Introduction
The IMF posits that it has given out several loans to poor countries to help them recover their economy. However, critics say that approach does more harm than good while commenting that loans deficit the economy and do not improve it. They posit that what should rather be given is aid as such lending practices only exacerbate the cycle of poverty.
In 2022, the Chinese government-funded and built the African Union Headquarters in Ethiopia Adisa Ababa. They also financed and built the Nairobi-Mombasa Standard Gauge Railway, which cost $4.7 billion and reports indicate that Chinese companies have taken part in the construction of an estimated 70% of the road network in Ethiopia. In addition, they have played a prominent role in the development of the notable Addis Ababa-Djibouti Railway, which serves as a crucial connection between the landlocked country and the Doraleh Multi-Purpose Port.
As documented by the Chinese Loans to Africa Database, Chinese financiers forged 1,188 loan pacts totalling $160 billion with African governments and their state-owned enterprises during the period spanning from 2000 to 2020. These loan commitments were primarily directed towards sectors such as transportation, power generation, mining, and telecommunications.
While it may be argued that all these are beneficial for the economy, it has led to huge debt in the economy of these countries with concerns around economic debt, political allegiances and power play.
However, with the rise of the digital economy where African countries are leveraging technology to solve problems, hence creating wealth for their citizens, can the digital economy eliminate the need for debt and can fintech help Africa recover debt?
The True Impact of Fintech on the Economy
In the past, fintech primarily referred to the technological systems employed by established financial institutions. However, with the advancement of technology and increased digitalization, the definition of fintech has evolved to take on a more consumer-focused approach. With the concept of embedded finance, you now have fintech affecting several sectors including education, retail banking, fundraising, non-profit, and investment management.
Fintech utilizes innovative technology to enhance and automate the delivery and utilization of financial services, spanning from mobile payment applications to cryptocurrency. It can be in the form of software, services, or businesses that provide technologically advanced solutions, disrupting traditional methods to make financial processes more efficient.
According to a McKinsey report, Africa’s financial-services market could grow at about 10% per annum, reaching about $230 billion in revenues by 2025. Despite the obstacles it faces, Africa’s fintech industry seems to be on the path to extraordinary expansion.
Africa is in the phase of transformation and technological and entrepreneurial revolution. Although still behind Asia and Europe, the African development bank group reported Africa is set to outperform the rest of the world in economic growth over the next two years, with real gross domestic product (GDP) averaging around 4% in 2023 and 2024.
Sachs, the Advocate for Sustainable Development Goals for United Nations Secretary-General Antonio Guterres, expressed his belief that Africa is poised to achieve a consistent annual growth rate of 7% or higher in the forthcoming decades. He emphasised that Africa’s resilient nature, as evidenced in the report, will pave the way for a substantial acceleration in sustainable development across the continent, positioning Africa as the fastest-growing segment of the global economy. He further emphasised that Africa presents significant investment opportunities and is an ideal destination for investments.
Fintech (digital financial services) has commanded so much power in the economy and is a pillar of the digital economy that must happen along with digital infrastructure, digital skills and education, innovation-driven entrepreneurship and digital government.
African fintech is growing rapidly and the youth are employing their creativity to create massive employment and prosperity, creating home-grown solutions to solve unique challenges in a variety of ways, as well as exporting some of the solutions beyond Africa’s borders. In general, the African continent has already demonstrated its readiness for Fintech and digital innovations, since it has one of the highest mobile phone penetrations in the world and is currently experiencing a boom in mobile financial services and payment technologies.
South Africa, Kenya, and Nigeria are currently driving the FINTECH revolution in Africa. Compared to the rest of the continent, these regions have relatively more advanced fintech ecosystems. Using fintech to stimulate economic activity, create a multiplier effect, and advance development goals are all ways in which fintech can make a positive impact.
The economic impact in Nigeria is expected to stem from the expansion of revenue pools and the attraction of foreign direct investment. The fintech sector, through the digitization of financial services, has the potential to drive increased productivity, capital utilization, and labor hours.
Fintech companies play a significant role in collecting financial data, which offers valuable insights into individuals’ financial status, spending preferences, creditworthiness, and general habits. This data also sheds light on aspects of a person’s health status. The availability of such data facilitates the development of innovative apps that cater to Nigerian tastes and needs while providing positive data for government policy decisions.
For example, suppose data analysis reveals that a particular state or region in Nigeria has limited online service usage. In that case, it suggests a combination of factors like digital skills gaps, inadequate technology adoption, and financial constraints. This information can inform regulatory and policy decisions, such as efforts by the Central Bank of Nigeria to penetrate the mobile payment market in that area or initiatives by the Nigerian Communications Commission to improve network coverage and promote local manufacturing of telecom devices.
Fintech plays a vital role in facilitating efficient access to loans for SMEs and individuals with no credit history by leveraging technology like AI and ML to make decisions based on alternative data. This creates opportunities for small and medium-sized businesses to grow faster and expand further. Moreover, the abundance of data collected by fintech companies enables the application of data mining techniques. Machine learning algorithms utilize data attributes such as customer ID, account balance, gender, education, marital status, and age to assess creditworthiness. Applicants with a positive credit profile have a higher likelihood of fulfilling their financial obligations. Given the increasing volume of banking transactions, AI-based data analysis becomes essential for accurate assessment.
While businesses aspire to make a significant impact in the e-commerce sector, many face challenges in accessing appropriate financial assistance due to a lack of credit scores. Traditional banks often hesitate to approve loans for startups and SMEs, exacerbating the issue. Despite Nigeria’s attractive banking sector, which boasts value pools of over $9 billion, a significant portion of consumers remains underserved. This is primarily due to issues related to service accessibility, particularly in rural areas, affordability concerns, and subpar user experiences. Fintech companies have identified this gap and are developing enhanced propositions across the value chain to address pain points in areas such as affordable payments, quick loans, and flexible savings and investments.
Despite the growing fintech activity in Nigeria and its positive impact on the economy, there is still considerable potential for further growth. In 2019, fintech accounted for only a small fraction of retail banking revenues (around 1.25 per cent), and while fintech investments in Nigeria reached approximately $460 million, most of it from external investors, this amount represents a small fraction compared to the $36 billion invested globally in the fintech sector.
Conclusion
While it is certain that the prosperity of an economy can elevate, uplift and prosper the people, it is critical that the government creates policies and frameworks that will unlock its entrepreneurial sector for the benefit of the government and all citizens.
The key to freedom from debt is innovative entrepreneurship and even more for fintech but this will require a combinative effort of all stakeholders.
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