It may take the threat of a fintech disruption to get local commercial banks focused on lending for micro and small businesses in Africa and other emerging markets.
Fintech startups and local fund managers have recently made progress on closing the financing gap for such “MSMEs,” estimated to be as much as $5 trillion each year. Fintech was the hottest category for venture-capital investing last year; underbanked emerging markets are prime targets of opportunity.
That surge has spurred several of Africa’s largest banks to adopt fintech approaches to reduce their own transaction costs, streamline credit checks and reach informal businesses.
Standard Bank, Africa’s largest bank, is working with South African fintech Nomanini to provide inventory financing and small lines of credit to informal retail businesses, or “traders.” Its app, called Trader Direct, could serve as a model for how to open commercial channels of capital to Africa’s informal and micro business sector.
“The aim is to reposition the organization in terms of how we help our clients. We want to do much more to help traders and farmers,” says Wendy Pienaar, who heads Standard Bank’s Ecosystems division within the bank’s innovation group. “We are starting to put a lot of focus and energy into growing different businesses, new types of ventures, and to become much more platform-based. And that is driving real change in some of the ways we go to market.”
Mainstream banks have largely ignored or declined to serve the informal and micro business sector, on account of perceived risk, underwriting costs, regulatory red tape and lack of interest. That has closed off the biggest source of private business capital to a sector that accounts for an estimated 40% of Africa’s GDP and more than 80% of consumer-good sales.
“Banks and other financial incumbents are a necessary part of this ecosystem,” says Wim van der Beek of Goodwell Investments, an Amsterdam-based impact investor and early backer of Nomanini. “Banks have the regulatory experience, they’ve got the balance sheets, they’ve got the capital. And they’ve got capital at the lowest cost. There’s nobody who can borrow as cheaply in markets as banks.”
Standard Bank is leveraging the data Nomanini collects on retailers to underwrite short-term inventory credit. The first test of its app is with Nestlé. Through Trader Direct, retailers can secure credit from Standard Bank to cover the upfront cost of goods ordered from Nestlé and its network of local distributors. Credit that gets approved is applied directly to Nestlé and its distributors’ invoices (through another app called Trader Assist), and is later collected by Standard Bank through Nomanini’s platform.
“At Nomanini, we recognized that the best thing we could do was accelerate retailers’ access to credit,” founder Vahid Monadjem tells ImpactAlpha. The partnership with Standard Bank, he says, “enables us to advance credit to retailers, not in the form of cash, but really safely, in the form of stock that comes from a supplier.”
Standard Bank also has also developed OneFarm, an app hosted by agtech venture HelloChoice, to facilitate access to financing, inputs and markets for Africa’s smallholder farmers.
“Traders sit at the center of their communities. So do farmers. But traders and farmers have the least power in their ecosystems,” says Pienaar. “The way to help them grow is orchestrating whole networks and the ecosystem around them.”
Standard Bank is partnering with the fintech ventures as part of its so-called “future ready strategy” to be more digitally-focused. Pienaar says the bank is focused on being a driver and orchestrator at an ecosystem-level in sectors like retail and agriculture.
“We’re being conscious of what traders and farmers need, but also wholesalers, producers, consumer goods companies, distributors, off-takers, so that we can help with transparency, with pricing, with logistics and obviously help with working capital,” she says.
“In recent years, we’ve really evolved our thinking around how much we can do to help traders,” Pienaar adds. “This is all part of the journey for us to get into the essential elements of communities.”
From digitalization to financial services
The pandemic served as a super-spreader of small business digitalization.
In the past two year, emerging market fintech and enterprise tech ventures have built out digital tools and services for the largely offline informal economy. Companies like Nomanini, TradeDepot in Nigeria, and Sokowatch in Kenya are gathering data through services like online inventory ordering, sales tracking and digital payments is in turn helping to prove the creditworthiness and bankability of the sector.
Lagos-based TradeDepot recently raised $110 million in debt and equity to expand its “buy now, pay later” financing option for retailers in Nigeria, Ghana and South Africa. Nairobi-based Sokowatch offers small lines of inventory credit to retailers off of its own balance sheet. Also in Kenya, logistics and enterprise tech ventures Twiga Foods and MarketForce are partnering with fintech Pezesha to unlock financing from its customers from individual, institutional and even crypto investors.
Nomanini was one of the earliest fintech ventures targeting services for Africa’s informal and micro business sector. It launched in 2010 to help informal retailers adopt digital mobile airtime sales, reducing the logistics headache of stocking physical scratch cards. The company estimates that airtime sales account for 10% to 20% of retailers business.
“Because airtime was sold on physical cards, there were all of these layers in the distribution network—and also a lot of security issues. You had these armored cars driving around full of scratchcards because they were as good as cash,” explains Monadjem.
It then developed an interoperable mobile wallet so shopkeepers could offer their customers additional services, like bill payments and money transfers. The company sprang into broader financial services from there.
The big opportunity is in supply-chain financing. “Eighty to 85% of a retailer’s income is based on the sale of physical goods, and we wanted to find a way to help them improve their sales. The lowest hanging fruit was credit so retailers could stock their shops more fully,” says Monadjem.
Nomanini found that retailers who are able to access working capital credit can grow their businesses 30% more than those without access.
Today the “micro multinational,” as Monadjem calls it, serves 10,000 retailers in five African markets, with plans to expand into six aditional markets.
Standard Bank led Nomanini’s $4 million funding round in 2019.
Future of banking
Standard Bank’s Trader Direct and OneFarm products are part of the bank’s Ecosystems unit, which functions as a test lab within the bank’s innovation group for new business lines, models and markets. The products are still far from being integrated and mainstream within the bank.
“Fintechs give us amazing agility, they give us an ability to get into a market fast,” Pienaar says of working with partners like Nomanini and HelloChoice. What an institution like Standard Bank can now do is super-charge lending and other financial services to underserved markets.
“On our side, we bring the trusted brand, the relationships. We bring the banking license. We bring the risk management frameworks,” she adds. “And we obviously bring the balance sheet and have deep pockets that we are able to invest.”
Standard Bank’s approach to digital banking and willingness to bank micro-businesses remains the exception in Africa. The pan-African Ecobank Group hosts an annual fintech challenge and partnered early in the pandemic with regional fintech ventures to help Africa’s small businesses transition to e-commerce. KCB Bank Kenya has developed a range of micro-business lending products.
“I think most banks in Africa have been content just serving the middle and upper classes and corporates and not bothering with the masses,” observes van der Beek. “Some think that they can continue doing that—doing banking the traditional way and ignoring the whole mobile money story in Africa. But they’ll ignore it at their own peril.”
Others have been put off by the historically high costs of underwriting small businesses and regulatory hurdles to developing and launching new products in the market.
“Credit to Standard Bank for doing that heavy lifting,” Monadjem says. “There have been a number of times where they had to push hard to get waivers or new products certified. But they made a decision to keep pushing with the regulators.”
The bank’s work will ultimately make it easier for other financial institutions to follow suit, adds van der Beek. “They are the first mover but there will be more banks doing this. And not just banks—other traditional financial services providers will too.”