- Financial inclusion efforts across the industry have genuinely transformed millions of lives
- Traditional financial institutions have typically been less nimble and slower to adapt resources to meet ‘last mile’ customers.
- 4G Capital augments technology with human resources and tackle the root cause to business and finance failures
Microfinance has been hailed as a critical cog in Africa’s development.
The continent, whose population is projected to almost double by 2050, is fertile ground for those seeking to bridge the financing gap.
Banking systems have locked out a majority of Africa’s populations from the sector whose effects can now be felt as neo-banks and other financial institutions crop up across the continent.
As of 2020, Africa had an estimated 1.34 billion people with Nigeria, Ethiopia and Egypt being the most populous countries at the time. By 2050, these numbers will almost be double if projections come to be.
With this growth, the demand for financial services will increase. Innovators in the sector who strike a chord with users now are primed to gain from this.
To understand the sector and where it is headed, Wayne Hennessy-Barrett, the Founder and CEO of 4G Capital is nothing but optimistic for what the continent has to offer.
Question: What is the role of microfinance is in Africa’s development?
Hennessy-Barrett: Financial Inclusion has been a challenge for traditional financial institutions, they have typically been less nimble and slower to adapt resources to meet ‘last mile’ customers. Micro short term unsecured loans, right-sized for micro-companies, correctly and ethically managed, can unlock small enterprise potential and strengthen supply chains and a pathway to formality, and greater inclusion within the economy.
Microlending institutions, like 4G Capital, play a vital role in bridging the finance gap provided they design and deliver appropriate solutions on terms that work for the client.
By working together with banks and institutional investors, we can mobilise and manage funds to reach small rural and urban businesses and deliver compelling returns for all stakeholders.
What is the reality of investing in Africa’s microfinance sector?
Hennessy-Barrett: Investors need to intimately understand the landscape, the key opportunities and risks and find the right teams who can consistently execute. There are different approaches to microfinance.
Some attempt to limit their exposure to non-performing loan risk through sheer book size. Another route is to cut overhead costs by relying heavily on technology alone rather than human resources. Both approaches are reactive, dealing with the symptoms rather than the cause. They seek to protect against the downside, rather than maximise value creation.
Many micro-businesses are ‘needs must’ entrepreneurs, created through necessity by a population with a limit to their education. Without access to knowledge or capital, their potential will always be limited. We adopt a hybrid approach to value creation.
We augment technology with human resources and tackle the root cause to business and finance failures – by offering financial literacy and enterprise training, providing clients the ways and the means to succeed. And our value creation approach is matched by our BCorp ethos – we succeed when our clients succeed.
Does microfinance investment prioritise ESGs in Africa or is it a free for all kind of sector where anything goes?
Hennessy-Barrett: Where there are exploitable gaps in regulation, there will always be players who take advantage.
These areas however are closing. Regulation in African markets is strengthening, and more is being done to hold companies to account while communities are also better informed as to their rights and options. It’s great to see client data protection take precedence, and we applaud the recent passage of the Fintech Regulation Bill by the Kenyan Parliament to bring greater accountability to the unsecured lending industry.
The regulatory framework provides a benchmark for ESG focused investors to calibrate their own measurement frameworks to identify which companies are genuine about client centricity. The principles of ESG are not new.
Sustainable businesses are businesses that are profitable, transparent and care for the environment and communities in which they operate. These businesses will last and grow while enjoying the loyalty of staff and customers.
Predatory lending has been a matter of concern, how does this affect investing in the sector?
Hennessy-Barrett: There have always been players who feed upon the strife and struggles of others.
We commend the authorities in their structuring of regulation and management of licenses to make this kind of behaviour harder. Investors interested in financial services need to see healthy and cooperative engagement with central banks and regulatory authorities along with transparent practices and reporting, beyond what is required.
Our decision to invest and operate in this sector is because we believe in our clients and their transformative role in society. It is exciting, and a privilege, to play our role in building the economy from the bottom up, unlocking potential and recognising the dignity of hard-working small businesses with the opportunities they deserve.
We see this approach delivering market-beating returns and opportunities for exponential growth.
Microfinance – Macro Returns? Is this so or not? What can be done better?
Hennessy-Barrett: It really is all about execution. The opportunity is clear, but to be realised there needs to be a coherent connection between client success, replicable positive unit economics and scalable growth channels.
4G Capital has managed to align these components, and in so doing has won the support of genuinely world-class investors and partners in our growth journey.
Why do microfinance investments seem not to impact society yet there are super-profits in the sector? Can we equate this to the fallacy of AID in Africa where a few dollars flow in, but they flow out compounded?
Hennessy-Barrett: We would have to respectfully disagree with the premise.
The financial inclusion efforts across the industry have genuinely transformed millions of lives. There is no single bullet, but all the major quality of life indicators (infant mortality, access to education, water, food, shelter, light and education) have been needed most.
We can only speak to our own experience, where we see the capital from local and international sources flowing through the 4G Capital digital channels to propel genuine MSME growth and support a transition from an informal to a formal existence.
Our clients buy inventory from local suppliers and sell to local customers and consumers. We see our investors witness elevated levels of alpha, as our company has grown on average 85% year on year, by growing our clients’ revenues by an average of 82% per year.
This seems pretty equitable to us, and we want to see this model grow steadily improving over time.
There were some extraordinary efforts on the part of DFIs, foundations and multilaterals who came to fore to help support MSMEs through Covid-19. We were honoured with the responsibility of managing some of these funds from the Mastercard Foundation, distributing them to micro businesses in need. The funds were channelled to exactly where they were.
Hennessy-Barrett adds that tackling the finance gap is going to take a combined effort from across the financial industry.
He says there is a need for partnerships that can complement one another.
“We are actively signing up as many partners as we can across the supply chain to support micro and small businesses. By linking small store holders, distributors, vendors and investors, we can work together to construct the framework for inclusion and growth with the digital connective tissue to build high growth, an integrated economy in African markets. 4G Capital is in an incredibly exciting position as we develop and deploy new products and capabilities to scale to the vast and growing markets in Africa and other global emerging markets,” he notes.
There’s never been a more exciting time to be an African fintech!