The Rise of Alternative Lending and Crowdfunding Platforms in Africa

Thursday, 20/04/2023 | 15:03 GMT by FM Contributors
  • Access to financial resources is getting much easier.
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In recent years, alternative lending and crowdfunding services have grown in popularity throughout Africa. These platforms open up new avenues for people and small enterprises to obtain financing that was previously unavailable through traditional banking methods.

More Africans are obtaining access to the financial resources they need to establish and grow businesses, invest in their communities, and improve their lives, thanks to the rise of alternative financing and crowdfunding.

The following are some of the major causes driving the growth of alternative lending and crowdfunding platforms in Africa:

Traditional Banking Is Limited

Traditional financial services are inaccessible to many Africans. Only 43% of African adults have a bank account, according to the World Bank. This is due to a number of issues, including a lack of infrastructure, hefty costs, and stringent lending criteria. As a result, alternative lending and crowdfunding platforms have evolved as a source of capital for people and small businesses.

Increasing Entrepreneurship Ecosystem Entrepreneurship is on the rise in Africa, with an increasing number of people launching enterprises and pursuing novel ideas. However, many entrepreneurs struggle to obtain the necessary finance to get their enterprises off the ground. Alternative lending and crowdfunding platforms enable these entrepreneurs to obtain money without relying on established banking channels.

Financial Services Enabled by Technology

The advancement of technology has allowed for the creation of novel financial services in Africa. Mobile banking, for example, has become a popular means for Africans, even in rural locations, to access banking services.

Similarly, alternative lending and crowdfunding platforms have used technology to generate new finance alternatives. These platforms have the potential to reach a larger audience while also providing a more efficient and simplified loan process than traditional banking methods.

Impact Investing In recent years, impact investing, or investing in firms or initiatives that have a beneficial social or environmental impact, has grown in popularity. Many African alternative lending and crowdfunding platforms are focused on impact investing, which provides capital for enterprises with a social or environmental objective.

These platforms enable investors to support businesses that are making a positive impact in their communities.

Inclusion in Finance

Many African countries prioritize financial inclusion, or the ability of individuals and enterprises to use financial services. By offering finance to individuals and enterprises that may not have access to regular banking services, alternative lending and crowdfunding platforms can assist to promote financial inclusion. This has the potential to decrease poverty while also promoting economic progress.

Some of Africa's most popular alternative lending and crowdfunding platforms are:

M-Pesa

M-Pesa is a Kenyan mobile banking service that was created in 2007. Since then, it has spread to other African countries such as Tanzania, Mozambique, and Ghana. M-Pesa allows users to utilize their mobile phones to transfer money, pay bills, and access other financial services. It has been attributed with fostering financial inclusion in Africa by giving access to banking services in underserved and distant locations.

Zidisha

Zidisha is a peer-to-peer lending network that enables individuals to lend money to entrepreneurs in poor countries. The platform's primary goal is to provide loans to entrepreneurs who do not have access to traditional banking services. Zidisha has an innovative strategy that enables borrowers to choose their own interest rates, which might be cheaper than those offered by traditional lenders.

Lendable

Lendable is a digital lending platform in Kenya that offers loans to individuals and small businesses. The technology assesses creditworthiness using data analytics and can give loans within 24 hours. Lendable's mission is to provide financing to people who are underserved by traditional banking channels.

M-Changa

M-Changa is a crowdfunding platform that enables people and groups to gather funds for charity purposes such as medical bills or education. Millions of dollars have been raised using the site for various African issues. To solicit money, M-Changa users can set fundraising targets and publicize their campaigns on social media.

Farmcrowdy

Farmcrowdy is a crowdfunding platform in Nigeria that focuses on agriculture. The website connects small-scale farmers with investors who can provide crop financing. Farmcrowdy connects farmers with lenders, training, and other resources to help them build their enterprises.

The Risks of Alternative Lending and Crowdfunding Platforms in Africa

Alternative lending and crowdfunding platforms have the potential to empower entrepreneurs, small businesses, and individuals who lack access to traditional banking services. However, there are also significant risks associated with these platforms that users need to be aware of.

Here are some of the risks associated with them:

  • Lack of regulation: Many alternative lending and crowdfunding platforms operate in a regulatory grey area, with little oversight from government authorities. This lack of regulation can leave users vulnerable to fraud, mismanagement, and other risks.
  • Limited due diligence: Many platforms do not conduct thorough due diligence on borrowers or projects before approving them for funding. This can lead to investments in high-risk projects or borrowers who are unlikely to repay their loans.
  • Limited transparency: Alternative lending and crowdfunding platforms often lack transparency in their operations, making it difficult for users to understand the risks associated with their investments. This can make it difficult for investors to make informed decisions and can increase the risk of fraud.
  • Cybersecurity risks: These alternative platforms rely on technology to operate, which makes them vulnerable to cyber-attacks. Hackers can steal sensitive information, compromise user accounts, or disrupt platform operations, leading to financial losses for users.
  • Limited liquidity: Many alternative lending and crowdfunding platforms are illiquid, meaning that users may have difficulty withdrawing their investments or getting their money back if a project or borrower defaults. This can result in significant financial losses for users.
  • Limited recourse: Unlike traditional banking systems, these platforms often lack legal recourse for users who experience fraud, mismanagement, or other issues. This can make it difficult for users to recover their losses.

To mitigate these risks, users should exercise caution and due diligence before investing. As such, they should research the platform, borrower or project thoroughly, and only invest what they can afford to lose. Users should also be aware of the risks associated with cyber-attacks and take steps to protect their accounts and personal information.

Conclusion

Africa's economy could be transformed by the growth of alternative financing and crowdfunding platforms. These platforms can stimulate entrepreneurship, eliminate poverty, and boost economic growth by providing finance to individuals and small enterprises.

However, these platforms come with concerns, such as the possibility of fraud and a lack of governmental control. Before using these platforms, investors and borrowers should conduct thorough research.

Finally, alternative financing and crowdfunding platforms are becoming a larger part of the African financial scene. These platforms open up new avenues for people and small enterprises to obtain financing that was previously unavailable through traditional banking methods.

The potential for economic growth and development in Africa is considerable as more Africans have access to the financial resources they need to start and expand enterprises, invest in their communities, and improve their lives. However, it is critical to approach with caution and thoroughly examine these platforms to assure their safety and dependability.

In recent years, alternative lending and crowdfunding services have grown in popularity throughout Africa. These platforms open up new avenues for people and small enterprises to obtain financing that was previously unavailable through traditional banking methods.

More Africans are obtaining access to the financial resources they need to establish and grow businesses, invest in their communities, and improve their lives, thanks to the rise of alternative financing and crowdfunding.

The following are some of the major causes driving the growth of alternative lending and crowdfunding platforms in Africa:

Traditional Banking Is Limited

Traditional financial services are inaccessible to many Africans. Only 43% of African adults have a bank account, according to the World Bank. This is due to a number of issues, including a lack of infrastructure, hefty costs, and stringent lending criteria. As a result, alternative lending and crowdfunding platforms have evolved as a source of capital for people and small businesses.

Increasing Entrepreneurship Ecosystem Entrepreneurship is on the rise in Africa, with an increasing number of people launching enterprises and pursuing novel ideas. However, many entrepreneurs struggle to obtain the necessary finance to get their enterprises off the ground. Alternative lending and crowdfunding platforms enable these entrepreneurs to obtain money without relying on established banking channels.

Financial Services Enabled by Technology

The advancement of technology has allowed for the creation of novel financial services in Africa. Mobile banking, for example, has become a popular means for Africans, even in rural locations, to access banking services.

Similarly, alternative lending and crowdfunding platforms have used technology to generate new finance alternatives. These platforms have the potential to reach a larger audience while also providing a more efficient and simplified loan process than traditional banking methods.

Impact Investing In recent years, impact investing, or investing in firms or initiatives that have a beneficial social or environmental impact, has grown in popularity. Many African alternative lending and crowdfunding platforms are focused on impact investing, which provides capital for enterprises with a social or environmental objective.

These platforms enable investors to support businesses that are making a positive impact in their communities.

Inclusion in Finance

Many African countries prioritize financial inclusion, or the ability of individuals and enterprises to use financial services. By offering finance to individuals and enterprises that may not have access to regular banking services, alternative lending and crowdfunding platforms can assist to promote financial inclusion. This has the potential to decrease poverty while also promoting economic progress.

Some of Africa's most popular alternative lending and crowdfunding platforms are:

M-Pesa

M-Pesa is a Kenyan mobile banking service that was created in 2007. Since then, it has spread to other African countries such as Tanzania, Mozambique, and Ghana. M-Pesa allows users to utilize their mobile phones to transfer money, pay bills, and access other financial services. It has been attributed with fostering financial inclusion in Africa by giving access to banking services in underserved and distant locations.

Zidisha

Zidisha is a peer-to-peer lending network that enables individuals to lend money to entrepreneurs in poor countries. The platform's primary goal is to provide loans to entrepreneurs who do not have access to traditional banking services. Zidisha has an innovative strategy that enables borrowers to choose their own interest rates, which might be cheaper than those offered by traditional lenders.

Lendable

Lendable is a digital lending platform in Kenya that offers loans to individuals and small businesses. The technology assesses creditworthiness using data analytics and can give loans within 24 hours. Lendable's mission is to provide financing to people who are underserved by traditional banking channels.

M-Changa

M-Changa is a crowdfunding platform that enables people and groups to gather funds for charity purposes such as medical bills or education. Millions of dollars have been raised using the site for various African issues. To solicit money, M-Changa users can set fundraising targets and publicize their campaigns on social media.

Farmcrowdy

Farmcrowdy is a crowdfunding platform in Nigeria that focuses on agriculture. The website connects small-scale farmers with investors who can provide crop financing. Farmcrowdy connects farmers with lenders, training, and other resources to help them build their enterprises.

The Risks of Alternative Lending and Crowdfunding Platforms in Africa

Alternative lending and crowdfunding platforms have the potential to empower entrepreneurs, small businesses, and individuals who lack access to traditional banking services. However, there are also significant risks associated with these platforms that users need to be aware of.

Here are some of the risks associated with them:

  • Lack of regulation: Many alternative lending and crowdfunding platforms operate in a regulatory grey area, with little oversight from government authorities. This lack of regulation can leave users vulnerable to fraud, mismanagement, and other risks.
  • Limited due diligence: Many platforms do not conduct thorough due diligence on borrowers or projects before approving them for funding. This can lead to investments in high-risk projects or borrowers who are unlikely to repay their loans.
  • Limited transparency: Alternative lending and crowdfunding platforms often lack transparency in their operations, making it difficult for users to understand the risks associated with their investments. This can make it difficult for investors to make informed decisions and can increase the risk of fraud.
  • Cybersecurity risks: These alternative platforms rely on technology to operate, which makes them vulnerable to cyber-attacks. Hackers can steal sensitive information, compromise user accounts, or disrupt platform operations, leading to financial losses for users.
  • Limited liquidity: Many alternative lending and crowdfunding platforms are illiquid, meaning that users may have difficulty withdrawing their investments or getting their money back if a project or borrower defaults. This can result in significant financial losses for users.
  • Limited recourse: Unlike traditional banking systems, these platforms often lack legal recourse for users who experience fraud, mismanagement, or other issues. This can make it difficult for users to recover their losses.

To mitigate these risks, users should exercise caution and due diligence before investing. As such, they should research the platform, borrower or project thoroughly, and only invest what they can afford to lose. Users should also be aware of the risks associated with cyber-attacks and take steps to protect their accounts and personal information.

Conclusion

Africa's economy could be transformed by the growth of alternative financing and crowdfunding platforms. These platforms can stimulate entrepreneurship, eliminate poverty, and boost economic growth by providing finance to individuals and small enterprises.

However, these platforms come with concerns, such as the possibility of fraud and a lack of governmental control. Before using these platforms, investors and borrowers should conduct thorough research.

Finally, alternative financing and crowdfunding platforms are becoming a larger part of the African financial scene. These platforms open up new avenues for people and small enterprises to obtain financing that was previously unavailable through traditional banking methods.

The potential for economic growth and development in Africa is considerable as more Africans have access to the financial resources they need to start and expand enterprises, invest in their communities, and improve their lives. However, it is critical to approach with caution and thoroughly examine these platforms to assure their safety and dependability.

About the Author: FM Contributors
FM Contributors
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