Enterprise Finance in Africa: Learning from New Trends Opportunities and Challenges in Europe and the United States

Meeting the FSD Network…

On 22 June 2017, I had the immense pleasure of meeting in Nairobi with the UK Aid-funded FSD Network CEOs from across sub-Saharan Africa and presenting some of latest enterprise finance trends emerging globally – in terms of new products, credit analytics and data methodologies. A key enabler of these global developments is the digitalisation of social and economic engagement, which makes this a particularly relevant topic to be discussing in Kenya where the M-Pesa mobile payments platform has become an indispensable service for almost all Kenyans.  M-Pesa has demonstrated the disruptive potential offered by digital finance, and I was there to discuss how ‘digital’ could be further exploited to increase access to finance for small enterprises in East Africa.

Who we are…

The Cambridge Centre for Alternative Finance at the University of Cambridge is a global leader in analysing developments in alternative finance, i.e. finance channels emerging from outside of the traditional banking and capital markets system, so my presentation definitely had a ‘non-bank’ bias.  I started by discussing the development patterns we’ve seen across the 170+ countries where we’ve been collecting data since 2013 about online loan and equity-based online finance platforms.  We started collecting data about alternative finance online platforms in Africa in 2016, and recently collaborated with FSD Africa to publish a review some of the crowdfunding regulatory trends and developments in East Africa and elsewhere.

The regulatory challenge and opportunity…

In general, the national regulatory environment for online alternative lending activities is a significant factor influencing the rate of market development, controlling for other factors like GDP, which should come as no big surprise to anyone familiar with financial services. African countries are no exception, with online alternative finance largely composed of non-investment models such as donation and reward crowdfunding and online microfinance platforms such as Kiva, which do not provide returns to funders. In the UK market by comparison, peer-to-peer business lending and equity-based crowdfunding have come to account for a meaningful share of total loans and early stage equity investment to small UK businesses: in 2015, crowdfunding accounted for 15.6% of total early stage (seed) and stage equity finance and 13% of new bank loans of less than £1 million to small businesses.

New forms of credit-relevent data…

A key factor influencing the development of alternative lending, especially enterprise lending, is the availability of data relevent to assessing the creditworthiness of borrowers.  This is an area where banks have historically held a dominant advantage in lending because of the transaction data they have about their customers.  However, it is new forms of credit-relevent data being produced by the digital economy outside of the banks that is increasingly being used to assess creditworthintess, thereby reducing the incumbent advantage held by banks.  An example is Kabbage, a US online lender to small businesses engaged in e-retailing, which uses the borrower’s online shipping account information, customer traffic and reviews as well as comparative prices and inventory to assess creditworthiness and monitor loan performance.

The African opportunity…

Given these developments, what can be done from a practical perspective in Africa to help facilitate the development of alternative finance channels serving small businesses?  We focused our discussion on exploring two opportunities. First, engaging with national regulators and helping them better understand the developments underway in digital alternative finance. Regulators have a tendency to either prohibit or over-regulate a new activity if they do not understand it.  This is a capacity building challenge, and could involve designing programmes to faciliate hands-on engagement with providres of ‘fintech’ technology and financial services.

Second, support the development of alternative data sources and analytics, and do this in a very broad context: useful data may be available from sources outside of financial services may not have much predictive power until combined with other data types, and the sources and types of data are constantly evolving as the digital economy unfolds. Non-financial firms in the e-commerce supply chain, for example, may have an information advantage in lending to enterprises as mobile operators had in lending to consumers. Supporting the creation of a distributed cooperative credit bureau model for small enterprises built on distributed ledger technology (e.g. blockchain) could be a path to explore in markets where there is currently no platform to make credit-relevant data available to non-bank lenders.  This raises other questions around privacy, data security, and a host or related regulatory issues, which highlights the importance of capacity building with regulators.

It was a great session with FSD, and I think we all came away intrigued about the potential for African economies to leap-frog (again) in the small enterprise credit space – can markets with no organised enterprise credit bureau today jump to ‘credit bureau 2.0’ as their economies digitalise?

This blog was authored by Robert Wardrop, Co-Founder and Director of the Cambridge Centre for Alternative Finance.

Comments

Time limit is exhausted. Please reload the CAPTCHA.