Accelerating Financial Sector Development to Boost Growth in Sub-Saharan Africa

There are many reasons why deeper financial development—the increase in deposits and loans but also their accessibility and improved financial sector efficiency—is good for sustainable growth in sub-Saharan Africa. For one, it helps mobilize savings and to direct funds into productive uses, for example by providing the start-up capital for the next innovative enterprise. This in turn facilitates a more efficient allocation of resources and increases overall productivity.

It also supports the creation of a larger variety of products and services, improves the management of risks, makes payments easier and helps lenders better monitor their clients. In addition, it provides instruments, such as insurance packages, and information that help households and firms to cope with negative events, ensuring more stable consumption and investment.

Given the weakening growth outlook for the region, examining all potential sources or lubricants for growth is now of particular interest. So, in our latest Regional Economic Outlook for Sub-Saharan Africa we examine the extent to which developed, well-functioning and accessible financial institutions and markets could boost growth and what policy options would best help achieve this potential.

Good progress but significant challenges remain

To fully appreciate the potential for further financial development, take a look at the encouraging progress sub-Saharan African countries have made over the last decades.

First, the region has led the world in innovative financial services based on mobile telephones, especially in East Africa. The fast spread of systems such as M-Pesa, M-Shwari, and M-Kesho in Kenya has helped reduce transaction costs and facilitate personal transactions even in the absence of traditional financial infrastructure. Microfinance has also grown rapidly, providing services to customers at the lower end of the income distribution, and large parts of the population now have access to financial services more generally (Chart 1).

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How Can Crowdfunding Scale In Sub-Saharan Africa?

It will have been difficult to ignore the exponential growth in crowdfunding over the past five years. In a relatively short period of time the industry has become an established and credible source of funding for small businesses and start-ups globally explains Will Tindall, Co-Founder of Emerging Crowd. In 2013, more than $6 billion was raised through crowdfunding platforms, and in 2014 an impressive $16.2 billion. When the results for 2015 are released, volumes are expected to more than double again, to reach $34.4 billion and by 2025 it could be as much as $96 billion . The industry has now surpassed venture capital and angel investing in total volumes raised; this is quite a feat considering it was a relatively unheard of concept not so long ago! Despite this phenomenal international growth, crowdfunding’s potential in sub-Saharan Africa (Africa) has yet to be unlocked. Small and medium-sized enterprises (SMEs) and startups, which account for the vast majority of growth and jobs on the continent, suffer acutely from a lack of access to capital. Meanwhile, China and India are gradually becoming middle class nations?—?thanks in part to entrepreneurial value creation. Business growth stages and capital needs The lack of an angel investing culture or any scaled venture capital offering means the “funding gap” is even more barren across Africa. This is widened further by the lack of entrepreneurial and support networks that exist in the likes of the US and Europe. An adapted crowdfunding model has the potential to address this head-on, but before the panacea can be reached, some sizeable hurdles and misconceptions need to be addressed: Read more →

Businesses have seen the light with solar energy and it’s finally paying off

A visit to a small hospital in northern Ghana changed Mahama Nyankamawu’s life forever. “It was dark, they had no electricity and the medicines they had had all gone bad,” recalled the 40-year-old, who went to the hospital after a car accident in 2014.

The experience inspired Nyankamawu to create Volta, a company that builds solar power projects for health clinics, schools and farms across Ghana.

Volta’s customers pay for 25% of the capital costs upfront, and the rest via monthly payments over two years. None of Nyankamawu’s customers have ever missed a payment, Nyankamawu said.

“Our model works best when it’s a substitute for people who are already using diesel generators,” he added. “They’re saving up to 45% on their costs by switching to solar.”

I met Nyankamawu at the Clean Energy Ministerial in San Francisco earlier this month, an annual gathering of energy leaders from 23 countries and the European Union. The meeting marked the first time the ministers met since more than 170 countries signed the Paris climate agreement to limit the global temperature rise to under 2C, a goal that won’t be met without strong domestic policies that give the businesses incentives to invest in a low-carbon future.

I often hear criticisms that businesses, which account for most of the manmade emissions that are causing global warming, aren’t doing their part to keep the rising temperatures in check. Surveys and anecdotal evidence show that many corporate leaders don’t see their role in this global effort.

But that’s not what I have seen. A growing number of companies are turning to renewable energy to reduce their carbon footprint. I am impressed with entrepreneurs like Nyankamawu and other business leaders who work on making renewable energy affordable and accessible. And they represent progress. Putting money in renewable energy, whether through power purchase agreements with big solar and wind farms in the US, or tiny household-sized solar projects in Africa, was a rarity even just five years ago.

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Four tips to improve impact investing in Southern Africa

It is clear that every country in Southern Africa has its own particular set of conditions that affect the ways in which impact investing is handled. Impact investors must therefore take their time to carefully learn about the conditions in each individual country. While a country-specific approach is obviously needed, GIIN researchers, in their report entitled Landscape for Impact Investing in Southern Africa, have compiled four key considerations that apply to Southern Africa, which are:

1) Leverage technical assistance (TA) facilities to build the pre-investment pipeline:

More pre-investment support is required in order to to develop a strong pipeline of investable opportunities for businesses; TA funders like USAID and DFID are recognising the importance of getting companies to the point where they can successfully raise capital.

The report says: “Targeted, tailored support requires an upfront commitment of resources but has proven effective in preparing potential targets for investment and in building high-quality deal flow. This process can also dramatically reduce diligence timelines if the investor is able, before investment, to increase familiarity with and visibility into a business.”

2) Develop sector specialisation:

Impact investors can also drive growth, impact and solid returns by narrowing down their focus on sector-specific portfolios. This has enabled some to use their existing knowledge to target some less well-known opportunities earlier and also to reduce diligence timelines.

The report expands: “Sectors such as agriculture, energy, and financial services present large opportunities where different companies often face similar challenges; learnings can be shared across portfolio companies.”

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African IPOs Set to Double Capital Raised in 2016

Insights

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