Check out this insightful from CGAP on innovative financing for inclusive credit fintech in Africa! https://lnkd.in/dGJzEsVU Last year, we published a blog by Marcus Fedder (https://lnkd.in/eGGQa8dD) discussing why African fintechs have yet to meet expectations in SME finance despite their immense potential. One key challenge identified was funding: “Fintechs generally do not have access to deposits, making funding expensive. Despite initial excitement, impact investors and DFIs are likely, in the medium term, to avoid fintech lenders that charge usury rates. But without funding, fintech lenders cannot grow their lending business.” This new CGAP paper delves into innovative financing mechanisms such as drawdown-on-demand senior debt, revenue-based financing (RBF), and asset-backed lending to tackle this critical issue. Key insight: While venture capital (VC) has traditionally been the go-to funding source, it is relatively inefficient and costly—unsuitable for growing loan portfolios. Instead, debt financing emerges as the most appropriate instrument for scaling a loan book. For early-stage credit fintechs with positive or improving unit economics, but not yet at breakeven, access to debt is becoming increasingly essential. At MFW4A, as a platform for knowledge dissemination, advocacy, and cooperation on the African financial sector, we are eager to contribute to dialogue and capacity building to scale up such innovative mechanisms.
The high failure rates of inclusive credit #fintechs hinder #financialinclusion. Over 54% of inclusive credit fintechs fail after their first funding round, and only 15% secure more than three rounds. This limits the sector’s capacity to address the massive $4.9 trillion global MSE credit gap. This funding gap is due to an inability of funders to accurately and efficiently assess the riskiness of fintech lending portfolios. Data-driven investment approaches, using real-time data integration with fintechs and advanced analytics, offer a promising solution. They enable innovative asset managers to offer tailored financing solutions, based on dynamic and precise risk models, such as drawdown-on-demand senior debt, revenue-based financing, and asset-backed lending, which are better suited for early-stage fintechs. CGAP’s research shows that these innovations help inclusive fintechs expand their portfolios and reach operational break-even. It also positions them as attractive investment prospects for a broader range of traditional asset managers and investors, including development finance institutions (DFIs). Donors also have a role to play to enhance technical capacity and promote data-driven solutions. By redefining how early-stage fintechs secure growth capital, these stakeholders can empower fintechs to scale their impact and reduce the MSE credit gap, driving sustainable economic growth in Africa. Thank you Alexander G. Sotiriou; David Kruijff https://lnkd.in/dbTJGypN