Bridging Africa’s Capital Gap: Unlocking the Potential of Alternative Financing

Written by: Joe Kinvi

We always talk about how Africa is a continent brimming with potential, yet it faces a significant challenge that hinders its growth: a $400 billion capital gap. This gap not only restricts the progress of the continent’s economy but also limits the potential of African businesses to achieve their desired growth.

One critical issue is that most African businesses require working capital, but they attempt to raise venture capital (VC) funding instead. Over the past five years, we’ve seen an influx of VC money to the continent, mostly going to tech-enabled businesses. While some of this capital is essential to get many companies off the ground, VC funding is primarily intended to finance innovative startups with high growth potential, and it doesn’t make sense to fund working capital with VC funds. A more suitable option in such cases would be debt capital.

However, accessing debt capital is challenging for many African businesses. Local financial institutions are often hesitant to lend, primarily due to the need for more assets as collateral, coupled with the lengthy process of unlocking credit. This creates a paradox where businesses desperately need funding but cannot obtain it.

In light of this, alternative financing methods could play a pivotal role in bridging Africa’s capital gap. Asset-based lending, invoice factoring, supply chain, and revenue-based financing could help businesses access much-needed capital. Additionally, leveraging blockchain and mobile money (MoMo) could increase transparency and ease of financial transactions. In Kenya and Ghana for example, the use of mobile money is the primary way that people transact digitally and many financial products have been built of top of MoMo rails.

FinTech companies and peer-to-peer (P2P) lending platforms are also increasingly emerging as potential solutions, providing a platform for businesses to access faster (but not cheaper) capital. Many of these platforms also enable businesses to connect with potential investors directly. Companies like Carbon and Fairmoney have done fairly well (no pun intended) in lending. Crowdfunding and impact investing have also shown great promise, particularly for socially impactful companies.

Another source of finance that doesn’t often come up is the diaspora. It’s estimated that $200-$300 billion of capital flows to the continent yearly, so I wonder if some of this capital can go towards businesses that need funding. The challenge is that remittance is often one way (inwards). However, if mechanisms exist to enable capital to flow both ways (inwards and outwards), would the diaspora collectively be open to funding more businesses across the continent? While this sounds very appealing, I foresee many immediate problems here:

• The risk appetite of these investors

Do they understand the risk associated with investing in Africa? If not, is this easy to learn? This group has access to emotional capital and needs some handholding in the early stages of their investment journey towards the continent.

• Devaluation of the local currencies

To understand what happened here, you must look at Egypt, Kenya, and Nigeria over the past 18 months. Without going deeper into the currency devaluation topic, African currencies have been highly volatile, and stability would encourage more investments.

• The challenges of moving funds in and out

Remittance has also been one way, i.e. going towards Africa. To mobilise diaspora investments, investors need to know exactly how the capital will flow back to them in the currency they invested in. There has been a lot of outward capital restriction in Africa, which can discourage diaspora investors from getting involved.

The success of these alternative financing methods depends heavily on creating an enabling regulatory environment and addressing the challenges in implementing them. More importantly, it’s about organising and finding tech-enabled ways to make this work while mitigating all the abovementioned risks. Collaboration between policymakers, financial institutions (home and abroad), and businesses is crucial to ensure that the correct type of capital reaches the businesses that need it the most.

In conclusion, unlocking alternative financing methods could be the key to bridging Africa’s capital gap. These innovative solutions could drive business growth and contribute to the continent’s economic development.

Do you have thoughts on how else this capital gap can be closed?

Please let me know in the comments.

This article was written by Joe Kinvi, a Managing Partner at HoaQ.