Regional Focus: Credit inclusion in Africa

Africa is one of the most diverse continents in the world. Home to more than a billion people and making up the largest free trade area on the planet. The continent is rich in natural and human resources and has the potential to build on these to drive inclusive growth.

The diversity of the continent is reflected in the rates of financial inclusion and digital connectivity. With over 50 countries, the region is home to low, middle and high income countries.

In recent years, the economic and social impact of COVID-19 on Sub-Saharan Africa has been significant. However, most regions are expected to return to growth of just below 4% through 2022 and 2023. The economic crisis sparked by COVID-19 has prompted some countries to initiate and fast-track structural and macroeconomic reforms to drive inclusive growth.

Financial inclusion

Today, financial inclusion remains a challenge in Africa. According to the World Bank’s Global Findex, only 34.2 percent of adults in Sub-Saharan Africa have a bank account. While progress has been made in recent years, there is still work to do.

The informal economy is central to many African countries. For those employed in the informal sector, a lack of traditional financial history can significantly limit their access to opportunities. For many, while they can make ends meet, they are locked out of services which could help them advance.

This extends to an inability to access credit, which not only limits the opportunities of individuals, but also has wider consequences for the economy as a whole. Traditional credit scores are inaccessible to millions, excluding them from credit which fuels personal and small business growth.

SME Growth

Africa is an entrepreneurial continent. Micro, small, and medium enterprises (MSMEs) are the lifeblood of economic growth; however, they need investment to thrive, and often face the same tough due diligence requirements as larger enterprises.

Lenders often rely on limited data to make credit decisions, giving them little insight into who they are really lending to. A reliance on cash is also a challenge as this results in no banking history, and no credit file, limiting access to any form of borrowing.

SMEs account for more than 95% of registered firms worldwide and more than 50% of jobs. Yet there is a substantial funding gap. The World Bank has described this as the ‘Missing Middle’ i.e: “the gap in capital which is larger than microfinance, yet smaller than traditional institutional financing”.

Digital innovation & acceleration

The mobile phone is the most ubiquitous technology on the planet. 6 billion people in the world now have access to a mobile of some description, these devices have become part of our everyday lives. Mobile devices, and particularly smartphones, are more than just a means for contact or entertainment, they connect people to services which enable growth and opportunity. Mobile connectivity in Africa has directly boosted financial inclusion through the widespread adoption of mobile wallets and mobile money accounts. According to the IFC, there are more digital financial services deployed in Africa than anywhere on earth.

Mobile money has proved to be a revolutionary tool. According to the WE Forum, in 2020, Africans exchanged $490 billion using mobile money providers alone. Sub-Saharan Africa heavily relies on mobile money, with 548 million registered accounts across 157 providers.

Mobile users in Kenya have embraced this technology at record levels. The use of mobile money has seen people begin to build financial records. It has seen them begin to create a history. It has allowed them a degree of financial inclusion.

The potential in alternative data

While the impact of smartphones and mobile money is undeniable, what has happened so far is a shift from those who are unbanked to those who are underbanked. Being underbanked means having access to the basics in terms of somewhere to keep funds, somewhere to receive money, and somewhere to send money from. What is still an issue is access to loans, credit, and insurance. While the mobile revolution has been welcomed, it is only one step in a journey towards financial inclusion.

The next steps need to see people being given greater access to the opportunity of credit. For thin-file customers, who have no credit history, assessing their credit worthiness is now possible by using alternative data. Through analysis of privacy-consented device data or psychometric assessments, lenders can gain insight into character traits which have been shown to predict a person’s willingness to repay a loan.  

The benefits of credit inclusion in Africa

Utilising alternative data will lead to greater access to credit across the continent. The benefits of this will be realised by individuals, MSMEs, and even lenders themselves. For the individual, the ability to tap into credit when required, will open possibilities like starting a business, continuing education, increasing financial literacy and becoming more financially resilient.

For MSMEs, access to credit allows for further growth and innovation. The African population have shown they are keen to embrace technology. Access to funding will allow companies to harness this and develop it further. Whereas lack of funds may have stifled MSME growth in the past, the use of alternative data, to access credit, will be a game-changer.

Alternative data credit assessment enables lenders to reach vast new markets. Africa has a mammoth population. It is predicted that Nigeria is set to become the third biggest country in the world when its population exceeds 1 billion. This is a staggeringly large marketplace for lenders to tap into.

There has certainly been progress across Africa in terms of reducing the number of unbanked. As the continent continues to develop, it will be vital to see service that extend opportunities to the underbanked. Africa has a track record of embracing new ideas and can demonstrate to the rest of the globe what is possible with the right approach.

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