Could innovative payment solutions for low-income consumers transform African finance?
This week, DFS Lab, the financial technology accelerator funded by the Bill and Melinda Gates Foundation, has revealed plans to invest USD200,000 in four startups which will provide financial solutions to low-income consumers, three of which are based in Africa.
The news is another indicator of how mainstream financiers with considerable influence are increasingly willing to support small businesses on the continent.
However, it might take more than a few fat cash injections from philanthropic angels to alter the fortunes for Africa’s SMEs. Around 23% of fintechs interviewed in TBY’s recently released Special Fintech Report revealed that the main challenge they faced in doing business was a lack of access to finance.
“Around 99% of the funds available for venture capital today are not targeted at West Africa, and in Sub-Saharan Africa things are even worse. If we remove Nigeria, South Africa, and even Kenya from the equation, the rest of the continent practically does not have access to funding for startups. The banking industry does not fund entrepreneurship and does not understand it,” said Bade Aluko, Chairman of Nigerian Venture Fund Chinook Capital in an interview conducted for the report.
One sector massively affected is agriculture. Agriculture employs 65% of Africans, but just 10% of these workers and businesses receive support through conventional financial institutions. Technology itself is stepping in to plug this gap.
For instance, blockchain is due to play a key role in streamlining business models in rural areas. Last month a project jointly launched by commodities trader Block Commodities, financial services platform Wala, micropayments company Dala, and agritech firm FinComEco, uses cryptocurrencies to enable commodity financing for smallholder farmers in Sub-Saharan Africa. According to the farmtech quartet, crypto will enable farmers to access more complex financing mechanisms, as well as easily monitor the value of their produce.
The group’s first project will be in Uganda, where they will lend 100 million Dala tokens (USD10 million) to farmers for the purchase of fertilizer.
And this is by no means the only innovative solution on the table. A fintech company in Kenya, FarmDrive, is helping to address the global USD450-billion financing gap in agriculture using machine learning.
This female-founded firm combines several datasets, including individual smallholder farmer, social, agronomic, environmental, economic, and satellite data, to create credit scores for farmers and decision-making tools for financial institutions. The company’s alternative credit risk assessment model offers products and services to financial institutions to help them reduce the amount of risk in their portfolios. For smallholder farmers, FarmDrive gives them opportunities to source loans and other financial tools. It is even linked to M-PESA, Kenya’s leading mobile money service operated by Vodafone.
Companies are also developing synergies between fintech and other sectors, such as energy or health. One such firm is South African company The Sun Exchange, whose “blue-sky thinking” is giving hundreds of South Africans access to clean energy. The Sun Exchange enables global investors to pay for solar panels that are leased to African hospitals, factories, and schools, and earn rental income paid in bitcoin or local currency.
CEO Abraham Cambridge told TBY, “we want to make the deal look attractive enough to encourage customers to take money out of existing fossil fuel investments and put that into solar.”
Recently, too, the South African Reserve Bank (SARB) has been one of the regulatory agencies making efforts to strengthen official framework in the fintech space. In 2013, SARB joined an intergovernmental working group along with the South African Revenue Services (SARS) and the Financial Intelligence Center to better understand fintech innovation. In 2016, it created a cryptocurrency and Distributed Ledger Technology (DLT) working group widen its knowledge of the technology and explore possibilities to issue a national digital currency.
In 1Q2018 it launched a dedicated fintech unit to support fintech firms in South Africa in the long term. “Given the pace of change, regulators are faced with the daunting prospect of having to reflect on the most appropriate regulatory responses to technologies that they may not fully comprehend yet,” commented Francois Groepe, Deputy Governor at the South African Reserve Bank.
Recently, many of these tech and finance leaders, policymakers, innovators, and investors from across Africa and the US gathered at the Africa Fintech Summit (AFTS) in Washington, DC, to discuss the future of financial technology. The event is timed to coincide with the spring meeting of the World Bank Group and IMF, in a bid to ensure that fintech is one of the talking points inspiring high-level debate on the future of the continent’s economy.