Following the coronavirus outbreak in Africa, the World Bank has committed US$50 bn and identified the protection of small and medium-sized enterprises (SMEs) as essential to the continent’s economic revival – a process in which FinTech has a crucial role to play.

As economies around the world impose lockdowns following the rampant spread of the COVID-19 pandemic, many business sectors find themselves severely challenged – and in some cases face a complete suspension of business. Consequently, the demand for business loans and financing is immense, particularly for Small and Medium Enterprises (SMEs).

Making the case for SME finance even more crucial, the International Labour Organisation notes that SMEs are responsible for more than two thirds of all jobs worldwide. They also account for the majority of new job creation. Worryingly enough, even before the coronavirus outbreak, less than 15% of SMEs in fast-growing economies had access to the credit they needed to grow. According to the International Finance Corporation (IFC), the unmet financing need of SMEs in emerging markets is a significant US$5.2 trillion every year.

Needless to say, this financing gap is only expected to widen following the COVID-19 pandemic – hampering job and wealth creation even further in a global economy that is already reeling under the massive fallout of the crisis. Notwithstanding that governments around the world have launched significant support packages for SMEs, often guaranteeing all or most of the credit being made available, it falls to the banks to actually administer and originate the loans. But are banks ready to face the huge responsibility of issuing new SME loans, even as existing borrowers face repayment issues and request interest moratoriums?

Caption: An SME vegetable vendor receives payments over mobile money (Credit: PYMNTS.COM)

FinTech to bridge widening finance gap

Indeed, SMEs in Sub-Saharan Africa count among the world’s most financially constrained, with the IFC estimating that 52% of SMEs in the region have an unmet financing need. With a credit gap of US$331 bn, SMEs in Sub-Saharan Africa are unfortunately at the bottom of the pyramid. In the continent’s largest economy Nigeria, for example, fewer than 7% of SMEs have ever taken out a formal loan, and formal small business loan requests are rarely approved. No wonder then that despite accounting for 96% of the businesses in Nigeria, 84% of its employment and contributing to 48% of the GDP, a large percentage of them do not survive their first few years. 

Giving a sliver of hope to SMEs, FinTech solutions have been helping the continent's SMEs overcome the challenges imposed by the pandemic by facilitating fast and convenient access to credit. FinTech lenders offer speed, accessibility and flexibility – the holy trio of benefits that SMEs expect from access to finance. By running credit checks faster, evaluating risk more easily, and issuing loans in a matter of days, these new, innovative, data-and artificial intelligence-led solutions are better positioned to serve SMEs’ financing needs, help them emerge from the financial crisis imposed by the pandemic, and unlock their potential to create jobs and contribute to economic growth.

Forms of FinTech

As the global leader in mobile money, with almost 10% of GDP in transactions generated through mobile payments, compared to 7% of GDP in Asia and less than 2% of GDP in other regions, Africa already boasts many FinTech solutions to improve access to finance. The common ways in which FinTech firms facilitate SME access to finance include:

·      Credit scoring: Alternative credit scoring (using data including social media networks or mobile phone contacts) to expand credit access to those who might not have a good (or any) credit score;

·      Equity crowdfunding: Small investors take a portion of the equity of the business in exchange for funding – similar to public issuance of stock, but without the high barriers to entry;

·      Rewards-based crowdfunding: Funding is provided in exchange for a reward, such as a first run of products or film credits, opening funding to businesses that may not be able to offer a financial return on investment;

·      Marketplace and peer-to-peer lending: Loans are either pooled or made directly using an online platform offering a new source of funding;

·      Digital versions of existing tools: Expanding the reach of traditional tools such as rotating savings and credit associations and microfinance through technology.

In recent years, SMEs are discovering the value of FinTech first-hand as online lenders offer a new business model that is faster, easier, more cost-effective and more transparent. For the first time, SMEs can share what data they have, which could be as basic as a series of bank statements to piece together their credit history, in exchange for access to finance to help them grow. These platforms use advanced analytics platforms and artificial intelligence to assess transactional and alternative data to gain a much deeper understanding of SMEs.

Caption: A worker rolling a spool of cable across the factory floor at Reroy Cables, an IFC beneficiary in Tema, Ghana. (Credit: Nyani Quarmyne, Panos/IFC)

Crowdfunding to come to the rescue

In particular, in the wake of the COVID-19 pandemic, SMEs are flocking to list their projects on crowdfunding platforms with a focus on investments in Africa such as Thundafund (covering Kenya and South Africa), Fundkiss (based in Mauritius), AB Crowdfunding (based in the DRC) and the WAEMU’s Afrikwity (covering Tunisia, Ivory Coast, Morocco and Senegal). Such platforms target the African diaspora as well as foreign sponsors by providing a plethora of investment opportunities in the continent.

Looking at South Africa, which is home to many vibrant crowdfunding platforms such as Thundafund (a rewards-based platform for non-profits and individuals which recently started its business arm, BackaBusiness), Uprise.Africa, Jumpstarter Crowdfunding and BackaBuddy, registrations of local businesses have soared on their websites since the inception of the lockdown, as start-ups list crowdfunding campaigns to meet basic expenses for salaries and supplies.

Even as the South African government has introduced various COVID-19 relief measures to provide SMEs with financial aid, early indications from SME South Africa show that an estimated 68% of businesses that applied have been unsuccessful. No wonder then that a report from the University of Cambridge has estimated that the total crowdfunding activity in Africa will reach over R30 billion by 2025, with all the potential this lending mechanism has to reach out to SMEs as and when they require funding, especially in times of crisis when all other avenues fail.

FinTech future forward

As banks find themselves further than ever from meeting the finance needs of SMEs in emerging economies, FinTech is coming up with more and more solutions to bridge the widening credit gap that African entrepreneurs are facing in the wake of the COVID-19 pandemic.

No wonder then that the World Bank has encouraged Africa to invest in digital technology, through the introduction of new digital platforms, the installation of digital infrastructure, the development of digital skills and the establishment of an enabling regulatory environment. This digital infrastructure is expected to facilitate FinTech developments, particularly on the lending side where investment insights company Tellimer notes that Africa’s lenders will be particularly inclined to offer a wider range of products and services.

With the sobering forecast of 20 million job losses by the African Union as the crisis rages on in the continent, all these measures and more are needed to ensure that Africa’s SMEs survive through the crisis and the impact of the COVID-19 pandemic is successfully alleviated.