In the following article, I will provide an overview of institutional and alternative online financing platforms for development in Africa. I will also highlight how private P2P lending can offer some promising ways to close the funding gap for Africa’s infrastructure while mitigating risks.

Alternative online finance, including P2P lending platforms, are very much in their infancy and early stages in Africa. They hold the promise and potential to be real game changers to accelerate financial inclusion.

For example, banks’ excessively stringent lending criteria hinders start-ups and small growing businesses. Alternative online finance will definitely be an enabler for growth across Africa, and could also be the conduit for new innovation in terms of credit scoring and analysis.

Looking at international payments, according to World Bank data Sub-Saharan Africa remains the world’s most expensive region for international remittances. The average cost of receiving a remittance in Sub-Saharan Africa was 9.13% during Q3 2017[1]. This is well above the goal set by the G20 to reduce the global average cost of remittances to under 5 percent. South Africa is the costliest G-20 country to remit money from, with an average sending cost of 16.57%.

Likewise, there are vast opportunities for establishing a number of alternative payment solutions for the large number of unbanked individuals across the African continent. The cost of banking in Africa is high, and alternative online finance platforms offer solutions for individuals, communities and businesses.

Kenya is the birthplace of the wildly successful M-Pesa mobile money system, which is now used by over 20 million Kenyans, or approximately two-thirds of the adult population[2]. By comparison, Apple Pay is used regularly by as few as 5% of eligible users[3]. Indeed, M-Pesa has become so widely used in Kenya that it can now hardly be considered ‘alternative’.

Appraisal of institutional funds for development in Africa

There is a significant funding gap to fulfill Africa’s infrastructure needs, which cannot be met by current official sources of funding alone. In particular, the proportion of Official Development Finance (ODF) in total infrastructure spending is modest, with increased likelihood of further decrease in a context of tightening budgets in countries that provide assistance.

The OECD Development Assistance Committee (DAC) Creditor Reporting System data[4] show that development agencies allocate roughly 27% of ODF for Africa’s infrastructure to the enabling environment. This support mostly consists of capacity building by deploying experts or training government officials in various stages of planning and operations. Although not all ODF to these ‘soft’ aspects is provided specifically to promote private investment, examples show that many activities have this aim, including for regional infrastructure.

Alternative online finance for development in Africa

Alternative online finance models are categorized using the taxonomy developed by the Cambridge Centre for Alternative Finance in 2013[5] (cf. Table 1). This taxonomy is broadly split into financial return and non-financial return models.

Table 1: A Working Taxonomy for Online Alternative Finance

According to The Africa and Middle East Alternative Finance Benchmarking Report[6], in 2015 Africa raised over $80m in alternative finance. 75% was raised from startups and SMEs, with over 60m raised across Africa. 90% of online alternative funding was originated from platforms headquartered outside of the continent. Microfinancing is the leading model for microfinance in Africa, accounting for 42% of total market volume. Relatively low levels of P2P consumer and business lending activities exist in Africa. Specifically, peer to peer lending accounted for only 17% of total volume in Africa.

Kenya and South Africa are the clear market leaders in Africa with over 16.7m and 15m raised respectively from online channels in 2015.

The East African region has the largest market share of African alternative finance markets. In 2015, East Africa accounted for 41% of total African market share, while West Africa accounted for 24% and Southern Africa accounted for 19%.

The lack of bespoke regulatory regimes and specific alternative finance policy development is affecting alternative financing industry growth in Africa. According to Transparency International[7], the greatest perceived risk by industry in Africa is corruption[8]. In this regard, decentralized P2P lending platform presents opportunities to improve transparency by applying strong anti-money laundering (AML) and know your customer (KYC) policies to connect borrowers and lenders from all over the world in a trusted, fast and easy way using the advantages of Smart Contracts and blockchain technology.

Funding new and dynamic sources of growth in Africa

Rekindling new and dynamic sources of growth in Africa is important, and financing those sources of growth is more important. Since there is a shortage of lending in Africa for many small and medium enterprises, many investment opportunities never get realized even though they would be very profitable.

An adequate financing scheme to provide promising projects with the necessary capital, such as through peer to peer lending could thus boost impact. Financing in this way can be made available on different levels –from larger-scale projects to smaller scale investments. Opportunities for Peer to Peer funding in Africa could be classified into three board areas:

· Renewable energy: There are tremendous yet unrealized potentials in renewable energy financing and payment in Africa, converting sunlight, water, wind, and waste into energy and energy into wealth in the region.

· Innovation, entrepreneurship and technology: Peer to peer lending can be used to assist local entrepreneurs and businesses in Africa to acquire the right technology and skills to assimilate new technology, adopt and adapt it, and learn to invent new products which benefit country-specific context.

· Agribusiness and trade: Supporting local farming communities and agribusinesses to join the global value creation network in the virtual world, allowing anyone to participate — small and big players. Export credits, while primarily benefitting exporters from the country provider, can also have direct benefits for P2P project lenders involved in agribusiness infrastructure projects.

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