Investors are steering clear of Africa’s non-bank lending sector amid prevailing macroeconomic conditions marked by high interest rates and slowing growth. However, pockets of opportunities with compelling risk-adjusted returns remain within productive asset-backed financing.
Africa’s non-bank lending sector is multifaceted, encompassing various product offerings that can be split into three sub-verticals. The first, non-asset-backed financing, includes unsecured financing products such as Buy Now Pay Later and payday loans. This vertical has proven a tough nut to crack, attracting the least funding in Africa. We’ve even seen major international players struggle, with companies like Klarna, the once-unstoppable Swedish payments giant, seeing its 2021 valuation cut by $39 billion in mid-2022.[1] The second vertical, non-asset-backed productive financing, encompasses unsecured financing solutions tailored for productive purposes such as working capital for SMEs. Players like Asante, Lidya, and B2B commerce companies Wasoko and MaxAb lead in this vertical.
The third vertical is productive asset-backed financing which includes secured financing products extended to individuals for productive purposes and presents the most compelling risk-adjusted prospects. It’s primarily represented by companies offering agricultural financing and financing for 2, 3, and 4-wheelers, which are vital sources of livelihood for many Africans engaged in activities like ride-hailing or daily job transportation. Out of the roughly $1 billion in debt and equity funds raised by African non-bank lenders in 2023, a significant portion, amounting to $750 million, has gone to established players in the form of $75 million+ deals, with most of this funding flowing to non-bank lenders providing productive asset financing[2]*.
Opportunities in productive asset-backed financing
The productive asset-backed financing sub-vertical has garnered the lion’s share of investments within Africa’s non-bank lending sector. This vertical is mainly represented by three lending products.
Vehicle financing
Vehicle financing primarily covers 2 and 3-wheelers, with limited involvement in 4-wheelers. These loans are secured by the financed vehicle, mitigating the risk of loss in case of default. Individuals utilise such loans to generate income such as ride-hailing or deliveries which, fosters a strong motivation for repayment, as borrowers’ livelihoods hinge on the asset. With limited financing available through traditional banks, vehicle subscription or lending platforms like MAX, Mogo Africa, MNT Halan, Watu or Moove have found a massive opportunity to expand while managing default risk through an efficient credit scoring, repossession, and redeployment process in case of default. Eleving Group, a European vehicle financing provider, has recognised this immense potential in Africa and seized the opportunity through their Mogo Africa subsidiary, which has scaled rapidly in Kenya and Uganda, further highlighting the promising landscape for productive lending in the region.
Agriculture financing
Africa’s agriculture sector is a major driver of the economy, accounting for nearly 35% of GDP[3] and employing 250 million people.[4] Smallholder farmers produce 85% of the continent’s agricultural output but often lack the financing and knowledge to access better practices. It’s estimated that the financing gap in Africa’s agriculture sector is $55 billion annually. This massive shortfall is a significant barrier to increasing productivity and achieving the sector’s full potential, which could reach $1 trillion or more in value per year.[5] Key players like ThriveAgric, Apollo, and AFEX have managed to crack this sector, but the financing needs of millions of smallholder farmers remain overwhelmingly unmet.
Asset-backed financing companies dealing directly with farmers rather than aggregators are preferable, as they ensure credit is used for productive purpose most efficiently. ThriveAgric stands out from the competition in this respect by providing credit-based inputs to farmers and imparting valuable knowledge on the best harvesting practices. This approach lowers the risk of lenders realising permanent capital loss by achieving a 3x increase in yield through optimised inputs and harvesting techniques. Through tight supply chain management and high-quality storage, it also reduces harvest loss from 40% to 9%, increasing farmer income levels and, in turn, making the financing more affordable with reduced likelihood of default.
Device financing
Non-bank lenders in Africa are diversifying beyond vehicles and agriculture, focusing on solar home systems and mobile phone financing, which are key drivers of economic growth. Africa’s mobile ecosystem currently supports more than 3.2 million jobs and generates $16 billion in tax revenue for governments. In 2021 alone, mobile technologies and services generated around $140 billion or 8% of GDP, and this contribution is expected to grow to $155 billion by 2025.[6] Recognising the limitations of banks to provide such loans, M-KOPA and other Solar Home Systems providers like d.light have tapped into mobile phone financing with great success. M-KOPA raised $255 million in May 2023, with over 65% of sales in phone financing. MNT Halan, a large Egyptian financer of 2 & 3-wheelers, no longer needs equity funding and Chimera secured $400 million stake, hitting a $1 billion valuation and gaining Unicorn status.[7] 2023 has also seen several other notable investments, such as South African rent-to-buy vehicle subscription provider Planet42’s $100m raise[8] and Moove’s $75m funding round last month at a valuation of $550m.[9] These deals illustrate a healthy investor appetite in the space and the potential for compelling exit opportunities.
Key elements for success in Africa’s productive asset financing
Succeeding in Africa’s productive asset financing sub-vertical depends on three fundamental elements, which form the pillars of a robust strategy to navigate the intricacies and risks of this promising but complex vertical. Mastering them ultimately leads to continuous investment, sustainable growth, and impactful outcomes.
Strong unit economics & stable debt funding
Investors in the lending space scrutinise metrics such as return on equity (RoE), impairment provisions, profitability, loan book quality, and financial leverage. However, it’s impossible to separate unit economics from stable debt funding. The availability of debt is what helps lenders grow. More importantly, the type of debt funding is crucial for profitability. One key area of concern for investors in Africa’s lending sector is the currency mismatch between assets (lending book) and liabilities (debt funding). Lenders must address this issue by financing assets priced in hard currency or preferably by self-funding with local currency debt. More importantly, growing a lending business when funding is abundant is easy, but what truly counts is the quality of the loan portfolio. Only those with the solid credit engines and operational procedures can grow sustainably.
Market differentiation
Establishing a clear market differentiation is essential for securing favourable debt funding terms, driving equity investment, and commanding a premium valuation. Consider the following industry leaders that highlight the importance of market differentiation. MAX benefited from its undisputed status as the leader in 2-wheelers, its strong and highly recognisable brand, and its advantageous OEM financing agreements, which helped the company to rise to prominence in the vehicle subscription market in West Africa. Similarly, Watu Credit’s position as the number one provider of mobility asset financing for two and three-wheelers in Kenya gave it several strategic competitive advantages, from brand recognition and reputation to enhanced partnership opportunities. Moove’s partnership with Uber enabled the company to build trust and credibility with drivers, access a larger pool of potential drivers, scale its operations faster and tap into new geographies, helping raise multiple funding rounds to fuel growth.
Geographical depth
Geographical depth is a critical element of success for players in productive asset financing for several reasons. It provides a multi-faceted defence against the inherent risks of concentrating loan exposure in a single region, allowing players to raise debt at attractive terms. One critical risk that concerns debt providers is currency risk, and geographical depth reduces the overall currency risk at the company level. Another reason is unit economics. Geographical depth can help businesses lower their operating expenses (OPEX) per dollar lent out, allowing lenders to improve their margins and attract higher valuations. In addition, geographical depth opens up securitisation possibilities, allowing lenders to sell their loan books and use the proceeds to continue accelerating growth while complying with required regulatory debt-to-equity ratios.
Leading players have seen the opportunity and are tapping into it
Several players across various sectors have recognised the vast opportunities in productive asset financing and are tapping into it. Tech-enabled B2B commerce players such as Sabi, Trade Depot, Wasoko, and MaxAB have extended their offering and are now providing working capital finance to SMEs leveraging the business data they have on their customers. They are doing so despite the challenges involved to the point that it has become a core part of their business models.
There are two main reasons: the first is the sheer size of the opportunity. There is a vast unmet financing deficit facing SMEs estimated at almost $330 billion annually.[10] Traditional financial institutions cannot meet this demand, leaving a massive gap in the market that these tech-enabled commerce players can fill with limited customer acquisition cost (they lend to their existing customers) and ease of credit scoring (they have valuable business data on their customers). The second reason is the synergy with their logistics or tech enabled commerce business. Economies of scale are essential for B2B commerce players to achieve profitability. Providing working capital finance, on some occasions at 0% interest rate (e.g. when supplier payment terms can be passed on to customers) is a cheap method of acquiring or keeping customers and expanding revenue and margins.
Of course, this does not come without challenges. Embedded finance strategies are aimed to be funded with debt, which relies on having enough cohort data for debt providers to assess risk. As a result, important equity funding, an expensive source of capital, is often required to launch and scale those activities in the first years.
Asset-backed productive lending: a model that works and that will unlock abundant and rewarding investment opportunities in Africa
At first glance, lending in Africa may not appear particularly enticing from an investment perspective, yet closer examination reveals that the productive asset-backed financing vertical presents a number of attractive propositions with risk-adjusted returns that remain compelling even in today’s high-interest rate environment. The collateralised nature of the loans, high principal recovery in the event of default, and enhanced affordability due to the productive use of such lending products all contribute to mitigating downside risk for investors.
Looking ahead, we anticipate continued growth in Africa’s productive asset financing market, where companies with adequate capital, robust unit economics, and market differentiation are well-positioned to succeed.
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*[2] Pitchbook, Briter Intelligence
