Carbon, the massive instant loan company based in Lagos, made headlines for its recent acquisition of Vella Finance. Vella’s focus on providing microfinance via a digital platform to small enterprises earned it over 8,000 customers in its first two years. Together, Carbon and Vella have produced the rumblings of a new, AI-powered, completely digital banking platform.
The emergence of innovative, large-scale financial technology (fintech) has rapidly grown in Nigeria. Nigeria is home to over 200 fintech companies, and many banks and mobile network operators are increasingly offering fintech services. Since 2018, Nigeria’s fintech industry has raised over US$1 billion. Today, there are seven startups valued at over $1 billion on the African continent, six out of seven of which are fintech companies.
Fintech’s growth in Nigeria has been celebrated as a boon to equity, bringing in previously “unbanked” people, or people without a checking account, into the financial system. The share of Nigerian adults with a bank account has grown steadily, increasing by 69 million Nigerians from 2016 to 2019. By diversifying the participants in financial services in Nigeria, fintech companies have expanded the market for risky borrowing and lending. The result is a burgeoning microlending industry that has enabled a wave of entrepreneurship. By financing a host of new companies, the fintech boom has become integral to Nigeria’s growing startup scene, and the new jobs and economic activity entrepreneurship promises for the rising African tech leader.
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Startup financing in Nigeria:
Micro, small, and medium enterprises, or MSMEs, are a key driver of economic growth in Nigeria. Formal and informal MSMEs together account for 96 percent of Nigeria’s businesses, 86 percent of employment in the formal sector, and 49 percent of Nigeria’s GDP. MSMEs are on the rise, with the number of new startups in Nigeria increasing by 35 percent in the past two years and funding for Nigeria’s MSMEs increasing by 42 percent.
Despite funding increases, Nigerian entrepreneurs continue to cite funding as their primary challenge. The IFC quantified that Nigeria’s MSMEs are restricted by a US$32.2 billion financing gap, exacerbated by limited borrowing. Nigeria’s Central Bank surveyed 840 MSMEs and found that only 31 percent had obtained a loan, with the vast majority of entrepreneurs relying on personal savings. According to bank surveys, insufficient collateral was the primary barrier to granting MSMEs loans, accounting for 84 percent of startup loan application rejections. Other factors included high interest rates, a limited credit history, and lengthy documentation processes. Often, lengthy and strict rules prevent MSMEs from even applying.
Diversifying the borrower market:
Gleaming as a solution to Nigerian startup funding woes is fintech. Nigerian fintech has expanded financial services to new borrowers previously not included in the financial system. With more Nigerians using and demanding financial services, fintech has created a new, profitable market for riskier microlending. The new and quickly growing market for riskier borrowing in Nigeria has also sparked the creation of new financial companies catering specifically to MSME needs. For example, the Sub-Saharan African company Wizzit specialises in providing microfinance to riskier borrowers via a mobile app. This past year, American microlender SoLo Funds expanded to serve entrepreneurs among Nigeria’s underbanked populations. These companies are not isolated examples. As of 2022, 15 percent of Nigerian fintech startups focused on lending solely to MSMEs, and fintech companies in 2021 were responsible for over half of MSME borrowing.
Fintech has also increased the number of deposits in banks, encouraging even established and conservative banks to support riskier borrowing. With millions more Nigerians using checking and savings accounts through digital platforms, banks in Nigeria today have far more funds on hand. This expanded safety net has allowed banks to be more willing to offer loans to riskier candidates.
The way forward:
Despite expanded banking access, financial inclusion in Nigeria is divided along rural-urban and gender divides. Lagos remains the primary benefactor of startup investment, with entrepreneurs in other regions struggling to attract funds. Repayment issues from lending to riskier borrowers are also an emerging threat. Fintech companies in other countries, like India, have already begun reporting elevated loan default rates. In Nigeria, reports of fintech harassment of delinquent borrowers have increased the urgency of creating formalised structures to protect both fintech companies and their users. Promisingly, Nigeria’s Federal Competition and Consumer Protection Commission recently outlined a strategy to tackle fintech loan defaults in 2024.
Despite these challenges, fintech continues to underpin Nigerian entrepreneurship. Catalysed by startup fervour, Nigerian fintech growth has spurred a glowing future for Nigerian entrepreneurship and, correspondingly, a host of new jobs and innovations for Africa’s largest economy.
Sanjana Ranganathan is a Georgetown University student studying International Political Economy. She previously served as CEO of Georgetown Global Consulting. Sanjana also holds multiple Georgetown University research fellowships as Mortara Undergraduate Research Fellow and a Provost Fellow. Her most recent project studies youth perspectives in post-conflict Sri Lanka.
