Digital banking start-ups are giving the conventional banking system a run for their money, literally outmuscling them in the race for consumer share in Africa. The term financial inclusion is often used within media circles when the topic of discourse is accessible finance in Africa.
The financial services sector is faced with the challenge of broadening penetration and usage of their products and services in Africa. What does financial inclusion mean to the average businessman on the street? This is a puzzle that needs to be solved by investors and developers of solutions for African businesses because it envelopes a lot of crucial hurdles for the continent.
Are we closer to the goal of financial inclusion in Africa?
Small and medium enterprises (SMEs) bolster the economies of many African countries. Products and services developed must be easily accessed by SMEs, for these African countries to prosper.
Access to credit is vital to the prosperity of any economy. Financial inclusion, therefore, means everyone interested has access to credit regardless of where they live, and the kind of business they run. Businesses depend on access to credit to multiply scale and the prosperity of SMEs tells a story of a vigorous economy.
In the UK where SMEs form 99.9% of all businesses in the private sector, only 0.1% of companies in the country employ more than 250 people, and about 96% do not have as much as 10 members of staff. SMEs generate close to half of the Government’s tax income and account for 51% of the turnover. Developed countries have similar numbers for SMEs, but the numbers are different for countries in sub-Saharan Africa.
Why the challenges in Africa are different
Unregistered companies are often included in workforce figures across Africa. In Zambia, for example, 90% of their SMEs are unregistered. Although 73% of the workforce isemployed by SMEs, they contribute only 11% to the nation’sGDP. These figures are quite significant when you consider the fact that Zambia’s population has risen from 8million to 18 million in the last 25 years. Generally, Africa has recorded rapid population growth. In 2017, sub-Saharan Africa’s (SSA)total population was recorded as 1.1 billion, with youths under 24 accounting for two-thirds of this figure.
Africa is in dire need of infrastructure to cater to her large population. With sub-Saharan Africa expected to reach 2.3 billion people by the year 2050, this infrastructure needs to be put in place now, to cater to already high levels of poverty and unemployment which can only be expected to rise. For the immense deficit of employment that Africa is faced with, financial inclusion is of paramount importance, if she is to record anywhere near the contributions by SMEs in developed countries.
There is a pressing need for financial services to reduce the amount of bureaucracy and regulations that have held back a fraction of Africa’s population from getting onboard with current breakthroughs in financial technology. This is why we must cast our sights on investing in African fintech.
Africa’s small businesses need access to reliable, affordable credit
Access to credit is a major determinant of success in business. There cannot be expansion or job creation without it. That only 6% of small businesses in Ghana have access to credit, and we have as much as a $330 billion financial gap, is a source of concern. How do African SMEs grow when only 15% of the 95% of them that have accounts qualify for credit facilities?
Africa’s many digital products and services are the results of the foresight of fintech companies who are willing to tailor their products and services to the needs of SMEs, however, true financial inclusion is a long way ahead. These lenders are constantly embattled by cyclic regulations that only create more hurdles for SMEs, not to mention that credit comes with high interest and short tenure.
Traditional banks reluctant to grant SMEs credit
The business terrain of small businesses is too erratic for conventional financial institutions, so they are reluctant to provide SMEs with credit. They are more willing to release funds to more stable businesses to minimize their risk. The reluctance of traditional banks to embrace digital banking is not unique to Africa alone, and so unpredictability of SMEs’business space in Africa does not account for this alone.
Although digital banks make a good case for financial inclusion in Africa, traditional banks are not embracing it quickly enough to increase competition and ensure improved products and services with better interest rates and more flexible tenures are available for SMEs.
Africa needs a comprehensive strategy to solve the challenge of financial inclusion. Such solutions must involve governments, banks, policymakers, and investors for the effective transformation of existing lending structures. No short fix will do the job of tackling the attendant problems. Such a strategy requires finance from investors to make funds available for any game-changing solutions to be introduced into the fintech space.
Why digital banking is key to financial inclusion in Africa
At the heart of digital banking is the need of the customer. Tailoring financial products to meet the needs of a diverse customer base is the future for financial inclusion in Africa. To ensure a seamless adoption of digital banking, relevant bodies must also improve regulation to weed out fraudulent lenders that seek to exploit unsuspecting customers with dubious offers.
A successful model for retail banking in Africa would have to offer long term loans with low-interest rates to stimulate business growth. Such loans can be used to scale up, expand the organizational structure, and hire more people, with increased tax payments for state governments.
There is an increasing number of mobile banking solutions in several countries in Africa, traceable to combined efforts of the public and private sectors. The implementation of such self-developed solutions is evidence that digital banking will stimulate financial interruption and will spread over time but it’s a marathon, not a sprint.
According to the Global Findex financial inclusion data from the World Bank, 34.2% of adults in sub-Sahara Africa own bank accounts. This is only 50% of the global average of 62%. While an average of 2% uses mobile money accounts around the world, SSA excels with adoption rates of 50% of the same 34.2%. It is this adoption rate that holds the potential to transform Africa’s economy.
We can take a lot of positives from the positive outlook of stakeholders on the opportunities in the African fintech space as well as the adoption rates of the populace. Maximizing Africa’s digital finance potential requires focusing on the continuous improvement of consumer-driven products, realizing that it’s a long-term process.