On a continent where 76% of the workforce is engaged in informal labour, the question of how to inject capital into businesses overlooked by traditional banking services has weighed on the minds of developers and financiers alike for decades. If opportunities are to be created for Africa’s booming population, a financial ecosystem that works for micro, small and medium sized enterprises needs to be developed.
Invest Africa member, 4G Capital, believes it has found a model that works for both lenders and their customers. We sat down with 4G Capital’s founder and CEO, Wayne Hennessy-Barrett to discuss what makes the company’s model stand out from other micro-lending solutions, how to make micro-finance a viable driver of financial inclusion and the role of tech in driving growth for Africa’s entrepreneurs.
‘The right credit with the right knowledge on the right terms’
4G Capital is an initial lender that provides working capital exclusively to micro and small businesses to enable them to grow. Named one of the London Stock Exchange’s companies to inspire Africa this year, Hennessy-Barrett credits this recognition to 4G Capital’s focus on their customers’ business development. Through a combination of business training and loans, clients have achieved growth rates of an average of 82% a year. It is by moving beyond credit alone that the company has achieved remarkably high repayment rates of over 92%.
Equally important to 4G Capital’s success is the company’s evolving Evaluation Algorithm (EVA), named after Hennessy-Barrett’s daughter. Focusing on smart data over big data allows 4G Capital to identify the ability of businesses to digest the unique combination of credit and training on offer. For its CEO, this blend of personal support and AI is what allows 4G Capital to offer ‘the right credit with the right knowledge on the right terms for each individual business’.
‘Tech is a lifter of good businesses’
Wary of the tendency to point to fintech and other tech-driven companies as the magic solution to Africa’s challenges, Hennessy-Barrett sees technology primarily as a ‘lifter of good businesses’. For 4G Capital, this means using mobile solutions to unlock underserved markets that would be impossible to reach with traditional brick and mortar financial services.
In Africa, this underserved market is huge. The funding gap for SMEs across Africa is estimated to be $331 billion. By using mobile money and mobile applications 4G Capital has built scalable access platforms for their clients, distribution partners and staff. This model integrates previously fragmented value chains and provides liquidity in raw capital. For small businesses, over time, this boosts sales and value whilst eventually bringing prices down for consumers.
Whilst technological innovation is at the core of 4G Capital’s impact and success, Hennessy-Barrett is keen to emphasise that technology cannot replace people. Aware of the ‘alarming trend towards total automation’ the company ‘operates a hybrid approach of using technology and data science to do what technology and data are good at and celebrating what people bring to the table, which is relationships, innovation, long sight and genuine insight’.
‘One of the toughest problems to crack’
This blended approach, Hennessy-Barrett believes, will allow his company to overcome the pitfalls that have plagued micro-finance in the past. Since it was first developed in the 1970s, the use of micro-loans to drive development has had a ‘chequered track record’, arguably contributing to debt dependency across developing markets. In Kenya alone, he points out, short term digital lending has created almost 3 million blacklisted customers, 400,000 of whom had taken loans of less than $2.
The challenge is learning from the mistakes of the past to find a business model that is not ‘dependent on shoving the maximum amount of credit on the maximum amount of people’. Rather than moving directly to scale, 4G Capital has focused on making the economics work for itself and its clients first. Aware of the responsibility of dealing with low-income people who are inherently vulnerable, 4G Capital follows its customers’ growth rates closely. By remaining ‘laser focused’ on businesses, the company ensures that its capital is adding value to creditors rather than trapping them in a debt cycle.
‘Governance, governance, governance’
Given the scale of the SME financing gap in Africa, this is clearly not an issue that 4G Capital can address alone. For business models like 4G Capital’s to be replicated, fintechs will need to ‘work with regulators and banks to build regulation that focuses on customer protection and cyber protection’.
Ultimately, financial inclusion in Africa needs to be addressed holistically by fintechs, banks and regulators alike. It is not a question of banks versus fintechs, but of building a diverse and complementary range of financial products. Whilst it may be unfair to expect banks to be overly risk-taking, Hennessy-Barrett points out, there is a key role for them to play in fostering innovation by tempering the risks faced by fintechs. For example, by providing local currency financing that would allow fintechs to move into higher risk areas which would be ‘uneconomical or uncomfortable for banks’. Not only does this approach benefit banks and fintechs, but it also allows ‘higher risk customers to transition to banks’ as their needs evolve.
‘The African opportunity is undeniable’
Despite the challenges, Hennessy-Barrett is optimistic that financial services in Africa are moving in the right direction – towards a responsible, diverse and competitive industry. As a business, 4G Capital is diversifying and evolving into ‘genuine multi-sided platform’. The company is looking to develop its offering to large multinationals and distributors alongside its traditional client base of trade retailers.
In the next 4-5 years, 4G Capital aspires to have a presence in Africa’s largest economies, expanding to South Africa, Nigeria and Egypt while consolidating their presence in Kenya. Distrustful of a ‘drag and drop approach’, the focus for the future will be on developing bespoke solutions for new markers. Hennessy-Barrett encourages investors to visit African markets where he says they will find that the concentration of risks in developed markets is in reality much higher than those 4G Capital faces in Kenya and across the continent. ‘The African opportunity is undeniable’ he concludes and 4G Capital has ‘barely begun’.