Looking for Unicorns? Go to Africa.

Fintech unicorns, a unicorn company is a start-up with a valuation of over 1 billion USD, have doubled this year in Africa which highlight the positive trajectory of the financial technology market. Due to an increased need for virtual banking in the pandemic, fintech firms have become more valuable in Africa and consequently increasing investments flooding into them. Tech unicorns have doubled this year reflecting the state of the market. Africa’s fintech market is booming, but is it going to last?

In terms of demographics, Africa is an optimistic environment for fintech investors. Young African entrepreneurs could easier circumvent the region’s financial problems and are a largely untapped resource. With a median age of 19, the continent is predicted to be home to 1.5 billion people by 2025. With an increasing number of them being digitally literate, this is optimistic for the revenue of fintech firms. Specifically, Nigeria seems to be the hub for investments, having received two-thirds of Africa’s fintech investments this year. For many young Africans, who are both entrepreneurial and digital literate, fintech is a lot more accessible and less dependent on inflexible financial institutions.  For those trying to set up a business, there are greater lending options online than with traditional institutions, especially in low-income households.

Consequently, African start-ups have attracted a large amount of foreign capital, which has cyclical effects on the market. Foreign investment has led to Africa’s number of unicorns more than doubling. OPay, a mobile-payments company, acquired its horn in August, after raising funding from investors including SoftBank, a Japanese firm. Fair Money, a Nigerian fintech, raised 42 million USD with Tiger Global Management, a New York hedge fund. Although this has dramatic positive effects, especially in Africa’s tech hubs, Nigeria, Kenya and South Africa, some valid concerns and constraints present themselves.

For example, China has recently cut its finance pledge to Africa, reflecting rising concerns about the risk of debt distress in Africa. China’s investment pledge fell 20 billion USD potentially because they have established themselves in the market and due to those growing concerns. Although there were hopes that African countries could service the debt, the pandemic has stagnated the progress of economies continent-wide. Instead, there is a shift to debt relief discussion. The states of Zambia and Ethiopia’s economies, both of which are large recipients of Chinese loans, could be indicative of a need for caution. Zambia became the first African country to default on its Eurobond loans and Ethiopia has sought debt relief after its descent into civil war. This does not prove causation between Chinese lending and direct debt distress however this does suggest that short-term myopia is detrimental in fintech. Debt concerns could foster a cross-national dependence on Chinese lenders.

An alternative to foreign investment dependence could lie in local investors. If African fintech start-ups receive the backing of larger conglomerates in the region, it bodes well for the market. For example, Aliko Dangote, CEO of an industrial conglomerate, would not profit from established African conglomerates if they do not circumvent such issues.

Africa is in its nature diverse, and investors are missing out if they do not see the different potentials that various regions offer. Throughout history, a large constraint on the region is fragmentation, which limits expansion and equitable access to innovation. In its essence, however, fintech presents fewer obstacles and can act as a bridge where traditional institutions have failed.  There has been some recent development which coupled with the progress in the fintech market will make the expansion of start-ups easier.  Cross-national expansion is now easier with the African Continental Free Trade Area, a deal that has been ratified by 38 countries. The Pan-African Payment and Settlement System were launched as part of the deal, to make the region’s many systems work better together. Therefore, investors are backing firms with ambitions that extend beyond their home countries. Furthermore, Liquid Intelligent Technologies is linking east to west Africa with fibre optic cable.

As mentioned previously, different regions also remain untapped by fintech investors, such as the Horn of Africa. For example, the self-declared state of Somaliland in East Africa is a largely underestimated economy. The foundation of these countries is remittance (money transfers), and fintech is simply a natural transition. EDahab, launched in 2015 by Dahabshiil Group, is a mobile phone-based money transfer service offering payments and micro-financing services and is Africa’s largest money transfer company. It has since expanded to the whole of Somalia. With a youthful population, Somaliland could be a hub, with perhaps connections to the rest of East Africa.

Overall, Africa’s start-ups are relatively young in comparison with the rest of the emerging world. The progress they have made in such a short time is indicative of future progress. The demographics, interconnectivity and regional opportunities present a unique opportunity for investors to be the first in a quickly progressing market. The competition across the continent is rapidly increasing and investors are taking notice.

By Hannah Duale

Sector Head: Sophia Li

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