31 Mar Why digital banking is the answer to reaching the goal of financial inclusion in Africa

Digital banking in Africa is becoming much more widespread, with start-ups challenging traditional financial institutions for consumer share. And financial inclusion is a term used a lot in the media when it comes to discussing accessible finance in Africa.

When it comes to making funding, banking and financial services available to the majority of people in Africa, what are the challenges ahead? And what do people mean by financial inclusion? To some, it could sound like a meaningless buzzword, and that’s something we must all tackle as investors and developers of solutions for African businesses. But it covers a number of important challenges specific to Africa as a whole.

Financial inclusion in Africa – how far are we from this goal?

Most African economies are propped up by small and medium sized enterprises (SMEs). For this sector, and by extension the individual country’s economy, to continue to thrive, it’s essential that financial backing and services are accessible and affordable.

Accessing finance should be a fundamental right for everyone, regardless of where they are living and working. It is the key to independence for individuals, for successful communities and for thriving economies. And all over the world, we turn to businesses as the main drivers of economic and social growth.

Let’s look at the UK for example, where SMEs form 99.9% of all businesses in the private sector. Just 0.1% of companies in the country employ more than 250 people, and around 96% have fewer than ten staff members. SMEs are responsible for 51% of the turnover and generate almost half of the Government’s income through tax. These percentages do differ across developed countries, but the real change comes when we get to sub-Saharan Africa (SSA).

Why Africa poses different challenges to the rest of the world

Often across Africa, unregistered companies are included in workforce figures. For example, in Zambia, we know that 73% of the workforce are employed by small businesses. However, they only account for 11% of the country’s GDP. Approximately 90% of Zambia’s SMEs are unregistered (or ‘informal’). When this is considered against the extremely rapid growth of Africa’s general population, these figures matter.

Again, taking Zambia as an example. Over the course of the past 25 years, its population has shot up from 8 million to 18 million. In 2017, the total population for SSA was 1.1 billion, with around two-thirds under the age of 24.

By 2050, the population of SSA is expected to reach 2.3 billion people. On a continent with high levels of poverty and of unemployment, it is essential that infrastructure is put in place now. Across Africa, we need to facilitate huge amounts of job creation, and as the lack of financial inclusion is a major barrier to the success of small businesses, this is the challenge we must surmount.

Which is why I’m focused on investing in African fintech. There is an urgent need for mass financial on-boarding without a standard regulatory framework or widespread financial literacy.

Small businesses in Africa need to access reliable, affordable credit

For example, in Ghana just 6% of small businesses can access credit. This is a huge barrier to any kind of business success and a major reason jobs are not being created in the numbers that they need to be. Across SSA as a whole, we are facing a financing gap of around $330 billion.

And although 95% of African SMEs have some kind of bank account, just 15% are eligible for credit. Without adequate funding, these businesses can’t grow. In addition, many of the existing credit lines that do exist are online digital lenders or micro-financial institutions. These are only possible due to investment in fintech disruptors and forward0-thinking tech companies that are willing to provide consumers in Africa with what they need.

However, these loans are often high interest and short-term. Lenders are also hit with contradictory regulatory changes. All of which means that true financial inclusion is still a way off for Africa’s businesses.

Traditional banks stall on extending lines of credit to SMEs

Traditional banks in Africa are generally hesitant to provide credit to small businesses in Africa. They deem this kind of lending too unpredictable and are more comfortable prioritising bigger loans to well-established businesses. But this isn’t the whole story for traditional financial institutions in Africa, and it’s not the only reason they’re not moving faster towards digital banking and financial inclusion.

It’s difficult for traditional banks to adapt to the disruption caused by challenger banks, not just in Africa, but all around the world. Big banks have been slow to react to the rise of fintech and are only now attempting to launch viable alternatives to slick digital banks. And this development is not happening fast enough for African businesses.

I think that Africa needs a cohesive effort from investors, governments, policy makers and banks to fundamentally alter the overall lending structure in the continent. It’s a systemic problem faced by every African country, and short-term fixes for individual problems are no longer enough. As investors, we can support this strategy by financing innovative solutions to improve financial inclusion and online banking in Africa.

Why digital banking holds the key to financial inclusion in Africa

Digital banking is driven primarily by customer needs. And it is the best change for Africa to change the way individuals, entrepreneurs and business owners access crucial services and funding. Part of this comes with improving the regulatory infrastructure, as it’s difficult for governments to catch up with unscrupulous online lenders who are taking advantage of the move of people online.

Africa needs a retail banking model that can give businesses long-term and low-interest capital to ensure growth. This is the key for small business owners to invest in their companies, formalise operations, pay higher taxes and employ more people. The continent has already shown that it can develop and implement payment solutions like this. There is no doubt that digital and mobile banking will be the catalyst for change, but this disruption takes time. There are now various online financial tools available in many African countries, thanks to group efforts between private and public sectors, but we have a long way to go.

The World Bank’s Global Findex financial inclusion data shows 34.2% of adults in  SSA have opened a bank account. Compared with the rest of the world, this is half the global average (62%). However, out of this 34.2%, almost half use mobile money accounts, while the rest of the world comes in at 2%. This is where Africa shines – in the widespread adoption of technology that can revolutionise its economy.

It’s encouraging to see the adoption of the kinds of technology that can create workable mobile payment solutions. And the movement by businesses, financial companies, innovators and investors to take the opportunity to harness digital finance in Africa is also positive. But it’s a long-term process, and we all have to be in it for the long-haul, while remaining cognisant of what consumers need.