Building a holistic financial ecosystem for African SMEs

Africa’s economic future rests on the shoulders of its vibrant small and medium-sized enterprises (SMEs). These businesses create jobs, drive innovation, and foster social progress. Yet, a major hurdle to their success lies in a fragmented financial landscape. Here’s where the concept of a holistic financial ecosystem – backed by data and collaboration – takes centre stage. Let’s do a deep dive to understand the various nuances behind this topic.

The Data Disconnect: Understanding the Barriers

Access to finance is the lifeblood of any business. Unfortunately, for African SMEs, traditional financing methods present significant challenges.

• Limited Data, High Risk: Banks often classify SMEs as high-risk due to a lack of formal credit history. Traditional credit scoring models rely on past financial statements and loan repayment records, which over 70% of African SMEs lack, according to a 2023 World Bank report.
• Regulatory Labyrinth: Navigating complex regulations and lengthy application processes can be a barrier for SMEs seeking financial products. The World Bank estimates that the average time to register a business in Sub-Saharan Africa is 20 days, compared to just 6 days in OECD countries.
• Financial Literacy Gap: A World Bank report found that only 34% of adults in Sub-Saharan Africa have an account at a formal financial institution. This lack of financial literacy hinders entrepreneurs’ ability to make informed financial decisions and utilize financial products effectively.

The Data Revolution: Building a Bridge

A data-driven approach can bridge the gap between SMEs and the financial services they need. Here’s how:

• Alternative Data Sources: Leveraging alternative data sources like mobile money transaction records, utility bills, and e-commerce activity can provide a more holistic view of an SME’s financial health. This allows lenders to develop more accurate risk assessments, expanding access to credit. McKinsey & Company study has shown that alternative data can improve loan approval rates for SMEs by up to 20%.
• Financial Needs Assessment: Utilizing data analytics, financial institutions can identify and tailor financial products to the specific needs of different SME sectors. This could include microloans for early-stage businesses, invoice discounting for B2B businesses, or asset financing for those requiring equipment purchases.
• Financial Inclusion Through Technology: Mobile banking platforms and digital lending applications can streamline loan application processes, reduce reliance on physical branches, and make financial services more accessible for SMEs in remote locations.

Beyond Data: Building a Collaborative Ecosystem

Data is a powerful tool, but it’s just one piece of the puzzle. A holistic ecosystem requires collaborative efforts from various stakeholders:

• Financial Institutions: Banks, microfinance institutions, and fintech companies need to develop innovative financial products and services informed by data-driven insights into SME needs.
• Policymakers: Governments can implement policies that promote financial inclusion, such as streamlining business registration processes and creating regulatory sandboxes for innovative fintech solutions. The IFC estimates that for every $1 invested in regulatory reform for financial inclusion, developing economies see a return of $8.
• Development Agencies: These organizations can play a vital role in funding data infrastructure development, promoting financial literacy initiatives, and fostering collaboration between financial institutions and SMEs.

Measuring Success: Metrics for a Sustainable Ecosystem

Building a successful ecosystem relies on measuring impact. Here are some key metrics:

• SME Loan Acceptance Rates: Tracking the percentage of SMEs successfully securing financing paints a clear picture of accessibility.
• Loan Repayment Rates: Monitoring repayment rates helps assess the effectiveness of risk assessment models and product design.
• SME Growth Rates: The increase in revenue, employment, and overall business activity of SMEs using financial services indicates the ecosystem’s success in fostering growth.

Conclusion: A Data-Driven, Collaborative Approach

By fostering a data-driven, collaborative approach to building a holistic financial ecosystem for SMEs, Africa can unlock its true economic potential. Empowering SMEs with the financial tools and support they need will lead not only to a more prosperous future but also a continent where innovation and entrepreneurship continue to thrive.

Arttha, the world’s most comprehensive digital banking platform, is empowering global banks and financial institutions in Africa and other countries with cloud-native and digital focused modules specifically tailored for SMEs across – savings, lending, interoperable payments, BNPL, agency banking, loyalty management, and more. Contact us to book your personalized demo today!

Meet us at the upcoming 14th Africa Bank 4.0 Summit and explore how you can spearhead the digital banking innovations of future, starting today, by teaming up with our fully-integrated platform!

Author
Udeet Bhagat
VP – APMEA, PureSoftware