Africa has a stubborn credit problem. Here’s why.

by MMC
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You know the saying “Money makes the world go round”? Replace “money” with credit, and it will be just as valid. The entire financial space is based on credit. As you read this, somewhere in the world there is a cash-strapped shopper paying for groceries with a credit card. And a family gets a mortgage for their dream home elsewhere. There is a company that borrows to obtain supplies. Even governments borrow to make their budgets work. In 2023, global debt hits a record $307 trillionmarking what countries, families and businesses have borrowed in total.

However, credit is a luxury in Africa. Most (82.6%) Formal micro, small and medium enterprises (MSMEs) in Africa have unmet financing needs. The credit to GDP ratio is only 18% in sub-Saharan Africa. Meanwhile, the comparable figures in South Asia and Latin America are 37% and 47%, respectively. SSA also lags behind other regions in access to finance, with only 19.9% ​​of businesses benefiting from a bank loan or line of credit in 2020. In Nigeria, 70% of bank account holders still have difficulty accessing formal credit. However, the demand for credit is reaching new heights.

Several reasons explain this deficit. For example, Morocco (71%), Egypt (67%) and Nigeria (60%) rank among the the first seven countries in the world with the highest unbanked population. This is a continent-wide problem: Africa is home to more than 350 million people who have never had a bank account. This already excludes part of the population from access to credit.

But even with a bank account, getting a bank loan in Africa isn’t the most inclusive experience for everyone. There is the usual slow application with lots of paperwork. And then banks have a checklist that leaves people out: a stable income, a minimum volume of entries through your account and an amount that remains in your account. Most of these requirements are beyond the reach of the average African.

Too technical for fintech?

Over the past few years, fintech startups have tapped into Africa’s credit appetite. Neobanks have flooded the App stores with fast and indiscriminate credit offers. This report by Google and Appsflyer shows that financial apps, including lending apps, grew 25% in the last year alone. Additionally, Google searches related to loans dominated from May 2021 to May 2022. These apps remove the barriers of administrative burden and slow approval from banks.

But this story is not a fairy tale. Technology hasn’t really found mutually beneficial models to solve Africa’s credit problem. That’s why borrowers who get money from some of these apps face sketchy loan terms, like extremely high interest rates or lenders calling their phone contacts to speed up repayments. Lenders who choose to be ethical don’t have it easy either. Many of them are struggling to make a profit and escape bad debts.

For example, in the financial year ended June 30, 2022, TymeBank reported a net loss of R976 million ($57.5 million). However, at the close of the 2023 financial year, its losses decreased by 20.7% to R858 million ($45.6 million). Its December 2023 result was mainly driven by significant growth in net interest income and fee income, which increased by 109% and 360%, respectively, to $28.2 million and $18 million from in fiscal 2022. This strong performance contributed to TymeBank’s revenue. revenue, which jumped 62% to $48.5 million in fiscal 2023.

However, TymeBank’s revenue growth has not been without costs. TymeBank’s credit impairment charges, representing loans that customers could not repay or were considered impaired, saw a substantial increase. This charge, from a modest $65,000 in 2022, increased significantly by 20,000% to $13 million in 2023, impacting Tymebank’s net revenue of $35.5 millions of dollars.

FairMoney is another notable example. It made a profit in 2021 with a net profit of 1.6 billion naira ($3.9 million). But by the end of 2022, it had suffered 3.73 billion naira ($8.3 million) in losses, with bad debts jumping 138% to $101 million.

Community credit wins

Africans have used informal, community-led systems to provide credit for many years. Whether it is the Chamas of East Africa, the Susu (Esusu) of West Africa or the Stokvels of South Africa, people have driven their own financial growth. And some of them have grown from casual savings pools to full-fledged investment clubs.

Alliance Milele in Kenya is a good example. In 2007, ten women pooled their resources, saving $185 per month (Ksh30,000). They met every third Saturday for eight months, set goals, wrote a constitution and registered as a company. A year later, with a banking partner, they purchased a residential property, bringing their portfolio to over $215,384 (Ksh35 million) in 2020.

Many more Africans are now using Facebook, WhatsApp and Telegram communities to create savings and credit pools. So even as tech startups struggle to close this credit gap, Africans are now using technology to make their long-standing credit practices more efficient.

The lesson here is that Africa’s credit problem might be considered “stubborn” only because we are trying methods that are not optimized for low-trust environments. Community-led systems operate primarily on trust, and that’s why they’ve lasted so long.

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