Antony Costantin

Antony Costantin is an intern at the SME Finance Forum. He is a second-year graduate student in M.A. in Arab Studies program at The Edmund Walsh School of Foreign Service, Georgetown University. He was previously a business analyst at Deloitte Egypt, where he worked with different industries, navigating through the challenges of developing efficient business models and sustainable market competitiveness in both Egypt and the global economy. He also worked with governmental organizations such as Goethe Institut and GIZ on youth and women economic empowerment projects in Egypt. Antony graduated from The American University in Cairo in 2019 with a BA in Economics and Political Science Honors Program with a specialization in political economy. Antony has received several awards for his contributions to civil society and economic awareness, such as Injaz Egypt Highest Impact Award and UNEP Most Active Participant. Antony aspires to develop and participate in reform programs in Egypt and MENA institutions in areas of economic competitiveness and development, and institutional and social reform.

Using Technology to Meet the MSMEs Financing Gap in West Africa’s Informal Sector: Challenges, Progress, and Opportunities

Aug 18, 2021
Using Technology to Meet the MSMEs Financing Gap in West Africa’s Informal Sector: Challenges, Progress, and Opportunities

This is a member spotlight summary.

While entrepreneurs in the informal sector contribute an average of 60% to the GDP of West African countries, less than 15% of those entrepreneurs have access to banks as a source of financing. Significant progress has been achieved by fintech companies who are working with banks and e-money operators in the region to build digital financial services to close the financing gap MSMEs face. However, there are several challenges that fintech companies and MSMEs face and many opportunities that can come out of solving those challenges.
During this week’s session, Gillian Darko, Ahmed Abbas, Arnold Kavaarpuo, Bemah Kone, and Segun Adeyemi from JUMO shared JUMO’s experience with fintech products in the West African market and how to approach the MSME financing gap. JUMO is a fintech company that provides financial services for MSMEs in emerging markets through its mobile application and mainly operates in the African Market.

Gillian Darko, General Manager (In-Markets Operations), highlighted that the SME financing gap is a global issue. The MSME financing gap is valued at around 5.23 trillion USD globally. There are around 3 billion people who are underbanked/unbanked according to the World Bank. JUMO’s mission is to radically advance financial inclusion by bridging the gap between financial services and those that need them the most, which are entrepreneurs, small businesses and people who do not have financial history and are excluded from the traditional financial institutions. In West Africa, the gap is very prominent. In Ghana for example, the current supply for SME financing is 2.7 billion USD as opposed to 4.9 billion USD in demand. Thus, there is less capital deployed than the amount that is outstanding due to supply and demand challenges. On the demand side, there is the assumption that banks only serve high net and big companies. Therefore, SMEs rely on people intensive methods (borrowing from friends, family, or donations) that have higher cost. The gap exists because of how SMEs are structured compared to traditional financial institutions. MSMEs usually lack the knowledge and resources to comply with banks’ requests. Another reason behind the gap is the regulatory challenge of protecting financial institutions and expecting clients to meet certain criteria, making it difficult for financial institutions to meet both regulatory and SME demands.

Targeting SMEs specifically is what JUMO is doing to attempt to close that gap. Ahmed Abbas, Strategic Partnerships Lead, Capital & Banking, explained that banks have a role to play in the world of digital financial services (DFS) along with fintech companies to tackle the financing gap.
Digitalization creates different asset classes that banks have started exploring. JUMO has had positive experience engaging with banks and partners in closing the financing gap. DFS offer banks opportunities to allocate capital effectively and gain healthy returns, sometimes better than the existing traditional asset classes. While the role of banks is not shifting, the way banks interact with new markets and opportunities is different from 20 years go. In order for JUMO to tackle the issue of informality in the West African market, Arnold Kavaarpuo, Country Manager for Ghana, explained that JUMO had to develop products that offer credit to SMEs who do not have any historical information to share. JUMO started building the records from scratch, looking at their fiscal assessment to determine affordability, and looking at the kind of goods they sell, whether they are perishable or not. JUMO also looked into the acceptable documentation and registration that is required locally, and thresholds set for risk taking purposes within credit limits and policy.

As part of the digitalization of financial services, JUMO is also leveraging any existing technology used by clients as a source of data. Segun Adeyemi, Country Manager for Nigeria, explained that customers without formal records for their business can still facilitate their credit request if they have some digital footprint such as owning a cellphone. Data points expected by JUMO are at the lowest level but allow JUMO to interpret and create a score to determine if the entrepreneur is worth being offered financial services. JUMO has developed its products in markets where some initial investments in the network had been made. For example, mobile phone owners are somewhat digitally savvy and are already associated with basic information such as ID, address, etc. These pillars allowed JUMO to build their own platform where customers are able to provide data and make minimum threshold for delivering products. Kavaarpuo gave an example of JUMO’s partnership with MTN in Ghana that resulted in 4.4 million people having access to 1.6 billion dollars, in which 6 out of 10 customers in this segment are SMEs. The product developed in that market gained confidence among entrepreneurs, moving them away from borrowing and lending from neighbors. In addition, Bemah Kone, Country Manager for Ivory Coast, explained that JUMO managed to penetrate and adapt to the local markets in West Africa by making sure the product’s name appeals to the communities and uses local dialects from the first interaction. Abbas added that proactive roles like naming conventions, use of language on the lowest common denominator devices, in depth market research, and appropriate, simplistic design work together to help the customers experience and improve their financial literacy.

As seen in the outreach numbers presented above by JUMO, financial technology use and companies are on the rise in Africa and the West African Region. Adeyemi explained that countries in the region just scratched the surface of fintech and its uses. Nigeria and other African countries are cash-based societies in a world where everything is moving digital. Covid 19 is increasing the pace of digitalization, but there are still limitations due to demographics and regulators. There is an increase in investment in SMEs by traditional financial institutions as well as by foreign and impact capital in areas that traditional services can’t reach. Those players are setting up agents providing financial services and literacy in more areas, saving micro entrepreneurs from traveling long hours to get services. Even though there has been regulatory work done to facilitate the adoption of mobile financial inclusion, the issue cannot be tackled without further liberalization to allow more players to participate. Also, countries are still far in terms of level of penetration, as seen in Nigeria at 60% financial inclusion with plans to reach 80% in the next five years.

In order for West African countries to close the MSMSEs financing gap, Kone highlighted that countries need to learn from fintech leaders in Africa: Nigeria, South Africa, and Kenya, to make sure progress towards fintech use and expansion is on the right track. When there is no regulatory framework in new markets, it is hard to unlock the value because the players do not know what to do and how to do it. However, there is a political will as seen in BCEAO’s, Central Bank of West Africa, financial inclusion initiative which has the potential to unlock the value of the region.

Consequently, fintechs are on track to help close the gap and mismatch of MSMEs financing in West African countries. Moreover, JUMO’s experience in the region with fintechs is an evidence that fintechs are a huge player in providing access to finance and financial inclusion in the West African market. However, that there are also several challenges ahead such as developing the necessary framework and legislation for fintech use and ensuring that they enable proper financial inclusion in order to close the MSMEs financing gap.

Digital Financial ServicesFintech