints. The absence of a navigable route to the sea for Uganda and other landlocked countries need no longer be a handicap to economic development.

Closer home, regional integration efforts particularly the East African Community (EAC) have borne fruit with banks extending their reach across the region.

The imminent operationalisation of the African Continental Free Trade Area (ACFTA) is expected to create an Africa-wide market with resultant benefits from economies of scale.

Financial markets have increasingly become global. In particular, the US financial markets have become a global bellwether with an outsize influence including in emerging and developing countries.

Given the dominance of the US dollar as a global reserve currency, we in the EAC are not immune to the dynamics in the US financial markets. Global movements in the dollar exchange rate and interest rates are increasingly impacting our markets.

On the one hand, as we expand our presence in the international Eurobond markets, we are becoming increasingly vulnerable to movements in global bond yield curves.

On the other hand, with a growing influence of foreign investors in our markets, we have to be alive to their short-term horizons and their potential flight to safety in turbulent times. Nevertheless, there are other urgent concerns that must be attended to.

The cost of globalisation in terms of the industries that are wiped out and livelihoods that are altered, must be addressed. We have also seen the rise of nationalism in the last few years, particularly in Britain, Europe and the US, threatening to reverse the gains made by globalisation.

There has been an increasing retreat to protectionism as large segments of the populace particularly in the West feel excluded from the global economy. The Covid-19 pandemic has presented the two sides of the coin in this issue.

On one side, the vaccine nationalism particularly by western countries has shown the ugly face of the retreat from globalisation. On the other side, the pandemic has emphasised the need for global cooperation and coordination as no one is safe until we are all safe. We are certainly treading dangerous ground.

Second, is the proliferation of innovations and new technologies. From mobile banking to cloud computing, artificial intelligence to blockchain technology, internet of things, and robotics, all heralding significant opportunities to re-engineer the operations of governments and business and transform lives and livelihoods.

Even before the Covid-19 pandemic, digitalisation had transformed the African financial sector landscape. In Kenya, we had seen access to financial services triple from 26 percent of adults in 2006 to 83 percent in 2019.

These transformational financial inclusion stories riding on digitalisation were replicated across the continent including in Uganda, Tanzania, Rwanda and Ghana.

Undoubtedly, digitalisation has been the silver lining during this pandemic. With various containment measures including social distancing, lockdowns, and stay-at-home protocols, digitalisation has enabled access to not just financial services but also other essential services including health and education.

E-commerce has exploded as businesses pivoted to the digital marketplace. Businesses in diverse sectors ranging from hotels, retail, transport, communications, entertainment, health to education, have to a large extent transformed their businesses riding on digital rails and platforms.

Workplaces have changed with a shift to working-from-home on a scale that was unimaginable before the pandemic.

Additionally, technologies and innovations are being adopted rapidly. New ideas and products are spreading at an exponential pace, putting pressure on innovators and promoters to compromise on the quality of their products.

Third, is the rise of sustainability concerns. It is now widely appreciated that businesses can only be as successful as the societies they operate in and draw their existence from.

Environmental, Social and Governance (ESG) considerations are now paramount in any organisation’s strategy and operations. Most notably, the adverse impact of climate change has become evident.

Natural disasters, associated previously with developing countries, have spectacularly reared their ugly heads in the developed countries.

In these circumstances, the urgency to meet targets to reduce greenhouse emissions under the Paris Climate Agreement has been amplified.

The consequences of failure are dire to society and banks specifically as they reel from the damage to their loan portfolios from extreme weather events. Further, banks may be left with stranded assets, if they do not keep abreast with the transition to a net zero emissions global economy.

Against the backdrop of the significant transformation foreshadowed by the three themes highlighted above, how will bankers bend without breaking in this environment? How will they guide their institutions to thrive and not just survive?

First, we must not forget that it is all about people. While Returns On Equity (ROEs), Price-Earnings (P/E) ratios and the bottom-line are easy clutches, people-centricity must be at the heart of products, services and operations of financial institutions.

The needs of citizens globally have grown over the last 18 months as lives and livelihoods have been upended by the pandemic, which has adversely impacted implementation of the Social Development Goals (SDGs) and threatened the vision of shared prosperity for all by 2030.

Supporting the recovery process will be at the heart of banks that will thrive in the new age. Targeted financial services to MSMEs and other vulnerable groups particularly women and the youth will be imperative.

This will need to be supplemented by finance plus, particularly in the form of business advisory services, as MSMEs pivot their business models to fit in the new normal.

Second, innovation presents opportunities but also risks. How do we maximize opportunities while minimising risks? Emerging technology including Artificial Intelligence is a goldmine in building credit profiles and enhancing access to financial services for segments of our populace with thin credit files and who lack collateral.

For financial institutions saddled with moribund ICT legacy systems, the cloud presents an opportunity to upscale to the anytime anywhere cutting-edge financial service platforms demanded by today’s discerning customers.

Even as we reap from innovation, we must remain alive to the risks. Recent devastating cyber-attacks including Solarwinds, Colonial Pipeline and Kaseya in the US. come into mind.

In the region, we have also seen an upsurge in online scams, identity theft and social engineering attacks. We must therefore reinforce our cyber defenses internally to neutralise the insider threat.

Third, strong governance should underpin the culture in banks. This goes beyond the classical tenets of an effective board, management and staff with clearly defined responsibilities and accountability.

Governance in the age of the fourth industrial revolution would also be about the public good, for instance, supporting appropriate behaviour in the financial markets.

Dr Njoroge is Central Bank of Kenya governor. This is an abridged version of his speech during the Uganda Bankers’ Association, Fourth Annual Bankers Conference 2021 held on July 27,2021