Innovation indispensable for East African banks

Innovation, risk management and skills development are themes that particularly resonate with banking executives according to PwC’s 2018 East Africa Banking Survey. The survey, based on responses from over 40 banking executives in East Africa (including 19 from Tanzania), noted that these themes cut across topical issues like IFRS 9, technology, financial crime and cybersecurity.

Unsurprisingly, many respondents (45%) told us that in 2018 the accounting standard change in terms of the IFRS 9 adoption and implementation was top of mind. Whilst the readiness, efforts and resources deployed to address this change varied depending on a bank’s size and complexity of operations, it was clear that banks still have a lot to do. For big banks the urgent need is to automate the process, but data clean up is a priority before embarking on this. Indeed, a consistent theme was that the quality and accuracy of data was a major challenge during the IFRS 9 implementation phase.

Weak governance processes and a lack of deep technical understanding within finance and credit teams was another challenge in relation to IFRS 9 implementation.  Management relied heavily on consultants who built Expected Credit Loss (ECL) models, an unsustainable strategy in the long run. It is expected that proper governance structures will be put in place and capacity building for credit and finance teams will be given attention, but Boards must also continue to emphasise the importance of reviewing business models and products to minimise any adverse impact brought about by the changes in IFRS 9. Limits for revolving facilities and guarantees are among the areas worth reviewing.

The PwC survey re-affirmed the role of technological innovation in re-shaping banking in East Africa so as to enhance customer experience, provide opportunity to lower costs and improve staff productivity.  Tellingly, 61% of the respondents (and 70% of Tanzania respondents) project that by 2021 more than 75% of transactions will be conducted through digital channels.  Not surprisingly therefore a key challenge highlighted by banks in their annual reports has been competition from non-bank institutions – indeed, annual reports for Tanzanian banks ranked this as the next highest challenge after regulatory change.

As banks continue to craft their technology strategies, it goes without saying that customer centricity should be their main focus. The strategy should focus on improving customer experience and build in mechanisms whereby customers can provide timely feedback on their experience and services being offered. It is also expected that banks will invest in data analytics tools in order to gain critical insights into certain patterns and trends. The insights gained will drive innovation and necessary improvements in services.

The survey also demonstrated that bank executives continue to identify traditional risks as highly significant including credit, liquidity and market risks. Credit risk is the most significant risk with 56% of respondents attributing it to the economic slowdown and 28% link it with poor credit underwriting practices.

Emerging risks such as regulatory compliance risk and cybersecurity risk continue to gain momentum and require a more holistic and comprehensive risk management strategy. Bank boards should be at the forefront of instilling a “risk culture” amongst employees. It is about time that risk management targets should be embedded into performance key performance indicators (“KPIs”) to give the risk agenda the necessary attention.

Financial crime remains a challenge for a number of banks within the region. Respondents cited document falsification and card fraud amongst the most prevalent forms of fraud. When asked about the measures taken to detect and deter financial crime, 68% of the respondents (and 76% of the Tanzania respondents) ranked monitoring of suspicious transactions using technology as the most effective measure.

Although the question of skills shortage did not feature prominently in the survey, it did feature in the recent Tanzania launch of the survey some participants highlighted this area as a concern, particularly in terms of succession planning at senior levels.

The banking industry in Tanzania and across the East Africa region is highly competitive and innovative. Continued success in such an environment will require banks to implement holistic strategies to manage innovation, risk and skills development.

By Cletus Kiyuga, Partner in PwC Tanzania’s Assurance practice

The views expressed do not necessarily represent those of PwC. For PwC updates on tax and other matters do follow @pwc_tz or visit our website www.pwc.com/tz