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Cashflow Financing:The Gem That Could Make Banks Irrelevant For SMEs In Africa

A few recent pronouncements in the financial services space has got me thinking about the future of SME lending in Africa. First, there was the pronouncement by Safaricom which launched a new feature for businesses that allows direct transactions .The Mpesa business tool now allows MSMEs to send money and make payments from their business tills directly. See more details here . This basically means, Safaricom has visibility and data on ALL MSMEs cashflows.

Facebook also recently made a pronouncement on the launch of the Facebook shops which is a new functionality which allows a small business to set up a shop within their facebook or instagram page. Now am sure you are wondering what does Facebook as a commerce platform mean ? Now some thought leaders predict that this could be Facebook’s next move in their bid to replace traditional payments and gain further control over the data of their billions of users, which will now include purchase data and business inventory. Facebook’s move could be to perhaps in the near future introduce Facebook’s controlled payment options which could potentially take over revenue from payment processing and will likely connect directly to consumer’s bank accounts.

Almost ALL formal SMEs have a bank relationship. Many have asked themselves do banks really understand my business financing needs ? According to the International Finance Corporation(IFC) 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. Many through various access to finance surveys have indicated the issue of collateral as key barrier to accessing growth capital or certain credit facilities from the banks.

In the informal, micro-enterprise space we have seen fintechs use data and cash flow from payments to offer credit to micro-businesses or individual micro entrepreneurs. Now the question remains, can small and medium enterprises who are formal, more trustworthy and are banked access credit in a similar manner? Therein lies the opportunity for cashflow based financing from the banks which is helpful to companies that generate significant amounts of cash from their sales but don’t have a lot of physical assets, such as equipment, that would typically be used as collateral for a loan.

A majority of African economies are driven by wholesale and retail traders. In Kenya for example and according to the Kenya National Bureau of Statistics(KNBS) 61.6% of MSMEs are in retail and wholesale trade of goods and services. This is a sector characterized by minimal physical assets. Many commercial banks have had this cashflow data through the bank statements for a very long time. Unfortunately,unless the banks innovate and seek to be involved, the opportunity could just be a piped dream for the highly regulated banking sector.

Safaricom through Lipa na M-pesa has seen this opportunity, Facebook is on a path to actualize this and a few private lenders in Kenya such as and have tapped into this opportunity though at very punitive interest pricing to SMEs. The truth is, we foresee more and more private lending companies and innovations take up this opportunity based on cash flow financing . This could be an option for the Lipa na Mpesa brand either to lend directly or to partner with many private lending companies who can offer credit on this basis. If banks do not jump in, the relevance of commercial banks to SMEs will dissapear right in front of our eyes !!!

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