Fintech innovation, including DeFi, and tokenisation, offers promising solutions to address the funding crisis faced by scaling businesses in Africa. By improving accessibility, reducing costs, and enhancing efficiency, these alternative financial services are playing a pivotal role in bridging the financial inclusion gap and fostering greater economic growth across the continent. Mouloukou Sanoh, Co-Founder and CEO of Mansa, explains the immense opportunities Fintech advancements are bringing to Africa’s entrepreneurs.
Major scaling businesses in Africa form a cornerstone of the continent’s economy, driving significant job creation and growth. Despite this, many businesses find themselves struggling to secure the financing necessary for growth, facing continual shortfalls in liquidity even in major economies like Nigeria, Kenya, and South Africa.
Traditional financial systems have failed to meet their needs, leaving a gaping annual credit gap. But Africa’s economic landscape is on the brink of transformation with fintech innovations, including decentralised finance (DeFi), and tokenisation, emerging as powerful catalysts for change.
Key Business Financing Barriers in Africa
Several interconnected factors contribute to Africa’s business funding gap. Firstly, currency fluctuations and USD constraints make it continuously difficult for many businesses to access necessary treasury capital to grow their business.
Secondly, traditional financial institutions often lack sophisticated methods to accurately evaluate the risk profiles of companies, which can result in overly cautious lending practices. Complex licensing procedures, unfavourable tax policies, and a lack of incentives for financial institutions also create barriers to business financing.
Another major hurdle is the strict lending criteria that traditional financial institutions impose which many companies struggle to meet, including collateral demands and extensive credit histories. When loans are available, they often come with prohibitively high interest rates, making them unsustainable for many businesses.
Kenya, for example, is home to numerous major companies that have revolutionised the country’s economy – yet fast-growing companies looking for a loan face interest rates as high as 15.88% from commercial banks. Meanwhile, in Nigeria, interest rates for loans from commercial banks can be as high as 29.13%​, making it difficult for businesses to manage loan repayments. Similarly, in South Africa, high interest rates and stringent lending criteria pose barriers to accessing finance.
New Fintech Solutions
Addressing these challenges requires a multifaceted approach, and fintech solutions are rapidly emerging as a viable alternative to traditional banking models. Digital financial services, including decentralised finance, mobile payments, online lending platforms, and remittance services, are expanding access to financial services for previously underserved populations and businesses.
Fintech offerings often require minimal documentation and offer flexible repayment options, benefiting businesses that may not meet traditional lending criteria. Operating with lower overhead costs allows fintech companies to provide more competitive interest rates and fees. By leveraging automation and data analytics, fintech solutions streamline processes and reduce loan approval and disbursement times.
A strong example is Jumo, from South Africa, which uses AI to build credit scores and extend loans to borrowers – and has distributed $3.5 billion to over 18 million customers. Another is Nigerian FinTech Lidya, which provides a flexible credit infrastructure so lenders can acquire customers, originate loans and collect repayments. Lidya has issued 32,500 loans and powered almost $150 million in loan disbursements.
The Power of DeFi
For African companies scaling internationally and requiring short-term liquidity for trade financial and cross border payments, some of the best lending options have come from the world of Decentralised Finance (DeFi), a financial ecosystem built on blockchain technology. DeFi democratises access to financial services by removing intermediaries and enabling peer-to-peer transactions. Smart contracts, self-executing agreements with the terms of the agreement directly written into code, automate processes and reduce the need for trust in third parties.
DeFi platforms offer a wide range of financial products, including lending, borrowing, and trading, often with lower fees and greater transparency than traditional financial institutions. This decentralised approach empowers businesses in regions with limited access to conventional banking services.
It is also good news for cross-border payments and trade finance for scaling companies in Africa because traditional cross-border transactions incur high fees due to intermediary banks and currency conversion costs. By lowering transaction fees, African businesses operating on tight margins can massively enhance their profitability and sustainability.
Tokenisation: Unlocking New Avenues for Capital
Tokenisation, the process of representing real-world assets as digital tokens on a blockchain, is also opening up new avenues for fundraising and investment. It allows businesses to issue equity or debt tokens, raising funds from a global investor pool and bypassing traditional gatekeepers. By enabling fractional ownership of high-value assets, tokenisation democratises investment opportunities, broadening the investor base for African businesses.
The technology also enhances liquidity, as tokenised assets can be traded more easily on secondary markets, making investments in African businesses more attractive. Blockchain’s immutable record-keeping increases transparency and trust, addressing perceived risks in emerging markets.
Tokenisation streamlines asset management, reducing costs and administrative burdens for businesses. It also facilitates cross-border transactions, opening international opportunities for African businesses. As regulatory frameworks evolve to accommodate this technology, tokenisation, combined with other fintech innovations and DeFi platforms, has the potential to reduce Africa’s funding gap significantly.
Change is brewing for Africa’s most ambitious companies, with fintech and DeFi set to remake Africa’s financial landscape and break down traditional barriers to access. As these cutting-edge technologies become more widely embraced, they promise to address the persistent funding shortfall that has long held back African businesses. By providing firms with the financial tools and resources they need, this shift could usher in a more inclusive and resilient economic environment in the long run.