By Viola Llewellyn, Co-founder, Ovamba
Africa’s banking sector is a drag on economic growth and the difficulties of operating in the industry are not representative of areas where the continent has been quick to adapt to its markets, such as mobile technology. As a result, Africa’s credit gap exceeds $360bn, leaving over 20 million formal and informal SMEs without access to capital according to the World Bank. Yet SMEs also comprise the overwhelming majority of Africa’s economic fabric – around 90% in Cameroon, for example. Therefore, to spark Africa’s economic engine, closing the credit gap for SMEs must be a priority as doing so will have a profound social and economic impact with a multiplier effect. Filling the void will require agile, innovative finance solutions and if achieved, Africa stands to become a more prosperous and competitive market.
Despite the staggering volume of SMEs in Africa, too many remain underserved or entirely unserved with limited access to quick, reliable and affordable credit. Figures from last year show that in sub-Saharan nations upwards of 40% – and over 70% in some areas – of SMEs fall into the under or unserved category. Financial institutions in Africa have proven to be ill-equipped to deal with SMEs’ demand for credit, lacking the infrastructure needed to appropriately score risk, and in turn lend quickly and lend securely. Similarly, international investors have taken a hands-off approach, opting to provide capital for development or through local partnerships instead of looking towards direct business lending.
To increase access to credit for Africa’s SMEs, the first step is to recalibrate how business risk is measured so that the market realities are appropriately benchmarked. The social and economic dynamics that impact the way formal and, perhaps more importantly, informal lending is done in each individual market must be considered – much of which can be deduced from the data on a customer’s mobile. These factors provide insight on valuable risk indicators like loan repayment likelihood. By then converting these observations into quantitative data the context in which SMEs operate begins to take shape. With more data to draw from, the sharper the context becomes in a target market and the more accurately risk can be scored.
The development of a data pool from which risk can be accurately measured has the ability to create a secondary market for debt not current available at scale in Africa. The secondary market will bridge the void left by traditional banking and micro-finance institutions, the latter of which provides valuable development capital but lacks the ability to grow in step with the businesses it supports. As Ashburton Investments (a subsidiary of FirstRand Group) notes in a 2015 report that compares African and established market corporate credit, investors are already drawn to Africa due to its rising domestic demand, commodity exports and infrastructure development. However, in light of slowing growth, an established secondary debt market that offers investors more flexibility should incentivise them to stay active in the market. Building this financial infrastructure is an opportunity to bring more foreign direct investment into Africa but, more encouragingly, it’s likely to boost inter-African investment.
For Africa’s SMEs, the knock-on effects should provide the financial means to grow to meet demand. Additionally, with fewer barriers to market and a lending environment that is supported by big data and therefore free of human biases, more SMEs run by marginalised groups – such as women – can enter the formal economy for the first time. As such, increasing connectivity between African SMEs and the global marketplace, as well as local supply chains, is poised to have a significant impact on reducing poverty. In line with the United Nations’ Sustainable Development Goals announced this year, private sector development can generate employment, boost incomes, improve access to education and healthcare as well as make goods and services more available.
The shift from trade to aid is an important aspect of this private sector transition in Africa. The real business opportunities – like addressing the credit gap – are plentiful given the multifaceted nature of Africa’s 54 domestic markets. The supply and demand indicators in individual markets should dictate what technologies and finance solutions, for example, are needed, illuminating opportunities for investors and businesses alike. Closing the credit gap will accelerate economic growth by creating more depth in the African market. Increased technological interconnectivity, sustainable income growth, more immediate access to goods and services as well as an increasingly stable investment environment are just some of the likely knock-on effects.