African financial services regulators are releasing regulations on financial technology well known as fintech, which stipulates rules in the provision of lending services based on information technology.For the past five years, technology and financial services in Africa have been intertwined and the arrival of the word fintech into the popular lexicon seems puzzling to many in the industry. This fintech based lending will not only play an important role in supporting the financial inclusion program that African governments have recently been promoting, but will also become an important alternative for unbankable individuals and micro, small and medium enterprises to access funds to start and develop their businesses. According to data in your blogger’s possession, only 15 percent of Africans have access to banking services and merely 5 percent borrow from formal financial institutions. While there are almost 100 million small and medium enterprises spread across the continent, which provide over 120 million jobs in Africa. Most of them cannot get the financing they need to expand. Conventional micro credit and the government subsidized micro lending scheme micro credit program have not been able to boost up young entrepreneurs and small and medium enterprises on a massive scale. Despite African countries guarantee, banks are still reluctant about lending to these potential borrowers, mainly due to administrative issues.Africa’s inexperienced aspiring entrepreneurs and micro-scale enterprises often have neither sufficient collateral to secure a bank loan nor the financial track records for lenders to evaluate. Location constraints also remain a challenge that has hindered people in rural areas to get access to traditional bank services.
Government and Non Governmental organisation’s loans are provided by only a small number of banks, which rely on their limited branches, thus financial access remains pretty low in remote areas. Fintech lending could definitely address these issues. Through leveraging technology, fintech makes capital available to the underbanked and unleashes potential economic activity, creates job opportunities and generates growth in a more inclusive manner.African fintech lenders that I have managed to interact with recently say that strong customer demand and different funding sources will stop the lower loan sales affecting their mainstream banking counterparts. Fintech based lending can potentially fill the Africa’s existing financing gap. In addition, peer-to-peer lending and crowdfunding fintech particularly can tap into the small and medium enterprises, of which only 8 percent are currently bankable. Giving them access to initial or additional funding will definitely enable them to launch or to expand their business. African countries like Uganda, Kenya and Nigeria have also previously promoted branchless banking system which enables banks and financial service firms to reach out to new customers without having to open physical branches.While agency banking has increased access to saving in rural areas, its services unfortunately have not included lending. The agents still require a borrower to apply through the bank’s local branch.In my view though is that agents should be able to administer lending.With its less bureaucratic style, fintech also offers innovative methods to evaluate its prospective creditors.
M-Shwari, a product of Commercial Bank of Africa, for instance, comes up with an alternative for creditworthiness evaluation for traditionally unbankable population in various East African countries.M-Shwari which started in Kenya and has spread to Tanzania and recently Uganda has been leveraging the success of mobile money to offer paperless and branchless banking services, ranging from saving to accessing micro credit. Its smartphone app evaluates daily mobile activities of potential borrowers, from simply making frequent calls to parents to paying bills on time, to determine their reliability.Once a potential borrower is approved, the money will be delivered digitally in minutes. Smartphones are inevitably enabling capabilities in the African lending industry. With Africa’s rapid mobile penetration and growing online commerce, fintech lending increases financial accessibility to the unreachable and accelerates financial inclusion.Africa’s smartphone owners are flourishing and are able to access the mobile internet. These are the perfect infrastructures for fintech lending to explore and expand throughout the archipelago.Peer to peer lending can also open up economic opportunities for women. Social norms, like the burden of domestic chores and property ownership, are most of the time unfavorable to women, leaving them with limited access to capital.Smartphones have significantly enabled women and minorities in African countries to obtain a broader range of financial access. Fintech lending lets African women make their own economic decisions. On the other hand, fintech lending provides investors with access to an alternative investment portfolio and within a safe and regulated setting. Diversifying one’s investment portfolio, even if only within one platform, by lending small amounts to as many different borrowers as possible, will diversify an investor’s risk.
I can confidently say that peer to peer lending platforms established in Africa are operating successfully. These companies are largely driven by innovation and unparalleled determination to disrupt the moribund banking industry.Although banks have same access to talent and knowledge, like all other new Fintech companies, they however don’t invest in innovation. Banks don’t want to leave traditional banking practice where, they control all the market and charge whatever they want. However, with the Fintech revolution, banks are already challenged to change the way they operates. Peer to Peer Leading platforms provide better rates, fast approval and better payment options using the latest technology.Through fintech, small and medium enterprises will be more administratively neat and transparent, thus enabling the regulators to better oversee their commercial activities and eventually generate more tax revenue. Conventional banks collaborating with fintech firms could also increase the number of loans being delivered in Africa.To take into account, small and medium enterprises now contribute to around 70 percent of Africa’s gross domestic product. This suggests that these micro, small and medium sized companies are in fact the backbone of the African economy, and in the event that they grow rapidly, then the economy of the whole continent of 1 billion people will accordingly develop more rapidly.Indeed, digitalized lending is not a simple quick fix to the issue of financial inclusion. Fintech needs to further improve customer experience while maintaining its prudential responsibility. African countries also needs to adapt their policies and administration to provide a more accommodating environment following fintech dynamics. Simplification and responsiveness should be key to help fintech grow. In doing so, it would facilitate small and medium enterprises expansion and eventually create a more inclusive economic development. Fintech providers are here to stay and if African banks wants to compete head to head with these new companies, then in my view they will need to make changes and adopt new technologies to their banking process. Fintech providers in Nigeria and South Africa started with targeting small businesses and now they are in to consumer space.Thank oracles for finch, its time for dinosaurs of African financial industry to shape up or ship out!