- Tech Safari
- Posts
- Laughing (or crying?) at the bank
Laughing (or crying?) at the bank
Africa's $331 billion SME financing gap š°
Morning!
New city, new startup! As I'm getting used to the heat, concrete and late nights of Lagos, today I'll be digging into one of the city's most exciting companies.
In case you missed it, Prox Weekly is your 5 minute rundown on Africaās tech scene. 7 minutes if youāre a slow reader š¢
If someone sent you this, make sure to subscribe and join 1000+ others who want to learn more about Africaās booming tech ecosystem.
This week in where I'm moving to..
Every time I visit a new city in Africa, I post about why I'm moving there.
It's a figure of speech, but everyone seems to takes me seriously.

For the record, I'm not moving to Rwanda, Kenya or Tanzania. It's too hard to commit to just one country.
But if we're talking about countries that are serious about their tech scene, there is one clear winner - Rwanda š·š¼
Check out why below š
Last year, Rwanda launched Kigali Innovation City:
A $2 billion dollar commitment to become Africa's tech hub.
Here are 4 reasons why Rwanda is the future of tech in Africa.
Thread š§µ
ā Caleb Maru āļø (@calebmaru)
9:16 AM ⢠Nov 3, 2022
And if you missed last week's deep dive on the Rwandan ecosystem, you can catch it here.
Okay, into today's edition.
A few months ago, I went out for dinner with my team at EntryLevel and realised something:
Alan (Head of Engineering) is a gun pianist. In his spare time he builds an app called Syncbeat which lets people play instruments online together.
Daniel (Product Manager) buys old vintage cars to re-furbish them, and then resells them.
Amelia, (Ops Associate) has been working on a fintech app for farmers (different to ed-tech but weāre here for it).
Albert is a serial comic book collector, and buys vintage comic books to sell them.

Just about everyone on the team had a side hustle.
And this isnāt just my team.
Zapier found that almost 40% of people in the US have a side hustle.
Chances are that youāve also done freelance work, another job to earn some side income, or have your own company.
And that work is probably based on your interests, or a skillset thats unique to you - itās probably opportunistic.
If thatās you, you are what is called an opportunity entrepreneur - someone who starts a business, or uses their skills because they see an opportunity to provide a service or create a product.

Opportunity or Necessity? š¤·āāļø
While there are many entrepreneurs, not all of them start their businesses out of opportunity.
Not all of them are using their design skills to start freelance business, or starting ed-tech companies because they see a gap in the market.
Some entrepreneurs start their businesses out of necessity.
And we see necessity entrepreneurs the most in Africa. Africa has the highest rate of entrepreneurship, with over 22% of Africaās working age population starting a business.
These entrepreneurs are the backbone of Africaās economy - with over 100 million registered Small to Medium enterprises (SMEs).
Key word here is āregisteredā - many more are informal - and institutions think this is number is much higher.
These SMEs make up 90% of the private sector and 80% of jobs on the continent.
So, why are there so many entrepreneurs in Africa? Itās a long answer (and I go into it in detail here), but the TLDR: There are simply not enough jobs on the continent.
When half of the working population canāt find a job but need to put food on the table, they start a business. And this is why most of Africaās businesses exist.
We call these entrepreneurs necessity entrepreneurs.
Necessity entrepreneurs can range from mothers selling fruit and vegetable at the local market to Masters graduates who cant land a job after their degree university.

The World Bank Group finds that these entrepreneurs are strongly negatively correlated with the amount of GDP per capita.
So, the poorer the country, the higher the likelihood that you will find necessity entrepreneurial activity.
And for these guys and girls, itās not a fun side hustle - itās food on the table or not.
Necessity entrepreneurs need cash
Now, when starting your opportunistic venture, there are a few common problems you run into.
Other times, you might find it hard to grow brand awareness and find your next set of customers.
Sometimes, you need some capital to get started which you draw that out of your own salary.
Other times, its coming up with the right name for your side hustle. No joke - I still need to rename my newsletter š
But as a necessity entrepreneur in Africa, the biggest challenge to surviving is access to capital - which 64% of African business owners claim is their biggest issue.

And these folk dont have a āmain hustleā to draw from.
Laughing (or crying?) at the bank š„²
For an SME to get a bank loan, they need to:
Have a good credit score
A strong track record of financials
Personal identity documents
Have a business licenses
Collateral or a guarantor
This flow has a ānarrow viewā of business and credit history, relies on human judgement and takes a up to three months to process.
If the business needed that capital to survive, theyāre probably not around by the time their application has been processed.
According to PwC, less than 5% of businesses in Africa have ever been able to access loans from registered financial institutions.
Common alternatives are friends and family (if youāre lucky), or loansharks (if youāre not so lucky).
So itās no surprise that Africa has the highest proportion of SMEs that fail from lack of financing.
The International Finance Corporation finds that 28% of SMEs are fully constrained, and a further 25% are partially constrained by lack of financing.
This funding gap for SMEs in Africa is estimate to be a whopping $331 billion. Ripe for disruption.

In come the fintechs
Over the last few years, we have seen the wave of fintechs coming through to solve financial inclusion problems for African consumers.
Business lending is no exception.
I chatted to Zach, CEO of Payhippo, about their approach to SME financing. Payhippo is a credit-led neobank for Africaās merchants.
Instead of the bankās ānarrow viewā of business lending, fintechs like Payhippo build a credit score for companies themselves from scratch - by using bank statement data.
They use this to size a business and create an internal score that lets them determine how likely a businesses is to repay.
And by creating their own credit score, they turn the average three month wait time for a loan into three hours - drastically changing outcomes for SMEs.

Payhippo finds that most of their loans are going to people under the age of 35 selling on mobile commerce.
Mobile commerce is a massively growing space in Africa, but financing to buy inventory is hard to come by and risky for first time business owners. Thatās why rapid loan approval can be a case of life and death for business ownersā companies.
And when you replace human judgement with technology, you can do this at scale and make accurate judgements while financing many SMEs who donāt have access to capital.
From Necessity to Thriving
Helping SMEs in Africa access capital is crucial for Africaās economy to grow.
Thatās why fintechs solving the capital access problem are exciting for the longterm growth on the continent.
In African tech thereās a saying āthere are no dog walking apps in Africa.ā
Startups that thrive on the continent dont serve conveniences, they solve Africaās hardest problems and provide core needs and services.
Payhippo an example of how startups are leveraging technology to help SMEs thrive, and push the continent forward.

What do you think of Payhippo's impact on SMEs? Let me know here.
That's a wrap! Catch you next week
And if you want one of these dope t-shirts, sponsored by Daba finance, refer a few of your friends š