November 1, 2024
Embracing the unknown as the new norm in the banking industry #IndustryFinance

Embracing the unknown as the new norm in the banking industry #IndustryFinance

CashNews.co

In a world where the only constant is change, the corporate landscape has become increasingly dynamic, with the banking and finance sectors facing unprecedented levels of uncertainty.

This unpredictability is not just driven by market forces but also by political shifts that have far-reaching impacts on economies worldwide.

Technological advancements, regulatory changes, and shifting consumer expectations have created a landscape where long-term planning feels more like a gamble. For banks and financial institutions, this fluid environment presents both challenges and opportunities. Agility and innovation are rewarded, but the risk of misstep has never been higher.

One key factor in this dynamic environment is the growing influence of technology. Fintech companies are disrupting traditional banking models, offering faster, cheaper, and more personalized services. This forces traditional banks to rethink their business models, invest in modern technologies, and explore partnerships with tech companies to stay competitive.

However, these rapid changes also bring risks, particularly around cybersecurity and regulatory compliance. While technological change is a significant driver of uncertainty, political events have an immediate and profound impact on the banking and finance industry.

Unpredictable political decisions can send shockwaves through global markets, affecting everything from currency values to stock prices.

One example is in USA where political developments in recent years have had far-reaching economic consequences. The trade wars initiated under the Trump administration, for instance, disrupted global supply chains and led to market volatility.

The imposition of tariffs on goods from China and other countries not only affected the industries directly involved but also had a ripple effect across the global economy, including the banking sector.

In Africa, the situation is equally complex. The continent has experienced unpredictable political events. In Kenya, the prolonged political standoff following the 2017 and 2022 elections, coupled with Covid-19, led to economic slowdown and uncertainty in the financial markets. Businesses, including banks, faced challenges in planning and investment as the political climate remained tense.

Recent conflicts, such as the Gaza invasions have equally disrupted the global energy markets, which have consequently caused oil price spikes and inflation, straining economies worldwide. Investor confidence in certain regions has drastically declined, increasing market volatility.

Financial institutions have had to navigate the uncertainties of fluctuating currency values, shifting trade policies, and the potential for new regulatory frameworks.

There is also a pressing concern regarding the significant economic disruptions in Kenya, particularly following the 2019 currency redenomination which led to a temporary liquidity crunch that negatively affected SMEs reliant on cash transactions, causing a slowdown in consumer spending.

This was followed by the removal of interest rate caps by the Kenyan government. While it was anticipated that commercial lenders would benefit from this, it led to reduced demand for loans as a result of the increased cost of credit. This occurred shortly before Covid-19, leaving borrowers with both the high costs of credit.

Smaller banks, in particular, struggled with higher non-performing loans as borrowers defaulted due to higher interest rates, affecting their profitability for quite some time.

A review of the half year 2024 financial results indicates a complex choice between balance sheets and the bottom line. Many tier-one banks are focusing on profitability, which may be an easier choice for larger institutions but poses challenges for smaller players.

Forced mergers and acquisitions loomed when the state announced a review of the 10 billion minimum core capital requirements for commercial banks prompting preliminary talks about banks’ ability to raise capital without facing operational closure given that only 40 percent of banks in Kenya are projected to meet the threshold.

Interest rates remain critical in influencing the cost of funds for banks. For instance, raising rates to curb inflation, increases borrowing costs for banks, leading to higher funding costs. Conversely, lowering rates, decreases costs but can also shrink loan margins, affecting profitability. These dynamics are often hard to foresee leading to challenging times that require economic fortitude.

As we navigate this new norm, it’s clear that institutions must adapt quickly to the new rules of the game. Given the current state of flux, the key lies in banks embracing agility and fostering a culture of continuous learning and adaptation in this new norm. Institutions must be prepared to pivot quickly in response to political and economic changes.

This approach requires a shift in mindset. Banks should view uncertainty as an opportunity for innovation and differentiation. For example, investing in data analytics and artificial intelligence, can help banks gain insights into market trends and customer behaviour, allowing them to make more informed decisions in uncertain environments.

Moreover, collaboration and partnerships will be essential. By working closely with regulators, fintech companies, and other stakeholders, banks can navigate the complexities of the modern business environment more effectively. It’s time for traditional banks to stop direct competition with fintechs and instead appreciate strategic partnerships through collaboration.

The new norm is indeed unknown. The banking and finance industry finds itself at the forefront of navigating this uncertainty, with political moves and technological advancements reshaping the financial landscape. Institutions must be more agile, innovative, and collaborative than ever before.

While the road ahead may be unpredictable, those who embrace the challenge and adapt to the new realities will be well positioned to thrive in this dynamic environment.

John Ndugi is the Chief Commercial Officer at Family Bank Limited

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