Digital finance solution to alternative credit

Wednesday November 18 2020
Young people.

Africa’s youth are well positioned to take advantage of digital finance disruption. PHOTO | FILE


The Covid-19 pandemic threatens to wipe out decades of economic progress across Africa. And unlike in the past, there is no help on the way, other than what we as Africa can do for ourselves.

The good news is that we hold the keys to our own solution in the form of enabling conditions to release the second-generation of disruptive digital finance.

The magnitude of the economic shocks caused by the pandemic are best understood through the lens of employment statistics: Kenya lost 1.72 million jobs in the second quarter of 2020. This loss is equivalent to 21 years of new job growth based on the 78,400 new formal jobs created in 2019.

A closer look at this carnage reveals that young Kenyans bore the brunt of this devastation, accounting for 63 percent of all jobs lost in Quarter 2, 2020.

Kenya, like many other African nations, is sitting on a ticking time bomb of youth unemployment. Representing a third of the population, the youth generate 800,000 graduates annually who compete for under 80,000 new roles each year. As a result, the youth unemployment rate is conservatively estimated to be as high as 35 percent. It is increasingly clear that we need an urgent solution for 90 percent of youth who fail to find formal employment.



A second generation of disruptive digital finance could help Africa leapfrog beyond the setbacks of 2020 towards the promise of 2030. The first generation of disruptive digital finance ushered in innovations such as M-Pesa, which created the foundation of today’s digital consumer credit universe through increased access to payments.

The second generation of disruptive digital finance will go beyond consumer credit and open up the universe of small business credit.

The ability of credit to multiply small business revenues through working capital has been well documented through innovations such as M-Shwari.

However, it is time for these critical innovations to move from the fringe to the core of mainstream financial services. As small businesses — formal and informal — increasingly adopt mobile money while they trade, this provides a rich database for alternative credit underwriting models. These new models can remove restrictive requirements for physical collateral, which currently prevent banks from providing credit to informal businesses and youthful entrepreneurs.

Africa’s youth are well positioned to take full advantage of the entrepreneurship opportunities that will arise from the post-pandemic economy. One of the most exciting developments has been the recent shift in e-commerce usage in Africa, from the early adopters to the late majority, as public health concerns created a perfect use case. This is one of many opportunities that create a perfect opening for the digitally-native youth of Africa to capitalise with the help of second-generation digital finance tools.

As countries grapple with economic stimulus programmes to reboot lifeless economies, Africa must not simply mimic the same. Instead, policymakers and venture capitalists must create conditions to fuel the adoption of second-generation digital finance through enabling regulations and available risk capital. The dividends of these focused actions will diffuse the youth unemployment landmine and birth a generation of job-creators who will realise the promise of 2030.

Ivan Mbowa is the general manager, Tala East Africa