Will Africa Become The Next Hub For Fintech?

What is Fintech?

“Fintech” is the broad description applied to a range of technologies that make financial transactions and management easier. It covers anything from internet / mobile banking to insurance, mobile money to crowdfunding platforms as well as cryptocurrency. And the field leading the way, growing by leaps and bounds, is mobile money, formally known as Mobile Financial Services (MFS).

Fintech Investment in Africa on a Growth Spurt: Here’s Why

In the last decade, African fintech start-ups are estimated to have grown by 32%, while approximately 70% of them have successfully been funded. In 2018, funding raised by African fintech start-ups exceeded USD 1 billion. The majority of these start-ups were in MFS, which has enabled the tropical continent to make its mark in the sector globally.

It is estimated by GSMA that more than 50% of the 282 MFS companies functioning globally operate from Africa, and 100 million mobile money accounts are active in the continent. The whopping number of users makes it evident that the market penetration of MFS in Africa is several notches higher than what has been achieved in Asia, the second-most populous continent of the world. South Asia, with around 40 million active mobile money accounts, is the next big consumer of MFS.

The figures are a testament to the booming business generated by MFS companies in the continent. Expectedly, fintech start-ups herein are attracting investors from across the globe, who now hails Africa as the next growth hub for FinTech.

Notably, the growth of MFS in the sub-Saharan continent has been phenomenal due to a couple of reasons.

• First and foremost, the global decline in the cost of mobile phone ownership has seen an exponential rise in mobility adoption. By the end of 2020, approximately 52% of the African population owned a mobile phone, and therefore, had access to MFS.
• Internet penetration has seen exponential growth as well. While still significantly below the world average of 62%, Africa in 2020 had 3G or 4G internet connectivity for close to 40% of its population.
• Finally, Africa does not yet have a robust broadband infrastructure or legal infrastructure to protect digital rights and copyrights. This enabled new start-ups to come up with innovative solutions and ramp them up fast.

Trade Changes for the Better: The AfCFTA

With the adoption of the African Continental Free Trade Agreement (AfCFTA), with effect from 1st January 2021, the World Bank expects a plethora of benefits to flow, especially in the fintech sector. It “represents a major opportunity for countries to boost growth, reduce poverty and broaden economic inclusion”.

While mobile network operators have heavily dominated MFS in Africa over the last decade, several fintech companies, with the advent of the AfCFTA, along with traditional banks are now venturing into fintech. In fact, their eye is fixed primarily on the MFS sector.

COVID or No, Fintech is set to Grow!

One of the major fallouts of the pandemic has been a massive shrinkage in the economies worldwide. Africa is no exception. The IMF (International Monetary Fund) estimates that the African economy will shrink by at least 4.4% in 2021, if not more. However, it is expected that the AfCFTA will bring in much-needed foreign direct investment in the continent, and thus alleviate the detrimental effects of COVID on its economy.

According to the World Bank, “achieving the gains from AfCFTA is especially important due to the COVID-19 pandemic, which is expected to cause up to $79 billion in output losses in Africa in 2020 alone.

• COVID-19 has caused major disruptions to trade across the continent, including critical goods such as medical supplies and food. 
• By increasing regional trade, lowering trade costs, and streamlining border procedures, full implementation of AfCFTA would help African countries increase their resiliency in the face of future economic shocks and help usher in the kinds of deep reforms that are necessary to enhance long-term growth.”

As a direct benefit of the AfCFTA, the World Bank expects that:

1. 30 million Africans will be lifted out of extreme poverty, and the incomes of nearly 68 million others who live on less than USD 5.50 a day will get a boost.
2. Africa’s income will improve by USD 450 billion by 2035, signifying a growth of 7 percent.
3. Africa’s exports will increase by USD 560 billion.
4. Wage growth will be spurred for women (10.5 percent) than for men (9.9 percent).
5. Wages for both skilled and unskilled workers will be raised by 9.8 percent and 10.3 percent, respectively.

Greater financial inclusion should in turn help in expanding the consumer base of fintech services. While MFS is set to gain the most, it shall surely not be the only beneficiary.

Is Mobile Money / MFS the only Fintech Opportunity in Africa?

Not at all! Most fintech innovations in fact target the section of the population that does not have access to traditional banks or funding sources. Predictably, innovative solutions have been developed in the fields of:

• Alternative Loan Sources: Peer-to-Peer (P2P) or Peer-to-Business (P2B) models of securing finances, targeting small businesses and proprietors who do not qualify for bank loans or the investment ticket size is too small for venture capitalists.
• Alternative Credit Scoring: Targets people who have a steady source of income but do not qualify for loans from conventional banks. Alternative criteria like social signals and percentile scoring amongst similar borrower groups, together with an intelligent and self-learning algorithm, are being used to make lending decisions.

1. Alternative Insurance Underwriting & Digital Insurance: Here, the premium is calculated based on alternative data points (social signals, lifestyle, medical history) and intelligent, self-learning algorithms.
2. Payment Gateways: With the boom in e-commerce, digital payment methods that facilitate payment through debit or credit cards, digital wallets, and even cryptocurrencies, are the clear global preferences. While traditional banks would charge a small fortune to handle such varied modes of payment, payment gateways have rushed to fill the void and have transformed into neat little apps, which can be easily afforded and integrated into any website.
3. Digital Wallets & Banking: Somewhere between a basic bank account & a payment gateway, digital wallets have revolutionized retail spending habits quite a bit. Digital banking has also managed to capture a significant market with their no-frills bank accounts, which can be opened and operated through the mobile phone without ever needing to step into a bank.

The Fintech Power of Transformation

For a long time since its inception in 2007, M-Pesa has been synonymous with the fintech boom in Africa. Indeed, M-Pesa has been hailed as one of the most successful FinTech companies in Africa, which revolutionized mobile transacting first in Kenya, and then in East and West Africa as well.

As fintech targets mainly the people who do not have access to a traditional bank or funding sources, it empowers small businesses and self-employed persons. That is exactly what M-Pesa did in Kenya.

Whole communities, including some of the world’s poorest communities, who did not have access to basic banking facilities were able to open & operate a bank account, send & receive money, make payments for bills & essentials and start & grow their businesses, thanks to M-Pesa. Currently, M-Pesa processes approximately 1.7 billion transactions annually, which happens to be more than 50% of Kenya’s GDP value! And where the impact is felt by the general population, the national economy will benefit too. As is evident from Central Bank, Kenya’s recent report – their citizens moved approximately 50% of the country’s GDP via their mobile phones in the year 2018!

The trend that was started by M-Pesa has now been followed by many other fintech companies. As previously noted in this article, close to 150 fintech companies born in Africa are now present globally. And the trend is only projected to grow. A study conducted in 2016 shows that fintech has impacted an estimated 200,000 African households by lifting them from extreme poverty. Also, it has motivated and empowered women to start businesses. Considering that the sub-Saharan continent is home to some of the world’s most impoverished communities, the scope for improvement is never-ending.

Fintech Growth Hubs to Watch in Africa

Contrary to some opinions that the fintech industry has stagnated in Africa, the adoption of the AfCFTA and the revamped banking laws and regulations of several African countries have set the stage for further growth in the fintech sector, and especially in MFS.

In keeping with the continent’s overall economic aspirations, several African countries have come up with new laws, regulations, etc., to boost the fintech sector. The countries that are set to become the new fintech hubs are:

1. Kenya – The country where fintech was born for Africa is all set to continue the trend.
2. Egypt – Egypt Vision 2030, which seeks to implement new banking laws for the country, aiding fintech companies, has been unveiled in 2020 despite COVID.
3. Nigeria – The Central Bank of Nigeria is working on a framework for a regulatory sandbox.
4. South Africa – The South Africa Reserve Bank has recently established a new fintech innovation hub.
5. Angola – A new regulatory sandbox framework has recently been adopted by Angola, which is also looking to diversify its economy.
6. Ghana – The Bank of Ghana has announced a brand new fintech and innovation office recently.

Final Words

Whether you are a family business, a high net-worth individual (HNI), an Ultra-HNI, or a business organization, managing your wealth and assets well is an activity that needs meticulous planning and informed attention. Our experts, at Xanara, have decades of experience in wealth management, asset management, and investment management. We don’t just grow your wealth; we nurture your portfolio – so that your wealth and assets bring you the returns you want.

Reach out to us for a consultation on how an investment in fintech can be the path to a fulfilling future!

About Xanara

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