EAVCA Report Indicates Positive Growth in East Africa’s FinTech Sector

The East Africa Venture Capital Association (EAVCA) in conjunction with Financial Sector Deepening (FSD) Africa, FMO (Dutch Development Bank), and Intellecap have released a report that contains the study findings of FinTech investment opportunities in East Africa.

FinTech (the financial technology industry) is a term used to refer to firms that leverage technology to provide financial services and products to customers or to other financial firms.

According to the report, investments in FinTechs and the number of startups in this industry have increased exponentially in the 2014-2015 period. In Africa and the Asia Pacific, mobile money has resulted in the Fintech growth being experienced in these regions. For example, Tanzania and Rwanda have the right environment for FinTech growth thanks to increasing internet and mobile penetration. On the other hand, Kenya is already ahead in both mobile and internet penetration, making most FinTech startups to establish in the country.

The rapid FinTech growth in East Africa is also enabled by investor interest and technology innovation.

“[…] the M-Pesa revolution, government investments in Konza City, and the launch of innovation labs in the country have made Kenya the technology hub of Africa. This niche market is estimated to be worth $ 1 billion by 2019. This revolution has also brought about an increased flow of VC funding to the region. In 2016, out of a total of $ 121.9 million invested in East Africa startups, Kenya accounted for 76% of this amount,” the report asserts.

The Existing FinTech Ecosystem in East Africa

The greatest driver of the FinTech ecosystem in East Africa is partnerships.

“East Africa startups have increasingly been engaging with financial institutions, incubators and accelerators, academia and government. These engagements bring together technology, facilities, knowledge and expertise as well as [the] experience of all the stakeholders involved,” the report states.

The best example is the M-Shwari product provided through a partnership between Commercial Bank of Africa (CBA) and Safaricom. M-Shwari allows M-Pesa customers to save and borrow money through their mobile phones as they earn interest on the amount they save.

However, the report notes that the biggest challenge when it comes to partnerships is that banks regard non-telco FinTechs as competitors instead of collaborators. Additionally, lack of open Application Programming Interface (API) between players impedes the effectiveness of partnerships. API integration is also too expensive ($10,000-100,000) for most FinTechs.

Additionally, governments have been keen on supporting technology development. For instance, Kenya has Konza Technology City while Rwanda has Kigali Innovation City. Still, East African governments could do so much more in terms of developing regulations that guide FinTechs. Presently, governments are applying a ‘wait and see approach.’

Other positive drivers of the FinTech ecosystem in East Africa are:

  • The interest capping law in Kenya has reduced loan advancement to high-risk customers which means that these customers can turn to FinTechs which are alternative sources for credit.
  • National Identification Authority’s (NIDA) plans to introduce a national ID system in Tanzania that will facilitate the KYC process.
  • Plans to implement mobile money systems interoperability in Kenya and Rwanda.
  • Uganda’s plans to enact a National Payments Systems Act
  • Proposed regulatory sandbox for FinTechs by the Capital Markets Authority in Kenya.
  • Ethiopia is in the process of developing laws to guide online payments and e-commerce.

The negative drivers are:

  • The central banks’ warnings against cryptocurrencies in Kenya, Uganda, and Tanzania.
  • Mobile money services are taxed heavily, 10 percent excise duty on withdrawal and sending charges and 18 percent on bank fees plus commissions in the form of value added tax.

Funding is important for FinTech growth. In Africa, FinTech investments have been increasing at a Compound Annual Growth Rate (CAGR) of 87 percent, which ranks it second globally after the Asia Pacific. In the past 5 years (2010-2016), the continent attracted $2.2 billion in venture capital.

“The biggest challenge is that only 45% of funding into FinTechs in East Africa has flown into FinTechs established in East Africa. Out of these FinTechs, 98% are established in Kenya. […] Only 23% of East African based FinTechs have raised multiple number of deals between 2010 and 2017. This is a big opportunity going forward,” the report states.