New report: Here’s why African fintech is fast-expanding

Despite talk of an overcrowded market and funding retreat, fintech is proving its mettle in the African markets, serving as a lever to financial inclusion and increasingly bringing innovative solutions to market that are uniquely designed for the heterogeneity of the African population.

Capital providers are buoyed by predictions of steady population growth and opportunities to reach unbanked, undeserved segments.

According to recent data, 71% of adults in developing economies had a bank account at a bank or regulated institution, with the associated expense, a lack of knowledge and geographical isolation having been flagged as key inhibitors to financial inclusivity.

In Sub-Saharan Africa, around 62% of unbanked adults in the region are rural dwellers, while 31% consider distance a barrier to entering the formal banking system. Meanwhile, the African population is expected to double to 2.5 billion by 2050, with much of this growth in urban centres, presenting a growing market for fintech innovation.

While financial inclusion rates on the continent are low, there is steady improvement. The World Bank outlined in its Global Findex Database report for 2021 that the share of adults making or receiving digital payments in developing economies grew from 35% in 2014 to 57% in 2021, adding that mobile money has become an important enabler of financial inclusion in Sub-Saharan Africa.

Africa resilient amid global capital retreat

According to CBInsights, global fintech quarterly funding dropped to $20.4 billion (bn) in the second quarter of 2022, its lowest level since Q420.

Despite a global ‘fintech funding winter’ in the first half of 2022, Africa remains the region least hit by the venture capital (VC) retreat due to the opportunity posed by the increasing size and maturity of African economies.

Prominent fintech Flutterwave, tripled its valuation following a $250 million (m) Series D funding round in February, while contemporaries Wasoko, Interswitch and MFS Africa also banked hundreds of millions of funding in the first six months of 2022.

As a result of this activity, total VC investment in Africa reached $1.8 billion in the first quarter of 2022 alone, a 150% increase compared with the same period in 2021, according to data from Africa-focused database The Big Deal.

Kenya attracted more venture funding in the first three months of 2022 ($482 million) than it did in all of 2021 ($412 million). But there is a need for start-ups to remain vigilant in this unpredictable economic environment and refocus on creating sustainable, long-term business models, as venture capitalists start to present far stricter funding terms.

VC funding raised in Africa, Q1 2022

• Nigeria: $600 million;
• Kenya: $482 million;
• South Africa: $228 million;
• Egypt: $202 million;
• Rest of Africa: $306 million.

But there is a need for start-ups to remain vigilant in this unpredictable economic environment and refocus on creating sustainable, long-term business models, as venture capitalists start to present far stricter funding terms.

Investors are also paying more attention to start-ups operating in ancillary industries that support fintech, such as logistics, blockchain, education, and green energy.

 The top investors in Africa according to CBInsights in Q2-22 were: 

• Berrywood Capital
• Cairo Angels
• MEXC
• Chandria Capital
• Future Africa
• Huobi Ventures
• Ingressive Capital
• Launch Africa
• Raba Capital

2021: a year of mega-deals

Fintech enterprises in Africa remained in the crosshairs of investors in 2021, with the continent seeing at least $2.2bn injected into 564 fintech start-ups by the end of the year (this figure varies according to different reliable sources). The average deal size more than doubled on 2020 figures, increasing from over $1,7 million to $3,8 million in 2021, Disrupt Africa outlines in its African Tech Funding Report 2021.

The number of funded start-ups grew by 42.1% on 397 in 2020, and the funding grew 206.3% on the US$701.46m banked the previous year.

The number of funded start-ups grew by 42.1% on 397 in 2020, and the funding grew 206.3% on the US$701.46m banked the previous year.

VC funds based in Europe, the US and the UK continue to scout for viable investment targets and are most interested in financial service providers that have incorporated fintech in their offerings.

Equity funding remains dominant, with the bulk secured during seed, pre-seed, pre- Series A and Series A rounds. This is due to the fact that most funded start-ups launched in the last three years.

However, many start-ups and SMEs in sub-Saharan Africa fail to secure loans or funding because they are unable to provide key information about their businesses to capital providers including clear financial statements, detailed business plans, market studies, credit profiles and tangible track records.

Several development funding facilities have also emerged in response to fintech growth, with the likes of the African Development Bank’s Africa Digital Financial Inclusion Facility working to address systemic barriers to the growth and uptake of digital financial services ‘by making strategic and catalytic investments in the ecosystem throughout Africa”.

Most recently, in April 2022, the ADFI announced a fourth round of financing of $54.8 million, which will benefit almost 69,000 women entrepreneurs in developing economies with access to digital technology and finance.

In July 2022, the International Finance Corporation (IFC) announced an investment in mobile money provider Wave Mobile to spur financial inclusion and support economic growth in Senegal and Côte d’Ivoire.

Growth capital for overall start-up investment in Africa is emerging primarily from investors in the UK and US, many with headquarters in South Africa and Mauritius.

According to Disrupt Africa, the most prominent countries for start-up investment are:

• Nigeria: 161 start-ups raised a combined total of $903.68 million.
• Egypt: 115 Egyptian start-ups secured a combined $445.84 million.
• South Africa: 89 start-ups raised a combined $336.40 million.
• Kenya: 87 start-ups secured $291,98 million.
• Ghana: 18 start-ups secured $19.75 million.

Meanwhile, exit and acquisition activity continues to rise across the continent. In 2021, 32 African start-ups were acquired over the course of the 12 months. The more developed African markets lead the way – South Africa saw nine acquisitions in 2021, while Nigeria saw three acquisitions, Egypt seven, Morocco three and Kenya two.

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