Africa’s micro, small and medium enterprises (MSMEs) have traditionally found it hard to acquire bank credit, but the fintech revolution is now helping to make lending to them a viable business. Tom Collins reports.
The International Finance Corporation (IFC) recently estimated that Africa’s finance gap for small and medium enterprises (SMEs) stands at $331bn. Micro, small and medium enterprises (MSMEs) form the backbone of most African economies and investment in this sector will significantly enhance job creation and wealth development. The informal sector contributes 38% of sub-Saharan Africa GDP yet 51% of the continent’s 44m formal MSMEs lack the finance necessary to grow. The true scale of the shortfall is almost certainly even greater given the lack of data.
Governments across the continent have identified poor liquidity as a bottleneck in the sector and private enterprise is beginning to plug the gap through innovative financial services. Digital solutions and tech-enabled finance are gaining traction and the MSME sector is no different. Speaking at the recent IFC-backed SME Finance Forum in Kenya, the IFC’s Karin Finkelston said: “We are seeing significant improvements in access to finance in Africa, creating opportunities for small and medium enterprises that create jobs and reduce poverty. We should celebrate the gains while recognising we have much more to do. Digital finance is the future so we must expand and tailor products and services to meet the growing needs of a dynamic continent.”
Banks are beginning to adopt proactive SME strategies but traditional constraints have stifled the sector. Banks require large amounts of collateral along with stringent credit checks in order to lend and the SME sector, particularly micro enterprise, struggles to fit this bill. A study by the African Centre for Economic Transformation (ACET) found that while 95% of SMEs have bank accounts in Zambia, only 16% had loans or lines of credit.
Banks, therefore, regularly service the SME sector but have not typically financed it. The big multilateral financial institutions (MFIs) and development banks have identified the sector as a key area of growth and begun concessionary lending through commercial banks, but uptake has been slow. Many of the continent’s banks are still figuring out exactly how to lend to the sector.
Micro enterprises, generally defined as employing fewer than 10 people, are even further removed from formal financial structures. Micro enterprises require low amounts of capital and come with very little financial backing or history and therefore fall almost completely outside most banks’ lending habits. In this context the majority of micro enterprises look towards family or friends for working capital.
Fintech plugs the gap
Some promising solutions can be seen in the fintech revolution. Fintech is booming on the continent with African digital payment service provider Cellulant breaking the glass ceiling for the largest amount raised in a single round at $47.5m. Indeed, private investment into financial technology is flourishing as competitive returns combine with quantifiable impact. While fintech can be used to describe a varying range of businesses and ventures, one application is the use of technology to lend in the high risk and more remote MSME space.
4G Capital, a fintech lender, does exactly this and has been lending to the micro and small business space since setting up in Kenya in 2013. Kenya’s MSME finance gap is $19bn, making it the largest in East Africa. Wayne Hennessy-Barrett, 4G Capital’s founder and CEO, sees great opportunity in the market and provides innovative financial services while generating sustainable profit. “We provide unsecured working capital for these business on terms that work for them – almost immediately and without collateral requirements, but ‘right-sized’ for their individual business needs,” he says.
Unsecured capital may come as a shock to some but the company points to a 94% repayment rate. The key, argues Hennessy-Barrett, is being able to offer a complete package – one that blends rigorous Know Your Customer (KYC) checks with customer business training, clear lines of regular communication and prudent incremental disbursements. “Securitisation is not really the key to positive repayment behaviour,” he says. “The name of the game is product alignment – building a financial service that meets the customers’ needs.”
4G Capital lends anything between $20 and $500 to MSMEs through mobile technology. Its core product is UPIA, which stands for “Unsecured Private Immediate Affordable”. The combination of micro-loans and no collateral requirement means the company has had a strong impact on the MSME ecosystems in which it operates. Micro and small businesses are able to quickly access working capital which the company ensures, through its training, is reinvested into growing the business as opposed to reservicing other debt or paying bills.
“Ninety-six to ninety-seven percent of our clients use the capital for business purposes,” says Hennessy-Barrett. “They are not using it to refinance other loans, to pay other debt or to meet their living costs. They use our credit to increase their take home wealth and provide a better future for their families.”
The firm claims that it provides a sustainable model both for the client and the lender, which, as a result, can quantifiably invigorate local markets by increasing liquidity and purchasing power. The average customer is able to grow their business by 82% within one year of accessing the company’s credit services. The company will lend within excess of $40m over the next year, is active in 70 markets across Kenya and recently began operations in Uganda. Core to Hennessy-Barrett’s vision is the role of inclusive fintech in helping informal businesses transition to the formal economy where they can both contribute to national development plans and access services currently out of reach.
Fintech companies like 4G Capital are able to lend where banks cannot due to their ability to meet customers’ needs through innovative approaches and solutions. Hennessy-Barrett argues that the potential in Africa for firms like his is “almost limitless” but cautions businesses must work with regulators to create the right conditions for fintechs to grow. Key to this is the encouragement of a vibrant and useable mobile money ecosystem such as that enjoyed in Kenya. This, together with clear frameworks for customer protection, will allow companies to provide liquidity in markets not serviced by traditional lenders, and better support the micro and small businesses which are the backbone of many African economies.