Digital banking and financial inclusion in Africa | N’Gunu Tiny

Despite African countries’ reliance on small and medium sized enterprises to keep their economies afloat, there is a lack of financial inclusion on the continent that is harming their prospects.

According to the World Bank’s Global Findex financial inclusion data 34.2% of individuals in Africa have a bank account of some kind. This is half the global average of 62%. However, the continent does beat the rest of the world in holding mobile money accounts, with half of the 34.2% using this platform. The rest of the world comes in at just 2% usership of mobile platforms. So on the one hand we have a continent that is crying out for more access to financial services and, crucially, business credit, and on the other a forward-thinking workforce ready to embrace disruptive technology.

Financial inclusion in Africa will be achieved by fundamental changes
As a fintech investor, my focus is on increasing financial inclusivity in Africa by funding the kind of disruptive alternatives to traditional financial institutions that the continent needs. We can’t wait for old-school financial services to catch up with the digital banking offerings already in use from fintech firms and start-ups.

There is a positive momentum in Africa to harness the potential of digital banking to solidify funding for SMEs and other businesses. But this kind of seismic disruption is a long-term process, and investors, developers, innovators and governments must be prepared to work together for the long-haul.

Digital banking is taking off in Africa, as challenger banks and lenders aim to fill the gaps left by traditional financial services. Most African economies are supported by their SMEs. This means the small business sector must thrive in order for the country’s economy to thrive. Without strong, successful small businesses, African economies would fail.

This means that it’s essential for financial backing, services and appropriate lines of credit are easily accessible to individuals, entrepreneurs and business owners. Not only must they be accessible, but they must also be affordable.

Creating a strong retail banking system is key

Along with many other investors and business leaders, I believe that access to financial credit should be a right for everyone. It shouldn’t matter where an individual is running a business, they should have the same access to reliable, affordable funding as businesses do in other parts of the world.

All over the world, businesses remain the drivers for social and economic growth. If we compare Africa with the UK, the reliance on SMEs is no different. In the UK, SMEs account for 99.9% of all private businesses. Only 0.1% of businesses in the UK employ more than 250 people, with most (98%) employing fewer than ten people.

And yet, SMEs in the UK generate just under half of the Government’s income via tax. They are also responsible for just over half of the country’s turnover. That’s how important they are, and why funding must be available to ensure growth opportunities.

Africa faces unique challenges. Across the continent, although we have figures for SMEs and the workforce, they are compromised by what are known as unregistered companies. For example, in Zambia, almost three-quarters of the country’s workforce is employed by small businesses. Despite this, SMEs in Zambia only account for 11% of its GDP. This is because around 90% of the small businesses in the country are unregistered (also known as ‘informal’). These figures are increasingly important when considered in the context of the continent’s rapid population growth.

Fintech can plug the financial services gap in Africa

Using Zambia as an example again, its population has grown from 8 to 18 million since 1995. In 2017, the population of Africa was measured at 1.1 billion, and by 2050 it’s estimated it will be 2.3 billion. With much of the population young and needing to contribute to the economy, it’s essential that its infrastructure is improved.

Africa has high levels of unemployment and rising levels of poverty. It also has a fast-increasing population. Without a big change in how financial support is offered and accessed, the continent will not be able to fulfil its vast potential. The lack of financial inclusion in Africa remains one of the biggest barriers to employment and business success.

By investing in African fintech companies, I believe we can collectively surmount these obstacles. Currently, there is an urgent need to instigate mass financial on-boarding. We are working without a standard regulatory framework and with vast numbers of people who do not have in-depth financial understanding.

Collective effort needed from various stakeholders

Around 95% of African SMEs do have access to some type of bank account, only 15% can get any form of credit. This is usually in the form of online loans, which can be very high interest and only on a short-term basis. They can also be subject to dodgy business practices, as the regulatory system has not yet caught up with technology.

If we turn to traditional financial institutions in Africa, we see that they are still reluctant to finance small businesses in many cases. In general, extending credit to a small business in Africa is just too much of a risk for old-school banks. They prefer to extend large amounts of money to established corporations. And as they are also slow to adapt to online banking and fintech, they cannot yet plug the financial gap across Africa.

Africa needs a group effort from governments, policy makers, banks and investors to change the overall financial structure. The idea is to make funding and financial services more accessible, and more affordable. Investors can support this by backing disruptive fintech using innovative technological solutions to consumer demands.

Digital banking is driven by consumer needs, and in Africa that is access to financial backing. The continent needs a newly created retail banking model that can provide small businesses with low-interest, long-term capital to ensure business growth. This will allow business owners to further invest in the businesses, formalise their operations, adhere to regulations, pay more taxes and employ more people.

Africa has already showed that it can support digital banking and innovative technology through the uptick in mobile banking over the last few years. We must build on this and push digital banking further and faster to ensure financial inclusion across the entire continent. I believe Africa has vast untapped potential and I also believe that ensuring financial inclusion is the only way to release it.