Small and medium-sized enterprises (SMEs) present a significant opportunity for Africa to build on the positive fintech momentum to grow GDP – but we need to stop thinking about formalising them and instead provide further fintech solutions that bridge information gaps and meet their credit needs.
SME’s Engine of Africa’s Economy
SMEs, including micro traders and micro-SMEs, are the engine of Africa’s economy. They make up 90% of the total number of registered businesses and employ 80% of working Africans. With Africa contributing 3% to global GDP against a 17% contribution to global population, it’s clear that there remains a great opportunity for African economies to grow their GDP contributions.
But we are not going to get better at solving these structural challenges by ‘formalising’ the SME segment in the traditional way. We need to rather reshape our solutions to address relevant problems and take advantage of the opportunities they present.
Focus on Elevating Micro Traders
The untapped potential lies in elevating micro traders, micro-SMEs, and SMEs at large by facilitating access to markets, giving them more opportunities to produce, sell, and access capital.
This is truly the glaring opportunity for Fintech in Africa. And particularly because there has already been so much fintech success in sub-Saharan Africa.
They have revolutionised the retail financial services segment by leveraging an existing mobile ecosystem to develop new technologies, particularly in East Africa (Kenya and Tanzania) and West Africa (Ghana, Ivory Coast, and Nigeria).
Rapid Rise of Mobile Money Account Holders
For the first time this year, the number of active mobile money account holders in Africa breached 50% of the total population to go above 750 million, with half of the new accounts opened in the last 5 years of the technology’s 17-year existence.
Many of these account holders are women traders in the fast-moving consumer goods (FMCG) and agricultural sectors who have converted from cash payment systems to the more efficient and safer model of mobile money.
This rise in mobile money adoption has resulted in an emergence of new entrepreneurs such as mobile agents where a region like Nigeria saw a 41% increase in the number of agents this year.
Fintechs now make up approximately 85% of retail cross-border payments in sub-Saharan Africa, with traditional banks only facilitating 15% of these flows. This has laid the groundwork for further opportunity for SMEs.
The key structural challenges facing SMEs in Africa are mainly registration red tape including Know Your Customer (KYC) verification processes, readily available data required by potential corporate and institutional customers and capital providers looking to partner with players in the segment. Access to credible financial information is also a problem.
Leverage Existing Relationships
To address these challenges, ecosystems such as cooperatives in agri- and agro-processing and FMCG wholesale distributors to the micro-SME segment can be accessed by leveraging these existing relationships and behaviours for vetting and KYC purposes.
This approach is superior to the traditional, paperwork heavy, slow and bureaucratic means like financial statements – and will greatly enhance credit decision-making. By digitising the flows in these ecosystems we can address information asymmetry, lack of audit trail and credible financial information to develop embedded finance solutions.
Using existing ecosystems will de-risk micro-traders, micro-SMEs, and SMEs in these ecosystems because there is set structure, existing relationships, trust, and preliminary information and data to assess which will likely be offline but can be transferred to an online environment.
We also see traditional banks opening up their capabilities for vetting and KYC to third parties with the risk appetite to do business in these under-serviced ecosystems.
By Onke Mkiva, co-head of the Technology, Media, and Telecommunications sector at RMB