Digitization of African MFIs – The Ground to Cover and Opportunities Therein

Author: Krinal Gupta, VP – Product Sales (Africa) at Profinch Solutions

As with almost every global economy, the African economy has also suffered major knocks from the Covid-19 pandemic, resulting in a worrying drop in the country’s Gross Domestic Product (GDP), as well as its economic outlook. According to the International Monetary Fund (IMF), 2020 is possibly the worst year for Africa’s economic growth in recent decades. Even as the pandemic continues to trouble residents, vaccines and technological advances are offering some respite. Microfinance Institutions (MFIs) in Africa are employing technological and digital innovations to scale up and overcome the havoc wreaked by the novel coronavirus. However, there is tremendous ground yet to be covered, offering massive potential to financial technology startups and institutions to become key catalysts for Africa’s growth and enable financial inclusion in the country.

Financial landscape in Africa

The African continent boasts of two financial identities – the Sub-Saharan Africa, a group of economies connected to the global economy, and the North African economy, part of the Middle-East and North Africa (MENA) region, which is linked to the Middle East primarily due to cultural, linguistic, and religious similarities. South Africa is the dominant economy in the Sub-Saharan region, featuring the Johannesburg Stock Exchange which is the major equity exchange in the African region. According to Statista,[i] the total assets under the management of financial institutions in South Africa stand at USD 1.41 trillion. Banks in South Africa have total assets worth USD 420.5 billion and the market capitalization of listed domestic companies in South Africa stands at USD 865.33 billion.

The African continent suffers from several financial woes including negligible financial inclusion, limited access to financial services, poor local infrastructure, and weak regional financial integration. Considering the fact that much of the African population finds it difficult to access services at a physical bank branch, digitization and mobile banking is gaining ground. Startups and technology innovators are creating platforms for the under-banked and preparing to put Africa on the global map when it comes to financial inclusion.

Importance of financial inclusion

In a continent as widespread as Africa, offering investors ample opportunities in terms of its emerging market status, it is important to also ensure that the country’s population is linked to the global initiative on financial inclusion. With scores of local markets and businesses fuelling the economy, and the rise in microfinance institutions, financial inclusion and digitization becomes imperative for Africa. This urgent need for financial inclusion paves the way for creating a new-age financial ecosystem which is future-ready, sustainable, and resilient. Financial inclusion is also necessary to ensure the revival of Africa’s banking structure. According to a recent McKinsey report,[ii] the pandemic is expected to lead to a 23-33% drop in African banking revenues between 2019 and 2021. Additionally, the banks’ return on equity is seen dropping between 5-15 percentage points in the same duration. McKinsey further noted that banking revenues might only return to pre-COVID levels by 2022–24, depending on the recovery scenario, emphasizing the need for decisive measures to bring in new customers to sustain the ecosystem while ensuring financial inclusion.

Technology as a key lever for financial inclusion

With the possibility of non-performing assets mounting in the aftermath of the pandemic and impacting all stakeholders in Africa’s financial ecosystem, the Central Bank of Kenya authorities are proactively pushing for digitization as a viable option to bolster the economy. Leveraging new and innovative technology can enable individuals and businesses with seamless financial transactions including money transfers, loans, and savings services. Technology can also prove to be the deciding factor and catalyst for financial inclusion. Indeed, financial technology or fintech is a must for both microfinance and banking institutions. Digitization can enable financial institutions to pre-screen viable customers and offer optimal services by way of a branchless infrastructure. Mobile and online banking services can help customers access their accounts easily and complete transactions without visiting the physical branch, enabling them to stay at home and yet stay connected with their banks.

Additionally, microfinance institutions can limit their credit exposure by incorporating technological solutions to vet the applicants and potential loan requests. Digital banking will also enable individuals to create and track a personal credit score which will help them with future loan requests and applications. In fact, forward looking banks should ideally accelerate their digital adoption to better serve customers by seamlessly integrating digital processes and data analytics. Such a process will help financial institutions in updating the lending processes, customer on-boarding, and risk-profiling structures. At the same time, the proliferation of digital solutions has also raised concerns about how they may abet anti-money laundering activities in the region. Indeed, it is a valid concern. However, such concerns can be effectively addressed with the right tools and checks.

Even as the African microfinance ecosystem rises to meet the changes necessitated by the pandemic, it is imperative that both MFIs and customers recognize the huge amount of ground that still needs to be covered before the entire ecosystem is satisfactorily digitized. This means effectively leveraging the entire ecosystem and encouraging it to embrace digital solutions. For example, incentivizing small mom and pop store to use new-age payment solutions. Inarguably, this is a significant opportunity for technology providers to tap the under-banked market and play an important role in the digitization of the African MFI landscape.