Can Fintech help close the Financing gap for Small and Medium Size Enterprises in Africa?

Abstract

The total financing gap for Africa’s 50 million SMEs, which form the backbone Africa’s economies, is estimated to be USD 330 billion.  Lending to them has not been expanding as expensive customer registration and KYC processes as well as antiquated, often manual, risk-scoring methodologies make lending to SMEs unprofitable. The fixed costs are too high in relation to the small amounts SMEs tend to borrow.  In the last few years, fintech, i.e. financial technology in the form of digitalization, mobile phone apps and background-algorithms, has led to dramatic innovation in dealing with processes and credit-scoring approaches, leading to potential disruption in banking and financial services, including in Africa. By analyzing four banks, two ‘bolt-on’ credit-assessment providers and seven fintech lenders, this paper focuses on the question how fintech has the potential to change processes and risk-assessment to reduce costs and make lending to SMEs more profitable.  The financing gap can be closed, but more likely by banks embracing fintech in their own processes than by stand-alone fintech lenders which are frequently too expensive to be sustainable partners for SMEs.

Keywords: fintech, Africa, SME, development, economics, finance, loans