How banks can better serve small businesses in Africa
Traditional banks need to figure out a way to serve small businesses.
Small companies power much of Africa's economy. But traditional banks haven't fully tapped into this potentially lucrative segment due to risk concerns and stringent onboarding and credit requirements.
This gap is being filled. A growing assortment of telecommunications companies and challenger banks are willingly embracing the perceived risks associated with smaller businesses, offering microfinancing and innovative solutions that traditional banks have been hesitant to provide. The allure — higher lending margins today and long-term relationship building for tomorrow.
If traditional banks want to remain competitive over time, they must figure out a way to serve this segment — quickly.
The category of micro, small and medium-sized enterprises (MSMEs) contributes about
Although 80% of MSMEs have bank accounts, about 70% still rely on personal accounts for business transactions. What's more, research from the
In all, about 28% of MSMEs in Africa don't have access to credit,
Effectively serving MSMEs presents significant opportunities for both banks and the broader economic development of Africa. The continent features a concentration of large commercial enterprises alongside a vast number of informal MSMEs. By formalising this sector, banks can help to unlock its potential, stimulating economic growth. As these businesses gain access to financial services, they can contribute more effectively to job creation and GDP growth, leading to a more resilient and diversified economy.
Small and micro businesses present unique risks, such as limited financial records, lack of collateral and vulnerability to macroeconomic events, which explains banks' hesitance to provide a comprehensive range of services. But MSME banking also offers benefits, including fatter lending margins, strong customer relationships and a large value pool.
The competitive landscape is fragmented, with players excelling in specific areas rather than holistically. Competition is heating up as digital banks, telcos and fintechs recognise the value of serving MSMEs and tailor products to them.
The increasing focus on MSMEs is no coincidence; methods for managing risk and developing a fit-for-purpose risk appetite have evolved. Advanced scoring algorithms that use non-financial data and fintech innovations tailored for MSMEs are now available, all of which are further enhanced by the fast rise of artificial intelligence.
Digital banks and fintechs are addressing the payment and financing difficulties of MSMEs in innovative ways. Fintech companies often start with a single product and rapidly diversify their offerings. Lula, for example, began as an MSME lending business and has since entered the banking space, while Yoco, initially focused on payments, is moving into lending based on insights into merchant cash flow.
Challenger banks rooted in personal banking are also entering the MSME space. Capitec, for example, recently acquired Mercantile and relaunched as Capitec Business, implementing a new commission-based model for point-of-sale services. TymeBank has enhanced its offerings through the acquisition of an MSME-focused fintech, developing innovative solutions such as a loan product and an AI-driven tool to support businesses in managing their finances.
Mobile network operators are broadening their financial service offerings to tap into the MSME market, using their extensive reach. Big tech companies are also launching MSME solutions as part of their broader financial initiatives, such as embedded finance, intensifying competition.
Despite the rise of fintechs and challenger banks, traditional banks still have valuable opportunities to work with MSMEs. Their credibility and established reputation resonate with MSMEs, similar to their appeal to larger corporations. But many traditional banks face a dilemma in deciding which MSME segments to prioritise. While they excel in serving medium enterprises, they often struggle to connect with micro and small businesses, where fintechs have gained significant traction.
The key question for traditional banks is whether their existing business models can adapt to this evolving landscape without major overhauls. Banks that dominate the upper MSME spectrum might find growth opportunities by targeting smaller enterprises and vice versa. But their current structures could hinder such transitions.
As they pursue growth, traditional banks must protect their core business and maintain operational capabilities. Striking the right balance between defending existing operations and exploring new segments will be crucial for long-term success.
While it's clear that financing and advisory services remain the most sought-after for MSMEs, there are also opportunities in non-financial services, including documentation assistance, operational support, training and data analytics. These 'beyond banking' services are increasingly seen as must-haves by all banking customers.
To succeed, banks must recognise the unique needs of African MSMEs and develop tailored products and services that simplify business operations. This may involve partnering with fintechs and specialists to enhance capabilities and offer fit-for-purpose and personalised solutions.
This strategy will not only generate new revenue streams for banks but also equip MSMEs with the essential support they need for growth. Ultimately, a collaborative approach will unlock significant opportunities, driving sustainable growth for companies — and banks — across the economy.
Pierre Romagny is a partner in financial services at Oliver Wyman.
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