East Africa is emerging as a hub for crowdfunding. The online platforms — which also offer grants, endowments, debt and equity — raised $37.2 million in 2015 in Kenya, Rwanda, Tanzania and Uganda.
Research on crowdfunding — the pooling of money by many individuals for equity investment in startups — and peer-to-peer (P2P) finance show that last year, the nascent segment raised $22 million for investments in Kenya, $7.5 million in Uganda, $4.2 million in Tanzania and $3.5 million in Rwanda.
Impressive growth rates of between 112 per cent in Kenya and 312 per cent in Uganda were recorded. In Rwanda, crowdfunding grew by 169 per cent and 281 per cent in Tanzania.
A study commissioned by London-based analytics firm Allied Crowds Ltd, shows that in the first quarter of this year, the pools reached $17.8 million, a near twofold increase over the corresponding period last year.
Crowdfunding raised $34 billion globally last year. The World Bank estimates that crowdfunding activities globally will raise $96 billion by 2025.
“We see lines blurring among main categories of crowdfunding. With the creation of many hybrid models, some rely mostly on institutional investors instead of appealing directly to the crowd,” said Alessandro Nava, consultant with the Consultative Group to Assist the Poor (CGAP), CGAP, a World Bank affiliate, says crowdfunding holds the most promise for helping entrepreneurs in underserved areas, but caution must be applied.
“Crowdfunding has the potential to become the next big thing for financial inclusion but it brings along risks for both borrowers and lenders that need to be better understood and addressed in a timely manner,” said Mr Nava.
Lelapa Fund’s chief executive Elizabeth Howard said that the favourable return environment for foreign capital in East Africa had increased prospects for local investors to benefit from impact funds. Lelapa is a platform that links global investors with African growth ventures.
“The challenge is the slow trickle through the pipeline, laws not being conducive, no tax incentive for early-stage investors and exchange rate risks,” said Ms Howard.
Lelapa found 45 per cent of start-ups in Kenya require $10,000 to $50,000 for growth capital, 40 per cent need $50,000 to $250,000 for expansion, exports (22 per cent), marketing (23 per cent) and product development (29 per cent).
For SMEs in Kenya, 50 per cent of firms require $100,000 to $500,000 for expansion, exports (40 per cent), marketing (21 per cent) and product development (29 per cent). Both start-ups and SMEs received more capital from friends and family than banks.
Alternative credit scoring models
The Lelapa Fund has screened over 350 SMEs in East Africa since March, and engaged over 30 in due diligence and investment readiness processes. It hopes to open access to first deals on its platform before the end of this year.
The rise of crowdfunding is attributed to alternative credit scoring models, low fixed and operating costs, quick loan processing, low interest rates, new asset class to yield starved investors and no prudential requirements.
FSD Africa, said that the use of technology enabled the platforms to mobilise and allocate capital more cheaply and faster than banks and development agencies.
“This could through increased efficiency and competition increase access to finance for low income individuals and growing companies,” said FSD Africa regional co-ordinator Joe Huxley.
FSD is funded by Britain’s Department for International Development and promotes financial inclusion in sub-Saharan Africa.
P2P financing operates on a shaky ground in Kenya, without a specific law dedicated to it. However it is covered piecemeal in the Banking, Microfinance, Remittances and Consumer Protection Acts.
Anjarwalla & Khanna Advocates said the platforms would be legally catered for when regulations on non-deposit taking microfinance businesses developed.
Anjarwalla’s partner Dominic Rebelo said although the Cabinet Secretary may designate P2P disbursements under the National Payments System, the regulations would not address platforms that outsource processing of payments.
The legal gaps have left East Africa with only five platforms set up: Three in Kenya and one each in Rwanda and Uganda, compared with 10 in South Africa and 55 in the rest of Africa.
However, the platforms operational in East Africa include philanthropy-focused Watsi and Kangu in health and education, concessionary lenders Kiva and Zidisha in agriculture, Indiegogo and Kickstarter for creative and GoFundMe and Global Funding for capital projects.
Shake Your Power, a Kenya crowd, used kickstarter to raise $81,000 from 943 backers. It is involved in building and distributing energy generating music shakers. Nikweli, a talent machine engine in Tanzania, also used Kickstarter to raise $5,000 from 40 backers.
Nikweli founder Tiffany Tong said she chose donations crowdfunding because applications for grants were too protracted.
“We ran a crowdfunding campaign and it was successful. It helped with our credibility and played a role in getting us into African Leadership Ventures, an accelerator programme that invested $20,000 in the business,” said Ms Tong.
Wanda Organic (Kenya), a soil fertility technology firm, which incubated the Kenya Climate Innovation Centre used Indiegogo to raise $7,895 from 32 people, way below its target of $45,000.
Fishmate (Kenya), a brainchild of Mukeli Matei, partnered with Cheetah Fund to conduct two separate crowdfunding campaigns. The first campaign in Kenya raised $2,943 from about 20 members, which then triggered a matching contribution of about $6,594.6 from Cheetah Fund. Fishmate, an initiative to make fishing sustainable, was then selected by Dutch university students for a second campaign run in the Netherlands that raised an additional $8,696.08.
M-Changa has since September 2012 raised $900,000 through 46,000 donations to 6,129 fundraisers, including one lending between $20 and $100 for funeral expenses for low income mourners.
PesaZetu in a pilot project, disbursed 1,200 loans worth $59,275 in December last year.
“We look to bring together Kenyan lenders with borrowers to enable people with funds to lend their money to low-income, creditworthy borrowers over mobile,” said PZ’s managing director Hilda Moraa.
Ms Moraa welcomed recent efforts at regulation, including guidelines for mobile money transfers.
“Platform operators are neither deposit-takers or lenders. As with other markets where there are P2P or online market place lending platforms, regulation did not exist but was developed over time on consultative basis,” she said.