Africa’s financial landscape is undergoing a dramatic shift thanks to financial technology. A new norm is now in the making due to technology. Fintech is reshaping the way Africans are interacting with financial services. It’s now more accessible and inclusive. Recent remarks by the vice president of the European Investment Bank (EIB) seem to be at full play in Africa. His sentiments on leveraging technology to improve access to finance for millions seem to be at work in Africa.
The fintech transformation is crucial for Africa’s development. It’s no secret that traditional banking systems are struggling to keep up with the continent’s growing financial needs. Fintech is here to solve these issues despite significant obstacles that it still ought to navigate. Let’s consider the opportunities and challenges facing Africa’s fintech and its broader implications on Africa’s economic development.
The rise of Fintech in Africa
Over the past few years, Africa’s fintech ecosystem seems to be gaining traction. Reports suggest an increase in the number of companies that offer innovative financial products and services from 450 in 2020 to now 1,263 as of early 2024. The robust adoption of mobile technology fuels the growth of fintech. There is also a growing entrepreneurial spirit of Africans due to unmet needs of the continent’s populations.
Conventional banks are trying but still striving to reach the target of addressing the need to reach those underserved. The reasons are obvious. For instance, high operational costs and infrastructural limitations add to it. Well, fortunately, Fintech comes in as using the conventional banking limitations as opportunities. They leverage digital platforms to offer convenient, cost-effective solutions such as mobile payments, digital lending, and online banking.
Fintech provides a solution to underserved and unbanked Africans who can now access finances. Fintech comes in as the face of financial inclusion; therefore, they can now save, borrow, and invest.
Driving Financial Inclusion
Over 60% of Africa’s adult population still remains unbanked, due to geographical and economic barriers. The introduction of M-Pesa in Kenya and Orange Money in West Africa serves to bridge the gap of financial inclusion. Through mobile phones, individuals can now transact money everywhere. Fortunately, most adult Africans own a phone, which adds to the success of this fintech in Africa.
M-Pesa, for instance, has proven to be transformative in rural areas where there are no banks. Small and medium-sized businesses are also growing due to access to finances and credit. Note that banks have many bureaucracies that deny unbanked societies a chance to acquire credit.
How Fintech Addresses Private Sector Credit Challenges
Private sector credit is declining in Africa despite the amazing strides that fintech is making in improving access to finance. The percentage drop in private sector credit from 56% to 36% from 2007 to 2022. This evidently is impacting investment in productive assets, which are the ingredients for industrialization and economic growth.
Fintech comes in at this time with innovative models that simplify lending. Notable are the peer-to-peer digital lending platforms that come with more flexible terms and lower interest rates. Business can now focus on growth opportunities, creating jobs and contributing to robust economic growth.
How Fintech Enhances Trade and Industrialization
Fintech has a role in Africa to facilitate digital payment solutions in cross-border transaction platforms and trade financing. There is an improvement in intra-African trade, which is boosting industrialization. The industrial share of intra-African exports is nearly double that of exports to the other regions.
Flutterwave and Paystack enable businesses to do cross-border transactions seamlessly. This fintech solution greatly reduces the cost and delays that often come with traditional banking systems, hence encouraging trade among African countries.
Challenges Facing Fintech in Africa
Despite a rapid growth in Africa’s fintech sector, there are many obstacles that demand solutions. First, Africa still faces economic instability. The majority of sub-Saharan banks cite economic instability as the lead challenge affecting their progress. Secondly, Fintech still faces a funding constraint. Banks are reporting limited access to capital. There is also an issue of high funding costs.
Moreover, Africa’s financial conditions remain tight despite the significant decline in sovereign bond yields. The African nations are regaining access to international markets. This, though, is not solving the private sector development issue due to high finance costs.
Climate Risks and Financial Resilience
Africa is among the continents that faces greater risk due to climate change. This risk has a far-reaching impact on the financial sector. Extreme weather conditions, for instance, deteriorate asset quality, with now 34% of banks reporting adverse impacts. Small and medium-sized businesses are also affected by the climate risks. Sadly, they often lack resources to recover from disruptions that result from climate change.
Fintech can help mitigate these risks by providing innovative insurance products, climate-resilient financing options, and data-driven risk assessments. For instance, weather-indexed insurance by some platforms compensates farmers based on weather conditions rather than traditional damage assessments.
Promoting Gender Inclusion in Finance
Fintech is also making a great difference in gender financial inclusion. Recent reports suggest that women-led businesses in Africa demonstrate lower rates of non-performing loans. It is a clear indication that women are now proving to be worthy borrowers. Banks are reporting over 70% better loan performances among women-led firms.
Recognizing this potential, many African banks are adopting gender strategies. About 17% plan to introduce dedicated gender-focused initiatives to support women entrepreneurs. Fintech platforms are also offering tailored financial products for women, helping them overcome traditional barriers to credit access.
The Role of Multilateral Development Banks
Multilateral development banks play a critical role in supporting Africa’s fintech growth. Through its Global Gateway initiative, the EIB aims to mobilize €100 billion in investment by 2027. This funding supports digital transformation, climate resilience, and financial inclusion projects across the continent.
Multilateral development banks like the EIB provide much-needed capital and expertise to scale fintech solutions. They also facilitate partnerships between fintech companies, local governments, and international organizations, fostering sustainable economic growth.
Building a Sustainable Future
Certain structural reforms are necessary to fully realize the benefits of Fintech. Africa’s executives need to create conducive regulatory environments that favor fintech developers. Investments in digital infrastructure, such as broadband connectivity and mobile networks, are also crucial.
Additionally, fostering partnerships between fintech companies, traditional banks, and development institutions can help bridge funding gaps and expand access to finance. By addressing these challenges, Africa can harness fintech as a powerful tool for sustainable development.
Also read: How African Billionaires Adapted to Global Economic Shifts
Final Thoughts
Fintech is revolutionizing finance in Africa, breaking down barriers to financial inclusion and driving economic growth. From empowering SMEs to promoting gender equality and mitigating climate risks, fintech is addressing some of the continent’s most pressing challenges.
However, realizing the full potential of fintech requires collaborative efforts from governments, private-sector players, and international institutions. With the right investments and policies, Africa’s fintech sector can continue to thrive, creating a more inclusive and resilient financial system for the continent’s future.
As EIB Chief Economist Debora Revolt Ella aptly puts it, “The high cost of finance remains a source of concern, but the digital transformation offers a unique opportunity to build a sustainable and equitable financial system.” The journey ahead may be challenging, but the promise of fintech offers hope for a brighter, more prosperous Africa.
