Despite the recent influx of alternative financing platforms across Africa, history shows that the concept of alternative financing, i.e. other forms of financing outside the traditional financial systems, isn’t a new phenomenon on the continent as it has long existed as cooperatives especially among the informal sector.
Cooperatives were set up to operate solely on mutual trust and are widely believed to have originated from Nigeria called by the local language, Esusu. Its primary objective was to provide access to financial services otherwise not available to local traders and farmers by financial institutions due to a lack of credit rating or collateral.
They used this practice informally to contribute money together which is then made available to members on a rotational basis for collective or individual purposes. On the family level, at the death of a prominent member of the family, the extended family contributes resources – funds to give a befitting burial ceremony.
In Kenya, the savings & credit cooperatives also known as Saccos are quite common, especially in rural areas. Over the years, they have gradually become an integral part of the government’s economic agenda contributing over 45% of the country’s GDP. A fascinating example is how 25,000 low income earning women contributing 10Ksh (< $1) per day were able to build and lease a multi-million student housing apartments generating about Ksh1million per month.
The advent of the internet and its increasing mobile penetration across Africa has given rise to another form of alternative financing that has gained significant popularity over the past years: Crowdfunding, according to the Oxford dictionary is described as “the practice of funding a project or activity by raising many small amounts of money from a large number of people, usually using the Internet.”
Crowdfunding types Image source:cooperativecity.org
Initially used as a means to raise funds for creative art and music societies, it has gradually evolved as a means to fund a wide variety of categories: from creative arts to moonshot technology, from charity based donations to micro-lending and so on…
Global platforms like Kickstarter and Indiegogo etc are the pioneers in reward-based form of crowdfunding. Project backers are offered several forms of incentives/rewards in exchange for supporting the project with funds. An example of such is Imeela.com, which means “thank you” in the local Igbo dialect.
Donation-based crowdfunding platforms are largely popular in Africa due to its charity nature and the lack of infrastructural facilities. Funds are solicited for the public and friends to donate to several causes ranging from medical, education, legal, etc. Gofundme, Donate-ng.com are examples of donation-based crowdfunding platforms.
Also known as peer to peer lending, with debt-based crowdfunding the individual or business owner (“borrower”) is matched to a lender(s) willing to offer fixed-rate loans with little or zero collateral. In some cases, the lender is the intermediary platform offering the unsecured loans once after a credit risk analysis has been conducted. Examples of these platforms include Paylater by Carbon, Branch, Aella Credit, Lidya, etc.
In other cases, investment opportunities from small businesses are aggregated on the crowdfunding platform and investors select which to fund according to the project analysis stated. Digital platforms such as Investify by Piggyvest, Fint.ng, Riby Finance, etc. offer such services.
For small businesses in Africa, equity crowdfunding provides an opportunity to access investment financing to support business expansion or product development otherwise difficult to get from legacy financial institutions. Financial capital is raised for a project or business venture in exchange for equity.
Local digital platforms like Uprise Africa, Thundafund, etc. are pioneering this model of crowdfunding enabling African businesses of any kind to offer equity for capital after due diligence has been conducted on it. Considerable successes have been achieved since their inception.
Over the years, there has been a gradual shift from the generic form of equity crowdfunding to niche sectoral forms such as agriculture, energy, transportation, real estate, etc. – characterize this as Crowdfunding 2.0. These asset classes were once reserved for wealthy individuals and large organizations due to the huge amount of capital required as a minimum to invest and the high-risk level of such investments.
For equity crowdfunding platforms, having a niche area allows them to fully focus on the inefficiencies along the chosen value chain and develop unique solutions tailored to the African market. Some of MEST Africa portfolio companies like Cofundie & Complete Farmer are pioneering this niche form of crowdfunding. For prospective investors, it creates a semblance of domain expertise and trust, which forms part of the due diligence to be conducted before investing.
It is of note that there are few companies in Africa that have successfully merged both forms of alternative financing (i.e. debt-based crowdfunding and cooperative society) creating a hybrid model, best suited for the African market.
Farmcrowdy advert Image source: www.farmcrowdy.com
Farmcrowdy is a notable example of such a hybrid form of an alternative financing model. Registered as an agricultural cooperative in Nigeria, the digital platform empowers rural farmers by providing them with improved seeds, farm inputs, training on modern farming techniques and provides a market for the sale of their farm produce.
It is able to fulfill such obligations mainly through crowdfunding, wherein farming enthusiasts and investors are invited to sponsor a farm project to earn good returns upon completion of the farming cycle.
What I loved most about the FarmCrowdy model is that it is a registered cooperative. An actual community!!! This was the killer model. Nobody in Silicon Valley would have thought of that for them. This is why I am a big fan of thinking things through for ourselves and not copying – Victor Asemota
Interchangeably, the term equity crowdfunding can also relate to both debt and equity-based instruments when they are offered on an equity crowdfunding platform. Other known examples of niche equity crowdfunding platforms include; ThriveAgric (Agriculture), Pramopro (Energy), Plentywaka (Transportation) and much more…
Given the increase in smartphone penetration and the exponential growth in population, equity-based crowdfunding is a viable route for technology startups trying to innovate for the African populace. Equity-based crowdfunding platforms offer its benefactors such as small businesses a preferred way to access capital and a wider market of interested off-takers.
While for investors, it provides them the opportunity to invest in non-conventional asset classes previously unavailable due to the high barrier cost that offers huge returns and a pathway to growing wealth.
However, equity-based crowdfunding is still largely unregulated as most African countries do not have the necessary regulatory framework to ensure proper operations of such a model compared to the developed economies.
Nigeria, for example, placed a ban in 2016 on any form of equity crowdfunding due to a lack of provision of no rules regarding the formation and operation of such companies under the law. This has had serious implications on startups and small businesses as many have been forced to close due to lack of venture finance and the unwillingness from financial institutions to offer high-risk loans.
Given that equity crowdfunding is still at its infancy stage in Africa and coupled with the increasing amount in remittances from Africans living in the diaspora, the implementation of a robust and reliable regulatory system will usher in a new wave of economic and social development on the continent.
Chisom Ukaegbu is currently an Entrepreneur-in-Training at MEST Africa. He is enthusiastic about the use of business strategy, user design & data towards developing sustainable innovative solutions.