How Fintech lenders can help SMEs unlock post-pandemic recovery

Larger and more traditional lenders cannot usually meet the needs of SMEs, but alternative lenders, powered by fintech, are beginning to address the challenge.

Opinion by

Image : Tunde Kehinde

It feels like a lifetime since the Egyptian government reported the first positive case of Covid-19 on the African continent back in February 2020.

As I write from Lagos in Nigeria where I have been based for almost the entire duration of this pandemic, I can see that there is much work to be done in rebuilding African economies as we look beyond the “new normal” of restrictions and vaccines.

While the human cost of this deadly virus is frightening, dramatic changes to our everyday lives – that have been catalysed as a result of successive lockdowns – leave us at a crossroads.

We can either choose to return to the ways we did business and interacted with one another before the pandemic, potentially risking the next global shockwave having an even more catastrophic effect on our livelihoods, or we can chart a new path.

Addressing the SME credit gap

SMEs are the backbone of all global economies but are an even more delicate and salient matter for African and other fast growing markets. The International Labour Organisation (ILO) estimates that SMEs contribute 70% of employment worldwide, while research by the Johannesburg Business School suggests that as much as two-thirds of African economies are made up by SMEs.

The latter disregards the informal economy, which is widespread across the continent, yet includes many hundreds of thousands of SMEs and jobs that are not connected to the wider economic matrix. It is fair to say that African economies are highly reliant on the fortunes of SMEs, perhaps more so than fast-growing economies elsewhere in the world.

I know from first-hand experience what a struggle it can be growing a business from the ground up in Africa. As an SME entrepreneur and business owner the multitude of obstacles can be overwhelming, including lack of reliable access to power, poor logistics and transport infrastructure, low but growing levels of internet and mobile internet penetration, and access to finance.

The global SME credit gap, which the International Finance Corporation (IFC) estimates to be $5.2 trillion (a figure not updated since before the coronavirus pandemic and now likely worse), is the challenge that Lidya and other fintech lenders have set out to solve.

A new approach to financing SMEs

Entrepreneurs and business owners with great ideas but lacking the finance they need to scale is constraining economic growth and job and wealth creation in Africa and elsewhere. By not providing the tools our small businesses need to thrive is perhaps one of the single biggest self-inflicted economic dilemmas of our generation, and it does not serve us well in building back better after the pandemic. 

The SME Finance Forum believes that 131m SMEs in fast-growing economies experience constraints in accessing finance and working capital. In many cases it is small and sudden costs which can become troublesome for business owners.

Larger and more traditional lenders cannot usually meet their needs because of high thresholds for collateral and credit history when applying, greater perceived risk, and the often small size of the loans required. In Nigeria, for example, most traditional lenders are unlikely to loan sums less than $50,000 and the process can take many weeks.

This traditional approach is outdated and not fit to meet the needs of modern SMEs in Africa and other fast-growing economies. Alternative lenders, powered by fintech, are beginning to address the challenge. Lidya, for example, uses a proprietary fintech platform that uses artificial intelligence (AI) to assess more than 1,000 data points and can disburse loans from around $500 in just 24 hours.

Unleashing untapped potential

By addressing the credit gap, fintech lenders will help to unleash untapped potential across fast-growing economies, providing long-term benefits to employment, public services, education and many other industries and sectors.

It goes beyond benefitting the SMEs themselves and will enhance the quality of life for communities that feel cut off. Not only are SMEs the largest contributors to national gross domestic product (GDP) figures and job employment rates, but they are incubators for progress – pushing the needle in sectors such as the creative arts to tech.

As a Nigerian, I am constantly impressed and proud of the innovative solutions which African entrepreneurs are taking to the next level, in some sectors stealing a march on the rest of the world.

Nigeria’s startup scene is vibrant and full of original ideas and thinking. This was another driver for why we founded Lidya; to nurture entrepreneurial mindsets and ensure that SMEs can grow without fear of whether a loan may or may not be approved, or if they have the right collateral to apply in the first place.

When you place yourself in the shoes of a small business owner, you are better equipped to empathise with their situation and create solutions, and this is exactly what fintech lenders are doing. 

At such a volatile time in our lives there is absolutely no need to lose more jobs than what the pandemic has already cost us. The various virus strains and access to vaccines have disproportionately affected different regions of the world.

Africa has not been immune to the more negative impacts of this pandemic with lockdowns and tight restrictions exacerbating an already significant unemployment problem and severely dampening economic growth projections, risking the future for Africa’s rapidly expanding population.

The African Development Bank (AfDB) has found that continental growth shrank by 2.1% during 2020. Academics highlight that African economies will not see a return to levels of pre-pandemic growth until 2022 when a greater proportion of the continent’s population will be vaccinated, travel resumes and safeguards against potential spikes in transmission levels have been put in place. This is why the work of alternative SME lenders and ensuring every SME has the best opportunity to grow is more important now than ever.

The pandemic has ravaged economies across the world, but it has also allowed space for a complete reset. We have a duty to think what we can do to respond better to events like this in the future and I for one believe the lending sector is one of the first port of calls for encouraging change.

SMEs are at the nexus of how we can help build back better from this pandemic and ensure the benefit of economic growth is felt more evenly across African societies. We need to lend them more than just a hand and make sure they have access to all the tools they need to succeed.

Tunde Kehinde is the founder and CEO of Lidya, an international alternative SME finance lender with operations in Nigeria, Poland and Czech Republic. Tunde also co-founded Africa Courier Express, the leading e-commerce delivery company in Nigeria, and Jumia Nigeria, the leading e-commerce platform in Nigeria.

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