Emerging and Growth Markets | November 9, 2021

How technology is disrupting small-business financing in emerging markets – in a good way

Jessica Pothering
ImpactAlpha Editor

Jessica Pothering

ImpactAlpha, November 9 – The COVID-19 pandemic could have been development finance’s moment to shine. 

Such quasi-public investors, after all, have been trying to fill a $5 trillion financing gap for emerging markets small businesses for, well, decades. 

Development finance institutions and multilateral banks committed billions of dollars in the early months of the pandemic, but little of it made it out the door in the first year, and even less found its way to small businesses that needed capital to pivot and survive. 

Instead, enterprising tech startups rallied to keep small businesses afloat.

“Data and technology have super-charged action, primarily from new players, who are now making bank on an enormous market long-ignored by well… banks (and other mainstream financial institutions),” ImpactAlpha reported at the end of last year. 

Now, venture capital investors are backing a range of tech solutions, many conceived on the fly, to address the working capital and growth financing needs of small and medium-sized businesses, the lifeblood of emerging-market economies.

ImpactAlpha’s Agents of Impact Call No. 34, Tuesday Nov. 16, will feature pioneers of this revolution in small-business finance, including Daniel Kimotho of the crypto platform Celo; Hilda Moraa of Pezesha, a Nairobi-based alt-credit fintech; Luyanda Jafta of the South Africa-based crowdfunding platform for working capital, The People’s Fund; and Daniel Goldfarb of Lendable, the lender to providers of ‘inclusive fintech.’

Digital disruption

When pandemic lockdowns disrupted normal business operations, tech startups pivoted to help other businesses do the same.

“Enterprise tech” companies able to give small businesses a digital upgrade soared through the pandemic. The survival tools included online inventory ordering, digital payment integration and operational management. That provided troves of data on shop owners’ sales, performance and growth, opening up previously restricted sources of working capital, inventory financing and other lending.

Kenya’s Sokowatch and Field Intelligence, Nigeria’s TradeDepot and Egypt’s MaxAB offer small lines of credit to shopkeepers using their ordering and delivery services. Kenyan enterprise tech venture MarketForce is partnering with fintechs to unlock financing to small businesses. Catalyst Fund is accelerating digital commerce startups in Ghana as a small business “on-ramp to financial inclusion.” In India, the digitization trend is heating up in the agriculture sector.

Small and growing opportunity

Many of the startups driving the small business digital revolution are early-stage, as are many of the investment funds backing them. A handful of larger deals—all inked in 2021—point to potential for scale. 

Brazilian e-commerce platform Nuvemshop raised $500 million for helping tens of thousands of mom and pop businesses set up webshops. India’s Khatabook raised $100 million to help millions of Indian merchants manage their business transactions online. Kenya’s Twiga Foods just raised a $50 million round, Egypt’s MaxAB raised $40 million, Pakistan’s Bazaar raised $30 million. Nigeria’s digital payments company Paystack was acquired by Stripe. 

Fintechs and funds

Traditional financial institutions see informal and small businesses as too expensive or risky. Fintechs like Lidya, Prospa and PayHippo in Nigeria, Finja in Pakistan and Cassbana in Egypt, see them as an untapped opportunity. 

Approaches are creative. Kenyan alt-credit venture Pezesha is linking both traditional and non-traditional lenders to small businesses (see, “Agent of Impact, Hilda Moraa”). The People’s Fund in South Africa is crowdfunding purchase order financing for small businesses. Lidya developed a “synthetic furlough” loan to help businesses retain workers while conserving working capital during the pandemic. Ugandan asset-financing company Tugende provided relief grants and paused loan payments at the height of COVID lockdowns. 

Local capital providers and fund managers with a development-finance focus are also bridging the small and growing business financing gap—often while facing their own fundraising constraints. Future Africa and WIC Capital are mobilizing opportunities for local angel investor networks. Iungo Capital, which has provided mezzanine financing to more than 30 small businesses in East Africa, pulled together a $500,000 COVID relief fund. South Africa’s Secha Capital, a holding company, is raising a second fund to invest in “boring businesses”; it helped portfolio companies secure relief funding and repayment reprieve at the height of the pandemic. 

Non-bank lenders, funds and financial intermediaries may “not yet have the scale that banks do,” observe Susan de Witt of the University of Cape Town’s Bertha Centre and Drew von Glahn of the Collaborative for Frontier Finance, but they’re “crucial to increasing access to business finance for MSMEs in emerging market economies, today and long-term.”

Early days

For all the excitement of the small business opportunity in tech and venture capital circles, most of the world’s micro and small businesses remain offline. In Kenya, only a sliver of Kenya’s informal workforce—about 37,000 workers generating $109 million annually—have been “digitized”; offline gig workers account for $19.6 billion in annual economic contribution. Many of Nairobi’s roadside vendors still source goods from markets via manual delivery agents hauling carts, rather than through delivery service apps. And they still transact primarily in cash, or through the ubiquitous mobile money app M-Pesa.