Microfinance and the future of fintechs in Africa

Feb 05, 2021 - 6 min read
Also Available in : Français
Rodolphe Dartigues, Global Account Manager at Sopra Banking Software

Players in the banking and financial system would benefit from focusing on the mechanisms of microfinance, which has now become a hotbed of innovation in the digital sector.

Long seen as banking for underprivileged populations, microfinance has historically appealed to a large client base too poor to qualify for traditional financing channels. Thanks to a flexible distribution network (normal branches, mobile branches, merchant networks, partnerships, etc.), microfinance gives a vast number of people access to premium financial services, even though these demographics have no way of using the classic banking system. Through this solution, savings, credit, transfers and insurance products are made available to all.

The person seen as the creator of this innovation is Muhammad Yunus, who founded the Grameen Bank in Bangladesh in 1976. The initial micro-credit institution helped 7 million locals borrow money to invest or to help with emergencies via a mutual, cooperative model. The idea has since been developed to adapt to the geopolitical realities of different emerging economies. For the last 20 years, its development has been supported by leading private and public institutions and international sponsors, which have guaranteed its solidity.

While microfinance has remained “social and solidarity-based,” the sector’s key players are now profitable financial establishments whose loan portfolios total more than 1 billion euros. The reality is that microfinance is now becoming a mature market poised to produce credible financial establishments alongside the traditional names in banking and finance, particularly in Africa.

A pivotal moment

Microfinance institutions are currently at a key stage in their development and are now dealing with the same challenges as those faced by banking establishments: the need to optimize their business processes, find strategies for sales differentiation and tackle the digitization of their working methods. Just like traditional banks, they are looking to constantly improve their productivity and meet technological challenges head on.

Some of these issues are inherent to the sector. Microfinance has specific characteristics, including its alternative distribution networks and clientele, and therefore requires technological solutions adapted to the realities of its environment. For those developing IT solutions, this is a field of promising and rapid growth.

Challenges for fintechs

The microfinance sector is also displaying an “adventurous” culture and is open to experimentation. Its organizations are flexible, pragmatic and often governed by less-constrictive regulations. As a result, they can be more agile than those in the traditional banking sector. Their appetite for digital technology should therefore be seen as a great opportunity for experimenting, which will lead to the development of new solutions. After all, it is likely that the process of technological diffusion will be inverted in the future. Microfinance institutions will no longer be content with following in banks’ footsteps and will instead become laboratories for technological progress and the creation of innovative solutions that traditional banks will benefit from.

These are just some of the stakes that fintech companies should be taking advantage of. In terms of its technological maturity, microfinance is still an “adolescent” sector that needs to grow into “adulthood.” However, thanks to their history and their position, fintechs have a role to play as credible strategic partners to foster the development of these institutions. Particularly in Africa, microfinance has extensive needs when it comes to robust and diversified digital solutions and offers major potential for growth and development. What’s more, it could accelerate the digital transformation of other financial activities.

This position could also enable fintechs to consolidate their assets in countries where they are already active, while also appealing to new clients. As microfinance is essentially a driver of positive and rewarding values (social mobility, solidarity, economic development), this sector may offer a way to stand out from the competition while building a motivating environment for employees.