How Fintech Companies Are Boosting Financial Inclusion in Africa
Image source: pexels.com
Author: Daniel Abioye
The launch and expansion of digital financial services have led to an unprecedented surge in the number of people gaining access to formal financial services. The African financial services sector has witnessed a massive transformation in recent years, leading to the inclusion of a greater percentage of the unbanked population. Africa’s fintech startup ecosystem is experiencing substantial growth of 17.7 percent, with the number of startups in this space increasing to 678 in 2023 compared to 2021. According to World Bank reports, the percentage of adults with access to banking services rose from about 37 percent in 2017 to 55 percent in 2021, which is still substantially lower than the global average of 76 percent.
Presently, Africa leads with the highest number of digital financial services implementations, encompassing almost half of the 700 million digital literate individuals worldwide. Notably, between 2020 and 2021, the number of tech startups in Africa tripled to approximately 5,200 companies. Of these, half belong to the fintech sector, which is focused on disrupting and enhancing traditional financial services. The remarkable growth of financial inclusion in Africa in recent years has been predominantly driven by digital banking and mobile money.
The fintech sector in the continent continues to experience unparalleled growth, driven by advancements in technology, reduced data costs, and enhanced regulatory frameworks. This transformation is reshaping the way people bank, conduct businesses, and trade. In 2023 alone, 149 fintech companies in Africa raised approximately $1.55 billion in funding (equity and debt) across 169 transactions. Fintech entrepreneurs are actively addressing the demand for accessible credit in Africa by providing seamless online lending platforms. These platforms allow individuals who don’t have previous credit histories to access credit by using alternative data sources to evaluate their creditworthiness. Additionally, most fintech companies have significantly lower operational expenses compared to traditional banks, enabling the cost-effective and profitable delivery of financial services.
Despite the progress made in recent years, a large segment of the population in Africa still struggles with the absence of fundamental financial services, which continues to hinder broader financial inclusion. Common barriers include low levels of financial literacy, inadequate infrastructure, limited access to financial services, and socioeconomic factors. However, the continuous spread of digital financial services through fintech penetration is transforming financial transactions in Africa. For instance, Kenya’s M-Pesa, an early entrant into the fintech space after its launch in 2007, currently has over 30 million monthly active customers across African countries. Remarkably, during this timeframe, Kenya has seen a substantial increase in financial inclusion from 25 percent in 2006 to nearly 85 percent in 2021. According to MIT, over a period of six years, mobile money has lifted about 186,000 families out of poverty in Kenya, with a greater impact on female-headed households.
Regarding investments by venture capital in Africa, Nigeria’s fintech ecosystem emerges as a dominant player. According to PwC, Nigeria accounted for nearly a quarter of the entire equity funding on the continent in 2022, contributing to a grand total of $1.2 billion raised across Africa.
The landscape of financial inclusion is undergoing a transformative shift in new and innovative ways with fintech companies. This advancement, spanning from mobile banking to blockchain, leverages technology to creatively reach underserved populations. Fintech not only changes the way financial services are delivered but also equips individuals with essential tools to effectively manage their finances. The promising trajectory of financial inclusion looks bright as fintech continues to innovate and offer new avenues for providing financial services to those previously excluded from the traditional banking system.
References
- “Africa’s Fintech Startups Are Overwhelming Favourites for Acquisitions.” WeeTracker, 16 Oct. 2023, weetracker.com/2023/10/16/african-fintech-acquisitions. Accessed 25 Jan. 2024.
- The Banker. “Payments Innovation the Key to Financial Inclusion in Africa.” Www.thebanker.com, 2023, www.thebanker.com/Payments-innovation-the-key-to-financial-inclusion-in-Africa-1681890717.
- Filry. “+200 Solo Founder Startups That Became Unicorns.” Www.failory.com, 2022, www.failory.com/startups/solo-founder-unicorns.
- McKinsey & Company. “Fintech in Africa: The End of the Beginning | McKinsey.” Www.mckinsey.com, 30 Aug. 2022, www.mckinsey.com/industries/financial-services/our-insights/fintech-in-africa-the-end-of-the-beginning.
- World Bank. “The Global Findex 2021: Interactive Executive Summary Visualization.” World Bank, 2021, www.worldbank.org/en/publication/globalfindex/interactive-executive-summary-visualization.