The opportunity of lending fintechs in South Africa

The South African economy had a strong negative impact in the last year because of the pandemic, bringing consequences that affected thousands of people in the country. According to the World Bank (2021), the pandemic caused in South Africa an estimated 7.8% drop in its economy in 2020, which makes it the most affected country in Sub-Saharan Africa (countries on the African continent that do not border the Mediterranean Sea). Likewise, it is expected to have a growth of only 3.3% in 2021, 0.7% less than forecast. Similarly, only around 2% of the SMEs had access to financing from banks during this difficult time.

Fintech in South Africa

In the case of the Fintech sector, it should be mentioned that South Africa has made considerable progress in the sector in recent years, which has led it to position 37th in the ranking of countries with the greatest progress in the sector. Furthermore, South Africa has 4 of the 12 cities with the greatest advance in all of Africa, with Johannesburg being the main Fintech city in Africa (Findexable, 2020).

Also, fintechs in the South African country raised around US $ 100mn in 2019 through 33 deals, which takes it to third place within the African continent, after Nigeria and Kenya, in terms of total flows of Fintech financing in 2019. Moreover, South African fintechs are expected to increase their market share, largely by granting rights to financially excluded clients (Tellimer Research, 2020).

Nevertheless, the main drawbacks for the growth of the sector are competition from the informal segment and market dynamics and regulations (in particular in relation to consumer protection, association agreements, and capital requirements).

Lending Fintech in South Africa

The strongest categories in South Africa are those related to digital payments, Insurtech and financing for small and medium enterprises. Only in the case of companies in the lending category of the South African country, these represent 21% of the total sector (Tellimer Research, 2020) and are characterized by having a relatively young consumer profile since the profile of clients of lending mainly brings together millennials and the Gen Z population, which represent 70% of consumers who apply for loans. 

Regarding the impact that Lending Fintech companies can have, this occurs in the opportunity that it offers to the SMEs since, according to Mckinsey (2020), SMEs make up about 98.5 percent of all businesses in South Africa and are a critical force in the country’s economy. Nevertheless, the lack of access to finance for SMEs remains a challenge in South Africa, inhibiting their growth and sustainability.

The regulations imposed by banks make it difficult for SMEs to access loans during the pandemic in 2020. For example, as of October, only 44,912 SMEs had sent a financing request to commercial banks, which represents 2% of all South African SMEs, and almost 40% of these requests were still in process. One of the main reasons for this is because some banks require SMEs to have an existing loan or transaction banking relationship with them to access financing, which automatically excludes unbanked companies.

This opens the doors for Lending Fintech companies to help close this financing gap and thus be able to collaborate with the country’s recovery.