Why Nigeria is the favourite market in Africa for fintech investors

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Why Nigeria is the favourite market in Africa for fintech investors

Fintechs dominate the African tech start-up space – the continent has five tech unicorns and all of them are fintechs. Of these, four are from Nigeria (with the fifth member of this club being Senegals’ Wave), highlighting the excitement early-stage investors see in the country’s fintech sector.

This year alone Nigeria has already seen several large-scale fintech funding rounds, adding Flutterwave and OPay to rarified list of African fintech unicorns. In 2020, Nigeria attracted over half of the continent’s US$160mn total fintech venture capital funding.

In this report we look at four defining characteristics of Africa’s top destination for start-up investors.

1. Nigeria’s low financial inclusion could drive fintechs’ success

Nigeria’s financial penetration is low relative to other emerging markets – only two-fifths of the adult population have a bank account (versus a 70% median across our sample of 11 emerging markets). Access to bank branches and formal credit is also poor. Credit card penetration in Nigeria is mediocre, at 2.6% of the population aged 15+ (versus a 5.7% EM median). These metrics highlight the difficulties faced by ordinary Nigerians in accessing basic financial services.

Financial penetration in Nigeria lags EM peers

2. Technological sophistication stands below peer countries

Nigeria’s technological indicators are also below other emerging market peers. Fixed broadband subscriptions (including cable modem and fibre to the home connections) are almost non-existent. Just 1.5% of manufactured exports (vs 4.7% EM median) can be classified as high technology, which points to a poor local skill base. In addition, the GSMA infrastructure score (which considers different aspects like network coverage/performance, network spectrum and technology enabling infrastructure factors) also lags peers; the main areas of weakness are in network coverage/performance and other technology enabling infrastructure.

Many start-up investors are clearly not letting these issues hold them back; technological advances can address some of these challenges (for example mobile data rather than accessing the internet via fixed lines). The size (206mn) and youth (median age of 18 years versus 28 for peer markets) of its population combine to make Nigeria one of the most exciting markets for disruptive business models.

Technological penetration in Nigeria lags EM peers

3. Nigeria’s fintech ecosystem is extensive and well-diversified

Nigeria’s fintech universe is wide-ranging but has a similar overall profile to global emerging markets, with payments and lending together accounting for 53% of the total landscape (close to the 52% EM average). The weight of software solutions (15%) is above the EM median (5%) and may reflect firms that are looking to service Nigeria’s vibrant fintech network. Investech (11%) is also above the EM median of 8%; many Nigerians are keen to invest to help hedge their exposure to both high inflation (via high-yielding instruments) and NGN depreciation (via hard-currency investments). In this context, it is somewhat surprising that the weight of blockchain fintechs sector in Nigeria appears to be broadly on a par with EM peers (9%); Nigerians have been quick to accept cryptocurrencies despite the government’s attempts to rein in their enthusiasm and the country ranks sixth globally in Chainalysis’ cryptocurrency adoption index. In contrast, insurtech firms account for just 4% of the ecosystem (versus 5% at the global EM level). Nigeria’s insurance density is weak; premiums are equivalent to just 0.5% of GDP compared to 13.4% for South Africa.

Nigeria's fintech ecosystem

4. Nigeria leads the African fintech funding arena

In 2020, funding flow to African fintechs amounted to US$160mn (up from US$107mn in 2019). Around 90% of this funding was concentrated on just three markets: Nigeria, South Africa, and Kenya. Nigeria was investors’ preferred destination; it attracted US$89mn funding (56% of total) and 37 deals (37% of total).

African fintech start-ups' funding

Nigeria’s tech start-up funding mix by sector

Fintechs are attracting the biggest share of tech start-up funding in Nigeria, taking 59% of the US$150mn that was raised in 2020 (an increase of 23% from the US$122mn raised across all sectors in 2019). 2020 funding was concentrated in 4 fintech deals: Flutterwave (US$35mn), Bitfix Gaming (US$15mn), Aella Credit (US$10mn), and Kuda (US$10mn). Globally, fintechs captured 18% of start-up funding in H1 2021, further highlighting investors keen interest in the Nigerian fintech opportunity.

Nigeria's tech start-up funding mix by sector

Fintech funding in 2021 is improving

There have been several large-scale Nigeria fintech funding rounds in 2021, adding Flutterwave and OPay to rarified list of African fintech unicorns. Interestingly, these transactions have closed even as mainstream investors continue to fret about capital controls and potential NGN devaluation. Many African fintechs are actually registered in other jurisdictions (eg Mauritius, Cayman Islands), which can help bypass some of these issues. In addition, these investors have a long-term horizon and hence are less affected by what may be seen as temporary difficulties.

Selected Nigeria fintech funding deals so far this year

Some other smaller fintech funding deals in 2021 so far include: Bankly (US$2mn), Cowryrise (US$3mn), Chaka (US$1.5mn), Okra (US$3.5mn), Mono (US$2mn), and PayHippo (US$1mn).

Related reading:

The ultimate guide to Nigeria fintech

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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