Expert view: How fintech is bridging the gap for Africa’s ‘unbanked’

Verdant Capital’s Edmund Higenbottam has helped raise more than a quarter of a billion dollars for inclusive financial institutions and fintech companies in Africa since 2017. Impact Investor talks to him about about fintech, impact investing, and their latest fund

With traditional banks struggling to reach the two-thirds of Africans who are still unbanked, fintech has the capacity to bridge the gap. 

“Fintech is an opportunity to mass-customise financial products, to reduce the costs associated with providing financial products,” says Edmund Higenbottam, managing director of Verdant Capital, when asked about the current investing landscape for financial technology companies in Africa. 

“Thereby you can increase the access to financial services lower down the income spectrum. You can manage the risk of lending to micro-entrepreneurs. And at the same time, you can build scale in these institutions because they have a broader market. The technology is changing the cost structure.” 

With traditional banks struggling to reach the two-thirds of Africans who are still unbanked, fintech has the capacity to bridge the gap 

The African fintech sector has seen strong growth in recent years, driven by improved internet connection speeds and higher mobile phone use. The continent is now home to more than 500 fintech firms, most of them in South Africa, Nigeria, and Kenya.

$250 million

Under Higenbottam’s guidance, Verdant Capital has grown into the largest advisor to the fintech sector in Africa. In the past five years, the specialist investment bank and investment manager has raised more than $250 million in private debt and equity for inclusive financial institutions and fintech companies. 

Before he joined Verdant Capital in 2013, Higenbottam worked at global investment banks including Deutsche Bank and Morgan Stanley. Higenbottam, who has a degree in Economics from the University of Cambridge, began his finance career in 2001 and has worked in Africa since 2008. 

“We like to look at long-term, secular trends and long-term secular themes,” says Higenbottam. “Yes, two-thirds of Africans are unbanked or underbanked. Part of the reason: how the financial sector runs in Africa is very old fashioned.” 

That’s because average income across the African continent is lower than elsewhere, and “when incomes are lower, then the sizes of each financial transaction are lower, whether that’s savings, credit, payments, insurance, everything is lower”, adds Higenbottam. 

New impact fund 

Verdant Capital recently announced the first close of the Verdant Capital Hybrid Fund (VCHF), with $36 million in private and public commitments. Its aim: to support micro, small and medium-sized companies (MSME) through investment in financial institutions. 

Its primary backer is Germany’s KfW Development Bank, which is contributing about $34 million on behalf of the German Federal Ministry for Economic Cooperation and Development. In addition, the fund is benefitting from capital commitments of private investors including its fund manager, Verdant Capital.

VCHF will target specialist banks, microfinance institutions, leasing, and factoring companies, fintech and other non-bank financial institutions. It is aiming for “a commercial return, and a developmental impact by supporting financial institutions which in turn support SMEs and micro-entrepreneurs, thereby creating jobs and livelihoods”, according to a press release last month.  

‘Gap in the market’

With the Covid-19 pandemic having stymied the growth of the capital bases of African lenders, the fund is addressing “an attractive gap in the market”, Higenbottam says. “What the market needs is risk capital, junior capital, equity or equity-like capital. And that’s actually in short supply.”

Higenbottam says that there is not enough funding to support small and medium-sized business in Africa because “the banks and specialist banks and microfinance banks who support them don’t have enough capital”, he says.

Verdant’s fund is aiming for a close of $100 million within two years, as it targets a variety of investors, ranging from development finance to family offices, foundations and private high net-worth individuals globally.

“What we’re really focused on is creating jobs for people who don’t have jobs, creating economic opportunities through entrepreneurship and making money for our investors,” says Higenbottam, when asked about what annual returns the fund is aiming for. “The return we aim for is slightly less than the targeted return on African private equity, and it’s quite a bit higher than the median realised return on African private equity,” he says.

Higenbottam stresses impact investing “must provide a commercial return in order to be sustainable. The Good Samaritan didn’t just have good intentions, he also had money”.

Measuring impact

How will impact be measured?

“We have models which look at how many jobs are created,” says Higenbottam. “If we make an investment in an institution of $5 million, that institution can then get senior debt of $20 million. So we’re growing our loan book by $25 million. 

“So $25 million of loans going into small businesses, medium-sized businesses, micro-entrepreneurs. And according to the profile of those loans, we can empirically estimate the number of jobs that might be created, both through our own models and secondly, through survey data.”

During his two decades in finance in Africa and elsewhere in the world, Higenbottam says he has seen “ever increasing development finance and impact capital coming into the continent”. 

For impact investors, “Africa is the priority, whether that’s development banks, or whether that’s private impact investors,” Higenbottam says. “A lot of the impact funds we work with are already active in Africa, and it’s about getting them into new sectors or new countries or new strategies.”