The need for bridging financial gaps in Africa as a tool of attracting investments

The need for bridging financial gaps in Africa as a tool of attracting investments

Africa has long been considered a global leader in fintech innovation and adoption. The continent’s low penetration rates for traditional banking services coupled with high penetration of mobile phones makes it a rich breeding ground for fintech innovation, and in many respects the continent has been miles ahead of other developing – and most developed – markets. This need for bridging gaps has evolved to a powerful tool for innovation.

Africa is a land of contradictions. In many countries electricity is a “luxury good” and at the same time mobile phone is a commodity.

Ten most populated countries in Sub-Saharan Africa
Countries Electricity Penetration Internet Penetration Mobile Phone Penetration
Nigeria 61% 50.20% 83.20%
Ethiopia 45% 15.30% 42.40%
Congo, Democ. Rep. 15% 6.10% 49.50%
South Africa 86% 53.70% 159.20%
Tanzania 33% 38.90% 73.60%
Kenya 65% 85.00% 79.80%
Uganda 19% 42.90% 50.40%
Mozambique 29% 17.30% 71.90%
Ghana 84% 34.30% 126.90%
Côte d’Ivoire 62% 26.30% 109.90%
Sources: www.internetworldstats.com; databank.worldbank.org; International Energy Agency

Also, countries like Chad, South Sudan or Sierra Leone have single digit numbers in electricity penetration (for example Sierra Leone is 9% and mobile penetration reaches 78.2%).

A similar phenomenon occurred in financial services. Due to poor infrastructure, vast isolated areas and bureaucracy banks couldn’t reach potential customers and the majority of population remained unbanked.

Mobile, due to its wide acceptance steadily became the tool of financial inclusion and local fintech business started to rise. While in more developed economies, fintech startups focus on disrupting the already existing banking industry, in Africa, they are typically building technical infrastructure and systems from scratch.

They built (and they continue to do it) services of fundamental importance. From powering payments, facilitating savings, ensuring financial inclusion for the unbanked to tackling access to credit for small businesses and individuals among others.

That’s why the sector holds long-term appeal for investors. During the late few years funding has increased multiple times. In 2017, $560 million was invested into African startups by VCs focused on African markets. It was a 53% increase compared to 2016, 2x the funding amount of 2015 and 14x the amount of funds raised in 2012. In 2018, only 7 funding rounds raised more than $223 million.

If mobile money was the first phase in the development of digital finance in Africa, the next phase of digital financial services on the continent focuses on lending, insurance and wealth management, as fintech companies continuously search the ground for new opportunities.  A variety of niche spaces which are also attracting investors. Some analysts move a step forward saying that Africa’s fintech landscape offers a perspective of how fintech is going to drive the economy in years to come, estimating that fintech’s contribution to Africa’s economy will raise multiple times in the next few years, reaching $150 billion until 2022.

 

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