Author: Kihingu Inc

Long-term debt financing in Africa is a problem…and an opportunity

Posted on by Kihingu Inc
Long-term debt in Africa

Financial sector assets in Africa are heavily concentrated in banking, according to the latest research by the Africa Long-term Finance Initiative (LTF). Taken together, insurance company and pension fund assets represented less than 40% of GDP on average in 2019 across the continent, against an average of almost 100% of GDP for commercial banks. No surprises, then, that the largest providers of long-term debt in Africa are banks.

Why the lack of diversity in domestic sources of long-term debt? In part, it comes down to the risk aversion of fund trustees: most institutional investors in Africa prefer to invest in government securities and real estate rather than taking on project risks with which they are unfamiliar.

Instead of investing long-term saving commitments in long-term investments, institutional investors hold a significant portion of their assets as term and savings deposits with banks. This upends the maturity transformation role often viewed as the core purpose of financial intermediation – that is, meeting the needs of lenders and borrowers by taking short-term sources of finance and turning them into long-term borrowings.

Where institutional investors have been willing to take on project risk, their investment has been limited to brownfield infrastructure – projects that are already constructed with regular income streams from delivery of services, where the risks are much lower than in the greenfield construction phase. Even here, institutional investors typically lean on Development Finance Institutions (DFI)s to provide first loss-guarantees.

Turning to the role of commercial banks, a disproportionate share of bank lending is allocated to the public sector. The deepest segment of most capital markets in Africa is the market for government securities (mostly short-term): the volume of outstanding government bonds represents, on average, some 20% of GDP across the continent. By contrast, most African countries do not have a market for corporate bonds. Wher exists, the market represents less than 5% of GDP in most cases. This imbalance between deep sovereign debt markets and shallow corporate debt markets is exacerbated by the high concentration of liquidity in just a few capital centres south of the Sahara: Lagos, Nairobi, and Johannesburg.

Government securities are attractive to banks as they represent ‘risk-free’ assets and do not encumber banks in terms of capital adequacy. Conservative culture or ‘career risk’ also plays a role: as one bank executive in our network observed, “nobody worries about losing their job for buying yet more T-bills”. In some cases, as government spending ballooned in response to COVID-19, and credit risk associated with lending to the private sector increased, top-tier domestic banks have seen the purchase of government securities as a welcome “safe-haven”..

From the perspective of users of debt finance, although traditional banking products are available to most formal enterprises, they often come at a high costernative formal sources of finance only play a marginal role on the continent, access to long term finance is often constrained. Likewise, lending to the housing sector is very modest – the average percentage of adults with loans for home purchase across the continent was around 5% in 2017.

Not only are domestic markets for private debt constrained – we could say “crowded out” – by the borrowing needs of the public sector, foreign borrowing is also limited, and entails foreign exchange risk that increases its cost. This underscores the pressing need to deepen domestic debt markets for the private sector (both enterprises and households) across the continent.

The importance of long-term debt

Long-term debt is essential to sustainable development, in particular because it allows investments to be financed over their active lifetime, thus matching the liquidity needs of the investment project. Debt is also generally less costly than other forms of finance, such as equity, dueniority, its payment structure (regular installments) and (re)financing flexibility.

Depth of the financial system (2016[1], % of GDP)

The depth of the financial systems depicted in the figure below for a selection of African countries is gauged by commercial banks’ assets, government bond market capitalisation, corporate bond market capitalisation, and stock market capitalisation. The figure shows, for each indicator, the average across the continent in 2016 and the percentage for each country in the same year, scaled by GDP.

Sources: World Bank (World Development Indicators) and BIS, supplemented by the LTF Survey

In developed economies, long-term debt finance is used by governments, enterprises, and households alike. For governments, debt is the only alternative to tax revenues when raising capital for investment. Enterprises find debt the most advantageous form of finance because it has a low cost of capital, often provides tax shields, plays a disciplinary role for managers and avoids diluting founders’ control. Households also find debt to be useful in alleviating liquidity constraints and thereby allowing them to smooth their income over the life cycle, opening up possibilities for purposes such as finance of housing, education and retirement.

Lack of data creates higher risk perception

In developed capital markets, the amount of long-term debt provided to the different sectors of the economy is well-balanced. Banks have a broad portfolio of loans that includes both public and privateending, and well-diversified institutional investors allocate their capital to both governments and corporates.

However, when data is not readily available to market participants, lenders tend to restrict their lending due to higher perceived risk. For example, solid and reliable credit history registries reduce these “information asymmetries”, allowing borrowers to have easier access to long-term finance.

Valid data on debt under the Long Term Finance (LTF) scoreboard

By improving market intelligence through data collection, the LTF initiative seeks to deepen markets for long-term finance in Africa by reducing information asymmetries. Governments can use this data not only to benchmark but also to improve their debt management practices, enabling productive financing that yields return better than the cost of debt itself. Likewise, private sector stakeholders stand to benefit from being able to better manage the risks associated with their investment in local African capital markets.

Coordinated efforts need to be made by a range of stakeholders – private investors, public investors, concessionary lenders, and expert providers of technical assistance – to increase the deployment and investment of domestic sources of long-term finance in productive assets, especially those resources available for long-term investment by pension funds and patient capital investors.  As we’ve outlined in this short blog post, the pis information asymmetry made worse by an inertia that comes from traditional over-reliance on government securities. For innovators, it is a status quo replete with opportunity.

Investment in productive assets like infrastructure will create a ripple effect on economic expansion over time. As economies expand, more capital for growth and scale-up is needed, which will attract larger foreign investment flows into Africa. This in turn will create job opportunities, higher disposable incomes and household savings, and – ultimately – inclusive economic growth.

[1] Data on government and corporate bonds are only available until 2016.

FSD Africa Investments injects £3m into Kenya’s first factoring fintech to boost supply of capital to small businesses

Posted on by Kihingu Inc

Nairobi: December 20, 2021

IMFact’s technology-driven factoring solution provides MSMEs with an alternative to bank lending by providing upfront cash payments for their unpaid invoices.

FSD Africa Investments (FSDAi), the investing arm of FSD Africa, has today announced a £3m investment into IMFact, an expanding fintech company that uses supply chain financing to provide working capital to micro, small and medium enterprises (MSMEs).

As a “pooled receivables” factoring business, IMFact purchases bulk invoices from MSMEs for a mix of upfront cash and deferred payments. This gives the sellers access to cash without the need to follow up or wait for invoices to be paid, freeing up capital to buy new inventory, pay suppliers, and grow the business.

IMFact’s “pooled receivables” model differs from the pre-existing invoice discounting practice where the best receivables or invoices are cherry-picked by the financing company meaning the rest of the receivables pool cannot be used as collateral. It also provides faster access to working capital than the invoice discounting usually offered by banks because it does not require an upfront deposit or guarantees.

We are pleased to be working with IMFact to support the rapid financing of MSMEs in Kenya at a time when many are struggling to get access to working capital from traditional lending institutions.  We particularly look forward to seeing the impact the investment has on Kenya’s medical and pharmaceutical sector and hope to encourage further scaling of fintech solutions to solve the funding gap among smaller businesses.
Anne-Marie Chidzero, Chief Investment Officer, FSD Africa Investments

Many of the MSMEs expected to benefit are family-owned businesses including those that distribute medical equipment and pharmaceuticals to public and private organisations. However, IMFact will also be working with supply chain businesses in other industries.

Covid lockdowns just another crisis : the resilience of Nairobi s micro-entrepreneurs

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In March 2020 when the first wave of Covid-19 hit, countries around the world introduced stringent public health measures. Kenya was no exception. Schools were shut, government and office workers were encouraged to work at home, markets were closed, curfews were introduced and movement in and out of Nairobi was banned.

Although these measures reduced the spread of the virus, their economic impact was swift and damaging. Millions of people’s livelihoods disappeared overnight. For those working in the informal sector in Kenya, which accounts for up to 77% of all employment,[1] days without income quickly became days without food. As the lockdown continued, the World Bank and others predicted dire consequences for long-term economic growth and poverty reduction targets.

Today, although the Covid-19 and macro-economic outlooks remain unclear, recent research undertaken by FSD Africa in Mathare, one of Nairobi’s largest slums, indicates that Covid is only the tip of the iceberg. The pandemic is potentially diverting attention away from the underlying drivers that make or break the livelihoods of Mathare’s inhabitants.

The Youth Enterprise Grant project

Over the last two years, FSD Africa has been studying over 1,000 youth living in Mathare as part of the Youth Enterprise Grant project. Starting at the end of 2018, young people aged 18–35 were given a smartphone and an enterprise grant totalling $1,200. Half of the participants received the grant in three lump-sum payments at the beginning of the programme, while the other half received a monthly stif $50 over two years.

The project was implemented by cash transfer specialists GiveDirectly, with funding from the MasterCard Foundation, FSD Africa and the Google Impact Challenge Fund. Ongoing research over the period sought to ascertain how the youth used the money and the phone to improve their lives and livelihoods.

Covid-19 strikes

One year into the project, the research showed several promising findings, such as the proportion of youth describing themselves as ‘self-employed’ – running their own business – increasing from 34% to 67%. Data also showed that a third of all transfers were being spent on new or existing business investments, with a further 13% of transfers spent on education. There was practically no evidence that funds were being misused.

But during the second year of the project, the Covid-19 pandemic struck. Researchers feared its impact would undermine the business investments and other gains reported up to that point. It was felt that the lump sum recipients, whose grant payments had finished approximately one year before, would be particularly affected.

The results of the project were therefore awaited with some caution. This included the responses to post-payment telephone surveys with monthly recipients, a final telephone survey of all YEG recipients and several longitudinal case studies.

But these findings, shortly to be releasedAfrica in the project’s final report, provide a more nuanced picture than expected of the economic impact of Covid-19 on micro-business and survival in the Nairobi slums.

The mixed impact of Covid

There is no doubt that lockdown affected the livelihoods of the YEG youth. Teresia, age 29, explained:

“Before Covid, I was working several days a week cleaning in the house of a Chinese businessman. When lockdown came he told me to stay away as he didn’t want people coming into his house. I didn’t get paid when I didn’t work.”

Many others reported similar stories, and in the endline survey, carried out in January 2021, 90% of respondents said their income had decreased substantially during lockdown.

Nonetheless, the broader research findings indicate that the impact of Covid-19 as a whole was temporary, and limited largely to the initial lockdown period. Analysis of other questions posed in the endline survey shows that most respondents, including those that received lump-sum payments nearly a year before pandemic, emerged in a better financial situation than at the beginning of the project.

Micro-entrepreneurs were resilient

All youth reported sustained positive perceptions of their financial situation at the end of the project compared with the start, with a marked increase in those feeling they could meet all their daily needs on most days.

The shift to self-employmalso sustained, with the majority of youth (79%) describing themselves as self-employed and 68% describing self-employment as their main source of income. The figures show little difference between lump sum and monthly payment recipients, indicating that business investments made with transfers at the beginning of the project survived.

Interviews held after lockdown revealed that although most participants experienced reduced or suspended business activity and income, Covid-19 had not caused any participant’s business to fail outright. While five of the nine interviewees said their businesses were directly affected by Covid, they tended to describe them as being ‘on hold’ during lockdown, rather than ‘failed’.

All felt these business ventures were restarting as demand picked up. This was especially true of skills-based businesses, like hairdressing, construction and cleaning, which are relatively easy to restart once demand increases.

A couple of businesses even grew during the lockdown. One yout in a modem to sell wifi connections to households in his area, which increased in demand as more people (including school children) were forced to work at home.

Covid was one issue among many

All of this challenged researchers’ initial concern that the Covid-19 crisis would be such a significant shock it would wipe out any economic gains arising from the project. Instead, the YEG research found that although Covid-19 was a major shock, its impact in Mathare was no greater than that of many other issues affecting micro-business operators.

Four interviewees, for example, reported businesses that had failed for reasons unrelated to Covid. Only one of these was due to poor business skills. The other three reflected the highly precarious nature of operating a business in informal settlements: they were due to livestock disease, police raids and medical expenses.

The challenges of running a micro-business

These issues echo comments made in focus groups when participants were asked about the chlenges of running their businesses. Rather than emphasising lack of skills, they cited a litany of other obstacles in operating in a place like Mathare:

“So I bought hair braids with the money. After that, it’s like thieves realized we have been given the money and they came and stole from me. They took everything.”

“You know we don’t have title deeds here so we are just risking, anytime we can be kicked out and I lose my rentals. Also, because we hear about slum upgrading so we must feel insecure about our business.”

“Personally, I have a small kiosk, there are people who come to me pretending they are city askaris but they just want money, the chief, people just wanting to disturb you and your business.”

In several cases, medical costs and funeral expenses had wiped out participants’ savings or undermined their ability to keep businesses afloat. Other challenges related to the unreliability of basic services:

“Challenges are like: when we don’t havey; you find that no money will come in [to the bio-block] that day. Also, when there is no power our video business suffers.”

Issues around crime, theft and corruption are not easy to resolve. Indeed, some informal income-generating activities are based on illicit operations, such as selling water or electricity by tapping into mains supplies. YEG interviewees described efforts to obtain official meters, permits or licences – to legalise their operations – as being expensive, bureaucratic and ultimately futile. So instead, they continue operating in the knowledge they are running on borrowed time until they are shut down.

Structural problems must be addressed

These findings should challenge policymakers to think about what micro-entrepreneurs really need to run sustainable businesses in informal settlements like Mathare. The YEG project shows that youth were enthusiastic in their use of the capital (and the phones) provided by the programme to start and grow businesses, but long-term stability, and growth, are reliant on a range of wider factors – particularly investment in public goods.

Reliable, affordable basic services, universal healthcare, secure property rights and security are all essential for micro-entrepreneurs to succeed but are hardly ever included as elements of urban livelihood programmes. Instead, there is a fixation on loans and business training, which will have limited impact unless underlying structural factors are re-oriented to support the needs of lower-income households and businesses. Unsurprisingly, the project found YEG participants less concerned about the role of their business skills in their success than the research team were.

Mathare’s micro-entrepreneurs have proved their capacity for survival in the face of so many continuous challenges, and the pandemic was simply seen as one more to tackle. While a significant shock like Covid-19 was an unexpected element oe YEG project, it has helped magnify the underlying factors that make or break the livelihoods of youth living in informal settlements.

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[1] IEA, Informal Sector and Taxation in Kenya, 2012.

Smartphones and micro-entrepreneurs in Nairobi’s informal settlemen

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In the space of two decades, the smartphone has revolutionised communication and enabled millions to access the internet. This is particularly true in Africa, where it is estimated more households now own a mobile phone than have access to electricity or clean water.

Within Africa, Kenya is one of the most digitally connected countries, with more mobile phone registrations than people.[1] An estimated 96% of internet users gain access via a mobile device,[2] and Kenya also leads the world in the adoption of mobile money services, with over 79% of adults holding a mobile money account.

Nairobi is one of Africa’s most vibrant and connected cities. As the continent urbanises and more young people enter urban job markets, understanding how Nairobi’s micro-entrepreneurs operate in the digital age offers useful insights for cities across Africa.

Much has been written on the digital dividend that internet connectivity can bring in terms of accelerating growth, creating opportunities and delivering financial services. But it is difficult to know whether this dividend pays out to poorer households, who may be the last to own mobile phones and less able to afford access to the internet.

These were the issues explored by FSD Africa as part of the Youth Enterprise Grant, an innovative pilot project that provided smartphones and enterprise grants to 1,000 youth in Mathare, one of Nairobi’s largest slums.

The Youth Enterprise Grant

The YEG project ratwo years, starting at the end of 2018. All participants lived in Mathare, with most aged 18–35. The project provided each participant with a smartphone and an enterprise grant totalling $1,200. Some received the money in three lump-sum payments at the start of the programme, while others received a monthly stipend of $50 over two years.

The project was implemented by cash transfer specialists GiveDirectly, who helped FSD Africa assess if and how young people used the money and the phone to improve their livelihoods. The research sought to ascertain the value of digital technology in building business skills and knowledge, money management and financial literacy.

The smartphones were pre-loaded with several apps. These included Facebook and M-PESA, the mobile money service via which the grants were paid. The phones were also loaded with Touch Doh, a money management app that uses animated characters, speaking in Sheng (Swahili street slang), to help users with budgeting. On Facebook, participants were held to set up a profile (if they did not already have one) and become a member of the Hustle Fiti page, a business advice and chat group operated by Shujaaz Inc.

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[1] https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=KE

[2] https://datareportal.com/reports/digital-2021-kenya

COP26 Highlight – Financial sector greening: Building foundations for sustainable finance in developing countries

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By 2025, more than a third of global assets under management could be ESG-aligned. With public budgets constrained in the wake of the Covid-19 pandemic, this mass transition by the financial sector has the capacity to drive green, inclusive, and resilient growth in the real economy. However, with limited skills, data, regulations and policies to support green finance, many of the most climate-exposed developing countries struggle to attract sustainable investment. At the same time, the greening of the global financial system must account for the unique challenges and opportunities in regions outside of Europe and North America or risk entrenching existing barriers to funding.

This event brings together expert voices from developing countries and private finance to show how nations with emerging financial sectors can lay the right foundations to tap into global pools of ESG-aligned capital and use it to accelerate the growth of green businesses. It will provide replicable examples of green financial market building and launch a conversation running through to COP27 on how developing countries can take a more prominent global role in transforming financial systems.

On Finance Day, 03 November, we convened a panel on Financial sector greening: Building foundations for sustainable finance in developing countries where policymakers, donors and the private sector came together to discuss how developed and developing countries can work collaboratively to help the latter develop local markets for green finance, attract a greater share of global sustainable investment, and shape international frameworks, standards and reporting.

Moderator: Dr Nicola Ranger – Deputy Director, UK Centre for Greening Finance and Investment

Panellists:
Ayaan Zeinab Adam – Senior Director and Chief Executive Officer AFC Capital Partners

Zoe Knight – Managing Director and Group Head of the HSBC Centre of Sustainable Finance

Mark Napier – CEO, FSD Africa

Alexia Latortue – Deputy CEO, Millennium Challenge Corporation

Watch recording here>>

Creation of Africa Green Finance Coalition hailed as “ground-breaking” moment for funding of continent’s green transition

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Nairobi: November 2, 2021

FSD Africa welcomes the Africa Green Finance Coalition, launched at the COP26 World Leaders Summit with the aim of closing the continent’s green finance gap through financial sector reforms, technical assistance, and peer learning.

FSD Africa welcomes the announcement at the COP26 World Leaders Summit that African nations will come together to create the Africa Green Finance Coalition (AGFC).

The AGFC brings together all the countries of Africa to pool resources, share learning and create a pathway for increased flows of green investment capital to the continent. It will facilitate learning and technical assistance across countries, while a peer review mechanism will hold members to account on their commitments to the necessary reforms.

The Africa Green Finance Coalition is exciting because it shows African countries working together and with a high level of ambition to put in place the policy and regulatory reforms that will allow them to compete effectively for the billions of dollars that are potentially available for decarbonisation and adaptation.  We warmly welcome this ground-breaking initiative and look forward to supporting its further development.
Mark Napier, CEO

The AGFC was presented to world leaders by Ukur Yatani, Cabinet Secretary for Kenya’s National Treasury, and Seyni Nafo, Spokesperson of the Africa Group of Negotiators, on day two of the COP26 climate summit.

Underwriting facility set to energise geothermal development in Kenya and Ethiopia

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We are pleased to announce that we, together with Parhelion, a UK-based specialist energy and climate risk finance advisory company, are planning to launch a first-of-its-kind underwriting facility, backed by East African insurers, to de-risk early-stage development of geothermal energy projects with the capacity to significantly expand electricity access and energy sector resilience in Kenya and Ethiopia.

The need

The energy sectors in Kenya and Ethiopia face several systemic issues:

• Large numbers of people continue to live without electricity — 12.5 million in Kenya and 42 million in Ethiopia are still unconnected.

• Growth in energy demand is outstripping supply — Kenya’s power demand is growing 20% faster than GDP, while recent annual growth rates of around 10% in Ethiopia imply a similar increase in energy demand.

• Current sources of energy are either carbon-emitting or climate-vulnerable — 35% of Kenyan power comes from thermal sources, while another 35% comes from hydroelectric dams exposed to drought risks. These risks are heightened in Ethiopia, where 89% of power is hydro-generated.

The solution

Geothermal power plants can produce large amounts of power no matter the time or weather, providing a reliable source of clean energy that is resilient to changes in climate.

Kenya and Ethiopia have large geothermal potential; however, growth in the sector is held back by high upfront investment coupled with the risk of drilling wells that are found to be commercially unviable.

Parhelion will work with East African insurers to create an underwriting facility that mitigates the low probability, high-cost risk of unviable wells. This will use insurance capital to de-risk the early-stage development of geothermal projects, making it easier for projects to attract private investment. Parhelion is also planning to launch the GeoFutures Fund, which would invest in nascent geothermal projects.

The opportunity

East Africa has a potential geothermal capacity of 15,000 MWe; however, just 500 MW is operational in Kenya while Ethiopia has installed just 7 MW. With support from the programme,Parhelion and FSD Africa forecast a 20% increase in geothermal output for Kenya and a 500% rise in Ethiopia, preventing more than 515,000 tonnes of CO2 per year. This is expected to create 2,600 jobs in renewable energy and insurance sectors while bringing electricity to 5.25 million people who currently live without power.

By building the capacity of local regulators and insurers to engage in underwriting facilities, the programme will enable these organisations to apply to same principles to other renewable energy projects. This will deepen the capabilities of the East African insurance market to channel private capital into sustainable development. Moreover, it will enable premiums from underwriting clean energy projects to be retained in the region, rather than the current system, under which local insurers simply act as intermediaries for international counterparts.

FSD Africa backs fintech pioneer to build a new platform aimed at increasing access to carbon markets

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London: 12 October 2021

  • Investment in 4R Digital Ltd to build a platform that will use digital technology to help democratise access to climate finance for small, green projects in Africa
  • The Carbon Value Exchange’s (CaVEx) use of remote monitoring technology will create verifiable carbon credits from projects such as solar pumps, electric vehicles, and nature-based solutions, as well as use digital finance to deliver proceeds from credit sales directly to project participants
  • 4R Digital’s co-founder Nick Hughes to reveal details at the AFSIC Investing in Africa Conference in London on 12th

FSD Africa, the UK Government’s flagship financial sector programme in Africa, is making an initial investment (£650,000) in a highly innovative digital solution connecting carbon credits from small-scale green projects across the global south to international buyers. The investment will deliver funding through the test phase of the solution being developed by Nick Hughes, who led the development of Africa’s revolutionary mobile money service M-PESA.

Hughes is co-founder of 4R Digital, a green fintech start-up developing financial solutions for a range of business partners committed to climate positive projects in Africa spanning distributed solar energy, electric mobility and nature-based schemes. 4R Digital is building a solution that connects these projects to investors looking to offset greenhouse gas emissions at the same time as supporting locally-led climate action.

It is illogical that Africans highly exposed to environmental change find themselves barred from carbon markets intended to fund our fight against the climate crisis. 4R Digital is developing a revolutionary solution with the potential to throw open international sources of finance for entrepreneurs, farmers, and small businesses in developing countries.
Juliet Munro, Director, Digital Economy

 

You can also find out more details by visiting the FSD Africa exhibition stand at AFSIC where the 4R Digital team will be giving a presentation on the technology and meeting interested parties.

Building resilience against flooding in urban areas

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Flooding in urban areas across Africa is on the rise. The continent needs to implement risk-management techniques to ensure its cities are resilient to climate change and the devastation it can cause. This article explores possible ways Africa can build resilience against flooding in urban areas.

Across Africa the annual wet season sees our news reports and social media feeds “flooded” with images of commuters wading through rain and sewerage to get home, cars washed off roads and businesses and livelihoods floating on busy streets. Then, the cleanup begins, the news forgets, people rebuild and, before long, the process repeats.

But it shouldn’t be this way and if we don’t act now the situation will only get worse.

Take Lagos in Nigeria as an example: annual flooding in Lagos has risen in severity over recent years, as climate change progresses. In 2018 alone, flooding caused $4 billion worth of damage, costing around 4.1% of Lagos State’s GDP. The city struggles to manage and recover from these floods, which not only causes disruption to business and social activity but also threatens to eventually make the city unlivable.

Lagos is not alone. More than 70 urban areas face significant flood risks, with 171 million people in sub-Saharan Africa exposed to the dangers of flooding.

In 2019, over 1,000 people were displaced, with roads and bridges destroyed after several days of constant rain in Dar es Salaam. The same happened in 2017 and 2018. In August, at least seven people died after floodwater inundated Addis Ababa

While people will routinely think about taking out insurance for their cars and to cover their health needs, too often they don’t insure against risks like floods. In 2019, SwissRe estimated that 91% ($1 billion) of losses from climate risks in Africa were uninsured.

We need to better manage risk to make our cities more resilient to climate change and the devastation it can cause.

But where do we start? Using Lagos as an example, we combined data, interviews, and models to see how flood risk in the city could be better managed and identified five key takeaways for improvement.

Number one, while flooding happens regularly, most public agencies and private businesses can’t quantify the risk. This includes insurance companies who often struggle to determine their own clients’ exposure. Or think of it this way; how do you know how high to build the bridge, when you don’t know how high the river flows when it floods? When we know this, we can build investment cases for resilient infrastructure and bespoke insurance products.

Which links closely to our second finding: the lack of usable consistent data. Too often data is missing or fragmented. When we lack data, we lose the ability to accurately model risks and impacts. And when we do have data, there is a need for more collaboration between stakeholders to ensure it is used meaningfully.

Third, trust is critical. Throughout the world, consumers can be sceptical of insurance companies and the same is true here. Innovative insurers are looking to address this through deliberately seeking out opportunities to offer clients real value. This also means that insurance companies should move beyond just policy sales, and instead become advisers who can better help clients understand and manage the exposure of their business or property.

Fourth, from flood sensors to satellite-based early warning systems, technology can have a profound impact on how we identify and respond to immediate threats. Partnerships are needed to develop and realise these opportunities, and this requires strong leadership from the local business community and public administration. The insurance industry, and indeed the broader financial sector in Nigeria, have a crucial role in developing local innovation and collaboration, and in leveraging the readiness of African and global reinsurers and experts to provide finance and support.

But as always, even the best data and innovations can only go so far. Leadership is critical. Insurers can step up by adjusting their corporate strategies, but they also need partners with whom to act. In Lagos, institutions such as the Lagos Resilience Office, the Financial Centre for Sustainability Lagos and the Lagos Business School could provide tangible solutions as well as practical advice. Alongside this, agencies such as UKAid funded FSD Africa and other global experts can facilitate support and investment for this process.

Lagos is just one example, but many of the findings offer insights for cities across the continent. With flooding likely to get worse, it is critical to act now to help our cities and communities withstand the flood.

Insurers have a big role to play, and many institutions, including FSD Africa, are ready to partner with innovators to develop new solutions. It’s vital this work is prioritised – to safeguard development gains made in recent years, boost sustainability and protect livelihoods.

This opinion piece was originally published in ESI Africa on 03 October 2021.

 

Insurtechs will reshape the insurance sector

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Needed but not prioritised, relied upon but not trusted – these are just some of the perceptions that have characterised interactions with the insurance sector. The sector has been grappling with the challenge of delivering relevant products for a long time, especially to customers at the base of the economic pyramid.

Only 3% of Africa’s GDP is driven by insurance, which is less than half the world average of 7%. Yet, insurance provides a safety net from many external threats like natural disasters, health threats and economic disruptions.

This brings the question: why is there such a discrepancy, especially given Africa is no less exposed to many of the risks that insurance buffers against compared to the rest of the world? Remote locations, lower education levels and a lack of trust or experience with formal institutions have been key contributors to low insurance uptake in Africa.

According to McKinsey, Africa’s insurance industry is valued at about $68 billion in Gross Written Premium (GWP) whichbehind other emerging markets such as Latin America and the Caribbean. Uptake across the continent is also inconsistent with 91% of premiums concentrated in just ten countries; South Africa has the largest and most established insurance market and accounts for 70% of Africa’s premiums.

In Kenya, a 2019 report by the Insurance Regulatory Authority (IRA) showed that insurance penetration dropped from 3.44% to 2.34% over the last 9 years, an indication that the sector has not been successful at capturing the opportunities presented by the expanding economy.

These statistics clearly depict the protection gap that has left households and businesses vulnerable to shocks triggered by various risks.

Covid-19 has and is still placing significant pressure on the way the insurance business is conducted. The pandemic disrupted providers’ engagement with both regulators and consumers. A study by FSD Africa conducted in 2020 that took stock of the effect of COVID-19 across sub-Saharan Africa, showed that the sector ed to enhance digitalisation as the virus reduced mobility and social interaction amidst government-imposed restrictions. Digitising the sector would also improve access and efficiency of insurance products and services. Furthermore, the study showed that regulators also needed to adjust their service delivery processes of licensing, registration, data collection and product approvals by embracing new solutions.

The pandemic has without a doubt amplified the need to adopt regulatory technology (regtech) and supervisory technology (suptech) in enhancing the efficiency of reporting and supervision processes. There have been notable uptake in online distribution of products, customer-centric services such as the use of chatbots, mapping out trends, assessing risks, managing claims and even marketing. Bold start-up companies are behind some of these most ingenious innovations, with support from the sector’s long-standing players. For example, Lami, in partnership with more than 25 Kenyan underwriters, released its flagship mobile application in early 2020, enabling Kenyans to pay for insurance in instalments and pause coverage if they travel abroad. In addition, Bluewave and APA insurance recently launched an affordable digitally distributed health cover for low-income populations, costing less than USD 2 each month for a hospitalisation cash benefit and funeral expenses benefit of up to USD 500.

To leverage such innovations, Kenya’s Insurance Regulatory Authority, together with its partners, launched BimaLab, a pilot accelerator programme in 2020. The move is meant to enhance visibility and push for resources for talented insurtech founders of early to mid-stage start-ups. The programme will harness innovation for inclusion and enhanced access to insurance products and services with an aim of increasing insurance penetration in Kenya. The programme, now in its second phase and with FSD Africa’s involvement, has seen an increasing contribution of technology to insurance inclusivity through companies such as AiC Chamasure and Sprout.

AiCare is enabling motor insurers to conduct accurate motor insurance risk assessments. This is improving underwriting efficiency and reducing costs of insurance premiums. Chamasure has created a peer-to-peer microinsurance and savings platform which enables those who save through informal social groups to purchase insurance through the groups in case of death or accidents. Sprout Insure developed a faster claim processing solution for crop insurance making it easier for farmers to buy policies and receive timely pay-outs.

It is vital for regulators to balance the need to facilitate and promote innovation with the protection of consumers and the adequate management of the risks that may arise. In this regard, there are seven regulators across sub-Saharan Africa that are also shadowing the second phase of BimaLab programme with an aim of building an enabling regulatory environment. The programme will enable insurance regulators from Nigeria, Ghana, Rwanda, Uganda, Malawi, Zimbabwe and Kenya to adapt and evolve their supervisory processes to be more flexible and responsive to new innovations, technologies, and risks as and when they arise.

As technology advances in the insurance sector, it is important that regulators balance the need to promote innovation with the protection of consumers and the adequate management of the risks that may arise. In this regard, there are seven regulators across sub-Saharan Africa that are also shadowing the second phase of the BimaLab programme with the aim of building a regulatory environment that facilitates and welcomes innovation. The programme will enable insurance regulators from Nigeria, Ghana, Rwanda, Uganda, Malawi, Zimbabwe, and Kenya to adapt and evolve their supervisory processes to be more flexible and responsive to new innovations, technologies, and risks.

Insurtech is revolutionising an almost century-old insurance industry in Kenya, leading to its financial system becoming more accessible to low-income populations. With the trend being recorded across the globe, technology is reshaping the competitive landscape, challenging traditional structures to significantly improving access to insurance.

FSD Africa recognises the role Insurtech plays in increasing insurance penetration and coverage. Thus, we are exploring a pipeline of Digital innovation projects to support this Insurtech revolution and the reshaping of the African Insurance Industry.