Digital technologies open vast business opportunities in Africa

The share of Africa’s population connected to digital technologies is growing rapidly. In 2020, around half a billion Africans – some three-quarters of the continent’s adult population – had access to mobile phones. A growing share of the continent is also connected to the internet, although often through mobile data networks that have limited bandwidth.

Expanding access to digital technologies is opening up vast business opportunities in a continent otherwise characterised by bureaucracy, corruption and state failure. Digital technologies circumvent the institutional failures that have long suffocated business growth and dynamism.

Digital platforms that connect service providers with Africa’s consumers are particularly flourishing in sectors as diverse as banking, agriculture, transportation and other services.

Platforms for everyone

• Africa is known for its booming mobile money market, which have supplanted bank branches for money transfer purposes. Using digital tools for coordinating transactions, mobile money platforms have significantly reduced the cost of sending and receiving money while also extending these services to remote areas that used to be neglected by banks. This is not confined to money transfer, but also other arenas of banking. M-Pesa in East Africa, Bank Zero in South Africa and FirstMobile in Nigeria offer a plethora of financial services including dedicated saving accounts and microfinance lending. Tens of millions business and individuals around the continent have now access to small, short-term loans from mobile money platforms such as M-Shwari in Kenya and Branch in Nigeria. Peer-to-peer lending applications such as KiaKia in Nigeria and crowdfunding platforms such as M-Changa in Kenya are also linking African businesses that seek financing with investors from around the world.
• In agriculture, digital platforms such as M-Farm and Twiga in Kenya are gearing towards connecting urban consumers with millions of rural farmers. These platforms removed middlemen that used to exploit informational gaps to increase transaction costs by directly linking buyers and sellers, and by actively providing both sides with reliable, verified price and quality information.
• In other services industries, the vast potential of digital platforms is only beginning to take shape. Retail platforms such as Jumia and Takealot have already made important headways in introducing a culture of e-commerce. Local ride hailing businesses are competing head-to-head with global giants like Uber from Ethiopia to Egypt and South Africa. Indeed, the “sharing economy” seems to be perfectly suited to the needs of African consumers who have limited spending power. “Uber for Tractors” platforms, such as Hello Tractor of Nigeria and Trotro Tractor of Ghana, have enabled hundreds of thousands of African small-holder farmers to access affordable tractors for rent.  Digital platforms are also helping consolidate fragmented markets, such as the labor market for informal works and artisans. The Kenyan firm Lynk, for example, helps connect households and businesses with informal technical workers – such as carpenters, plumbers and electricians – through a digital platform that verifies and rates these workers.

Challenging digital monopolies

These benefits of digital platforms, however, come with a number of challenges that introduce policy dilemmas. One of the challenges is that digital platforms tend to end up with one dominant player, due to the network advantages from joining the largest platform. Like many other businesses with monopoly power, dominant platforms could be tempted to use bare-knuckle approaches to entrench themselves.

For example, the mobile banking application of M-Pesa, which currently has 50m active users around the world, has been accused of limiting the inter-operability of its platform with other platforms to reduce competition. Fortunately, Kenyan regulators compelled Safaricom, Kenya’s largest telecom firm that also runs M-Pesa, to make its application inter-operable with other mobile baking services.

The presence of a dominant platform is not without some merits. In African markets where the infrastructure for supporting businesses is typically missing, a dominant firm with sufficient resources can play a state-like role by building such an infrastructure.

Safaricom, for example, invested significant resources to recruit and train an extensive network of money transfer agents in the early stages of M-Pesa. Jumia, likewise, built a network of logistics operators, warehouses and pick-up stations that has helped streamline the complex problem of last-mile distribution in Nigeria. The challenge, therefore, is in defining and enforcing a red-line that demarks too much monopoly power among dominant platforms.

Competition with foreign platforms

The natural monopoly problem becomes more contentious when the dominant firms are foreign ones with significant technological advantages over their African competitors. In ride hailing, for example, local applications all over the continent are struggling to compete against Uber.

Given the vast size and resource access of Uber, as well as its network advantages from starting early in many countries, local ride hailing business are unlikely to win this competition. However, policies that are intended to protect local firms can backfire. For instance, Ethiopia, which protects its services sectors from foreign competition, has paid for it by becoming a laggard in this rapidly changing technological landscape.

A related problem arises when African businesses that are owned or managed by foreigners become dominant platforms. A case in point is Jumia, which bills itself as Africa’s largest e-commerce business. After enlisting in the New York Stock Exchange in 2019, Jumia was accused of branding itself as African although its top managers were Europeans and its head office was in Dubai.

Relative to international businesses like Uber, businesses like Jumia with African roots might have better local integration that enables them to contribute to the development of the business ecosystem. Still, African governments have a long way to go to ensure that local entrepreneurs receive sufficient backing – from financial access to incubation and acceleration programmes – that can improve their competitiveness in a globalised marketplace.

The digital future

Internet platforms are growing in importance in many sectors in Africa taking advantage of expanding digital access. These platforms could enable African countries to leapfrog to more efficient and modern economic systems that are not constrained by red tape and bureaucratic hurdles. At the same time, designing and implementing appropriate policies that support the growth of digital technologies remains a challenge.

While the benefits of having competitive local firms are apparent, this may not be feasible in digital marketplaces with rapid technological change. What is needed is not protective measures but carefully coordinated policies that support and nurture local digital enterprises. Regulators also need to sharpen their toolkits to better understand and proactively mitigate anti-competitive practices that beset digital platforms, especially in vital services – such as finance and payment – that undergird all other e-commerce activities.

Addisu Lashitew is a nonresident fellow in the Global Economy and Development programme at the Brookings Institution.