2021 was a big year for Africa’s fintech scene. Tech start-ups across the continent raised almost $5 billion – an increase of nine times in five years. Fintech accounted for almost two-thirds of this funding, with an increasing number of companies taking advantage of Africa’s young, entrepreneurial and tech-savvy population. Our feature on African fintech from three years ago, in which we expressed optimism about “Africa’s accelerating development,” still rings true.
While of all this is certainly pointing in the right direction, more work is required if fintech is to realise its potential to transform the African economy. To discuss this, we spoke to Sam Sharps, Executive Director of Technology and Public Policy at the Tony Blair Institute for Global Change. Sharps, and the team at TBI, have looked closely at what can be done to “supercharge” Africa’s fintech scene.
Sharps recognises that “there’s a huge opportunity” when it comes to African fintech. “There’s a lot of activity, and many young, entrepreneurial people. There’s a lot of emerging markets which haven’t been plugged in as much to traditional financial models in the past […] All that adds up to an opportunity.” However, he fears that this “is in danger of being wasted” because “the environment for investment in tech start-ups and fintech is not as good as it could be.”
And why is that? On one hand, Sharps argued that there is a need for macro-level reform of markets: improving “infrastructure, trading rules, and all the rest of it – this is a massive challenge for the African continent.” But there is equally a need to look at the “fundamental building blocks” of how fintech ecosystems are created. That involves, for example, “ensuring that start-ups have visibility of other activity in their area, so they can learn from other businesses and start partnerships.” It might also mean making it easier for investors to have high-quality information about African fintechs, as many currently are “not really sure about where to go to look for interesting opportunities,” Sharps added. This would help democratise Africa’s fintech scene, because, at the moment, “there’s a very narrow set of businesses that are hoovering up a lot of investment.”
Some African countries are already starting to make significant progress on this front. Sharps pointed to Kenya, South Africa and Nigeria as the centres of gravity on the continent. Zambia, Senegal and Rwanda are all possible hubs as well. Sharps suggested that “the best hope for Africa” could be to “build out from there” in trying to replicate “that kind of activity across different capital cities in different nations.” In turn, this would help create a more integrated and standardised pan-African marketspace.
With “strong political leadership,” Sharps even mooted the possibility of “some kind of digital single market,” but added that this is a “leadership issue first.” Existing political and economic structures can only allow so much progress to be made, Sharps argued.
One obvious area where fintech is able to contribute to African fintech is financial inclusion. According to Sharps, around 35% of the African population remains completely unbanked. “There’s clearly an absence of traditional structures,” Sharps said. This could be an opportunity for fintechs because, unlike in Europe or the US, regulatory structures are not tilted in favour of the incumbents so much. There are fewer barriers to entry for start-ups looking to join the fintech scene, making it a “much more addressable market.”
In terms of creating the ideal regulatory structure for Africa, Sharps advocated a relatively cautious approach. While the Tony Blair Institute has not yet proposed any ideas for specific banking regulations, Sharps suggested that any future environment should allow “tech start-ups to innovate and do interesting stuff,” but within a regulatory framework in which they can “gradually be introduced to the market without loosening all kinds of controls.” A gradual approach would, Sharps suggested, help build confidence in nascent systems and therefore allow fintech to put down stable, long-term roots in the continent.
“The very, very worst thing for any African country – or any other country for that matter – would be a gigantic collapse where millions were lost through fraud, or whatever it might be, to a tech start-up or a fintech business,” Sharps noted. “This would just destroy confidence almost immediately.”
Building confidence also means being realistic about what the fintech scene can achieve, at least in the short-term. We have previously looked at how certain cryptoexchanges are at risk of selling disadvantaged African consumers a dream, luring them with suggestions of sky-high returns on crypto investments – at a time when their own currencies are often unstable. Sharps said that “we’re still in the early stages of working through what crypto might mean for developing economies,” but argued that it is critical to determine “how to engage with it safely.”
That said, crypto, if used cautiously, could offer a number of important benefits. “Particularly when people don’t feel able to trust their currency or when they’re in need of some kind of safe-haven,” according to Sharps.
Sharps ended our conversation by noting some of the “practical” work that needs to be done, noting that “inevitably, there’s going to be a need for a continual strengthening of infrastructure in Africa” including when it comes to ensuring strong internet connectivity. However, he argued that “African entrepreneurs have proven quite adaptive to the technology that’s available,” pointing to examples of mobile payments being available on 2G mobile networks as an instance of fintechs “working with what’s there.” While calling for increased investment into African infrastructure, and being keen to explore alternatives such as satellite broadband and more advanced mobile networks, Sharps said “that adaptive message is really, really important” for encouraging innovation. However, “infrastructure needs to be continually built up because that provides the ground on which the market can start to find a home.”
There are clearly reasons to be excited about the potential of Africa’s fintech scene. However, it is now incumbent on market participants, regulators and policymakers to ensure the opportunity is not lost. If the conditions are right, we could “supercharge” African fintech – with significant benefits for businesses and consumers across the continent.
Author: Harry Clynch
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