10 Ways Crowdfunding Will Impact Investment Banking

When enhanced technology touches an industry, there are often casualties. Unfortunately, in many instances, technology progression and creative destruction mean a net job loss. Jobs are created in one area, but higher-tech replaces many others elsewhere. We are seeing upheavals almost everywhere, from transportation to education. Investment banking is one industry on the cusp of a major overhaul. Financial technology, including crowdfunding is leading the way. While still in its infancy, equity crowdfunding and all that surrounds it does not seem to be going anywhere. With the crowdfunding industry’s substantial growth, many are wondering how this will affect traditional finance, including investment bankers. As always, there are pros and cons to the introduction of nascent trends and technologies into a very traditional business, but there is always opportunity in the face of change. The key is to find how to ride the wave as it moves along.

While crowdfunding and other financial technologies do not represent a cure-all or complete replacement of traditional methods, there are areas where both crowdfunding and traditional finance and investment banking will work in tandem to effect major change within small business finance. There are also downsides, some of which we discuss more in-depth here.

Speed of Transactions

In almost every instance, when technology touches a market, it increases both speed and efficiency. Corporate finance is no exception. With the help and encouragement of both regulators and technologists, companies are seeing much more rapidity in investment cycles. Services like digital signatures, escrow, accredited investor confirmations and bad-actor checks are all becoming more streamlined. The push for direct, internet investing is adding fuel to the fire to make this happen with more efficiency.

As the various required regulatory items in capital transaction see drastic reductions in their hurdle speed, transactions flow more smoothly and deals get done more rapidly. It’s a win-win for all involved.

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The importance of SMEs in growing inclusive growth in Africa

Inclusive economic growth is growth that leads to job creation, causing a ripple effect on the purchasing power of the majority of the populace. The private sector, and in particular small and medium enterprises (SMEs), are the drivers of an economy. SMEs are also the largest providers of direct employment and inclusive growth can be achieved through promotion of policies that would drive their development.

According to the Central Bank of Nigeria, 96% of Nigerian businesses are SMEs (US = 53%, EU = 65%). Inclusive growth can be achieved by positioning these SMEs to take advantage of the opportunities in the economy.

Financial services is crucial to SMEs

According to the Small Business Administration of the USA, two of the top 10 reasons why SMEs fail are lack of capital, and poor credit management. It is no different in Nigeria and the rest of Africa. While there are several aggregators/sources of capital including Private Equity (PE) funds, development finance institutions (DFIs) and insurance companies in Africa, the key players in the financial services industry that are optimally positioned to serve SMEs and therefore drive inclusive growth are banks and micro-lenders.

Government macro-economic policies impact SME financing

Lenders operate within the wider macro-economic environment, and government policies regarding inflation and infrastructure are crucial to keeping the cost of funding down. When inflation drives up the cost of funding and ultimately lending costs, it in turn drives up the cost of production, making SMEs less competitive.

Standardisation of physical address systems is another area where African governments can make a meaningful contribution to SME growth. Inconsistent address systems make it difficult for SMEs to establish formal relationships and credit histories with suppliers, customers and transient clients.

What can banks do?

At the credit application and processing stage, banks need to invest in systems that allow more efficient and tailored risk profiling. Such a system rewards diligent entrepreneurs with lower lending rates and greater access to capital.

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African Innovator: Tanzania’s Askwar Hilonga, an Impact Entrepreneur Addressing the Water Challenge in Africa

Askwar Hilonga is the perfect example of an African solving real African problem, and in this case the Water challenge. Askwar need investors to help scale his business, and we strongly believe that the return on investing in his low-cost water infiltration system, which is in great demand in the continent as well as other developing countries would be very high.

Why mobile money is big business in Africa

Another week and another bank in Africa is entering the mobile money space.

Pan-African Ecobank is partnering with Orange Cameroon to allow the telco’s customers with accounts at the bank to transfer cash between the two services. The two firms are already working together in Mali and plan to introduce the service in four other African countries.

Banks partnering with mobile companies is the latest attempt by financial firms to tap into the continent’s large populace of the “unbanked.”

In sub-Saharan Africa, only a third of adults have access to bank accounts. Compare this to Latin America, another emerging market, the figure stands at 51%, according to the World Bank. There are a lot of people whose money simply never touches the region’s financial systems.

The mobile phone revolution and the rise of mobile money, especially in east Africa with platforms such as M-Pesa, has changed this.

Mobile money is now big business in Africa. Last year, the market generated $656m in revenue and in the next four years this is expected to double to $1.3 billion, analysts say.

Until recently, financial firms ceded this space to telecom companies. But the clear growth of the sector has compelled a re-evaluation. Now banks are not only trying to compete in this space but also offer new products that promise access to banking services to those who up until this point were excluded.

So in Nigeria, for example, GT Bank are getting in business with Etisalat Nigeria, the country’s third biggest mobile operator, to create GTEasySavers, a savings account that can be opened via mobile phones. For the 57% of the country with no access to formal financial services, that’s a small step in the right direction.

And in Kenya, in 2011, only 42% of people had bank accounts. That has risen dramatically, driven by mobile money platforms.

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6 Facts About The Nigerian Impact Investing Landscape

Some actors believe that Nigeria may be in some sort of ‘impact investing bubble’. This thinking is encouraged by the lack of a record of successful exits and the growing skepticism in the long-term viability of existing impact investments, according to the Global Impact Investing Network (GIIN) report on the landscape of impact investing west Africa.

Impact investments are investments made into companies with the intention to generate social and environmental impact along with a financial return.

The research conducted in partnership with Dalberg, with support from the UK’s The Impact Programme also revealed that the recurring mischaracterization of Impact Investing with [venture] philanthropy has led to difficulty in raising capital because a fair amount of local investors are convinced ‘impact investing’ implies a compromise on financial returns.

Here are 6 more facts about the Nigerian impact investing landscape:

1: Nigeria leads the way in impact investing in West Africa

Twenty eight impact investors are active in the country, including 20 non-DFI and 8 DFI investors.

2: Impact investment deals in Nigerian amount to $ 1.9 billion in last decade

Identified impact investments (which include deals made by all DFIs – Development Financial Institutions –  and 12 non-DFIs) amount to USD 1.9 billion in deployed capital across 181 direct  investments since 2005

3:  Impact investing is still playing small in Nigeria

Although the impact investing sector in Nigeria outpaces other countries in the region, the community of investors is small relative to the size of the market. Ethiopia, for example, is less than a quarter the size of Nigeria in terms of GDP, but has almost triple (58) the number of non-DFI impact investors.

4: Investors are not local

Only seven of the 28 identified impact investors have a local presence as at December 2015. This is because of the high cost of living and operating businesses in the country. Nigeria ranks 170 out of 189 countries on the 2014 World Bank Doing Business index.

5:  The TEF is the only identified truly local impact investment fund

The Tony Elumelu Foundation—funded through the personal wealth of a Nigerian national, Tony Elumelu—is the only identified impact investor that relies significantly on local sources of capital

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