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Fintech: Empowering Nigeria’s Family Businesses with Access to Capital

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Nigeria’s economic framework is significantly bolstered by family-owned businesses. From small neighborhood shops to expansive corporations, these entities inject an impressive $200 billion into the national GDP. However, despite their crucial role, family businesses often remain underrecognized and encounter distinct challenges, especially in accessing capital and managing finances effectively.

This trend of family businesses as pivotal economic contributors is not confined to Nigeria alone. Globally, they form the foundation of many economies. In India, for example, family enterprises account for about 79% of the GDP and provide approximately 60% of employment opportunities. A prime example is Reliance Industries, whose subsidiary, Jio Platforms, owns India’s largest telecom provider.

Family enterprises account for 70% of GDP in Spain and Mexico, while in Italy, the UK, Portugal, and Canada, they contribute over 60% to the national GDPs through numerous family-owned businesses across various sectors. This statistic underscores the global significance and economic impact of family-run businesses.

In a related development, Moniepoint, a leading financial service provider in Nigeria, conducted a case study on Nigerian family businesses. The study revealed various reasons behind their success and highlighted certain challenges that are noteworthy.

Credit serves as a vital lubricant for the economy, enabling businesses to secure necessary funding for expansion and product diversification. Loans have consistently been a crucial method for acquiring funds to launch a new business venture or to grow an existing one. They provide businesses the ability to fulfill short-term financial needs while also building capacity for the long term. Despite this, access to credit remains out of reach for many companies, particularly those that are informal and family-owned.

According to a 2021 report from The Guardian, which cites the Credit Bureau Association of Nigeria (CBAN), a mere 4% of an estimated 40 million micro, small, and medium enterprises (MSMEs) in Nigeria have access to credit. This scarcity of traditional financing options presents a significant challenge for family businesses, which account for 60% of MSMEs, thus creating a substantial dilemma.

It’s crucial to acknowledge that the challenge of accessing credit affects both individuals and businesses. The National Bureau of Statistics in Nigeria reports that 70% of bank account holders are unable to access credit. Adding depth to this, EFInA’s 2023 financial inclusion survey reveals that only 6% of Nigerians have formal access to credit.

This problem is not confined to Nigeria. In India, 80% of MSMEs lack access to credit from formal financial institutions, and in Brazil, the figure is 60%. This pattern is consistent in many developing economies.

Moreover, according to a case study by Moniepoint, most businesses prefer not to seek external investment. Instead, they opt to borrow from family, friends, or take loans from cooperatives rather than approaching formal financial institutions. Despite the potential for more substantial support from formal institutions, the challenges in securing loans from these traditional lenders often hinder these businesses from obtaining the necessary capital for growth and expansion.

The reasons are quite straightforward. Small businesses typically lack sufficient collateral and are viewed as higher risks compared to larger corporations.

Another significant hurdle is managing cash flow effectively, which is identified as one of the top six reasons for SME failures. Although specific data on Nigerian family businesses is limited, a 2022 KPMG report in Nigeria underscores the generally low adoption of technology in many MSME operations.

Given that family-owned enterprises predominantly make up the MSME category, they particularly feel the impact of these credit shortages.

According to a representative from a Big Four consulting firm mentioned in the report, the difficulties associated with securing loans have led many Nigerians to become cautious about taking on credit or debt. However, innovative practices are beginning to mitigate these issues.

The global rise of financial technology companies is enhancing access to financial services in innovative ways. Initially, these fintechs focused primarily on payments and essential banking services, but they are now making significant inroads into credit services as well.

A study carried out between 2014 and 2019 by researchers from Wharton University, McGill University, and the Paris School of Economics revealed a noteworthy trend: once fintech companies began lending to small and medium enterprises (SMEs), there was a 20% increase in bank credit within six months.

In Indonesia, the eCommerce giant Tokopedia launched a credit scoring division named Tokoscore. This development has boosted the overall credit viability across the nation, facilitating the adoption of Buy Now Pay Later services.

In Nigeria, lending to SMEs is increasing. Moniepoint, in September 2023, disbursed loans totaling $20 million to various sized businesses, indicating the growing role of fintech companies in providing essential capital to Nigerian enterprises.

Amidst escalating inflation, Nigerian fintechs that supply working capital loans are crucial for family-owned businesses to navigate varying market conditions, sustain their operations, and pursue growth. Moniepoint’s example illustrates the potential profitability of this market, given that family enterprises often generate robust cash flows.

Furthermore, fintech companies are not limited to those providing direct lending. Those offering payment solutions and business banking services, including expense cards and instant transaction monitoring, also contribute significantly. These services offer deep insights into expenditure patterns, aiding entrepreneurs in making well-informed financial choices.

Interestingly, due to the cash shortage experienced in 2023, an increasing number of family-owned businesses have started adopting alternative payment methods such as card payments and bank transfers. This shift brings a sense of optimism about the future of these enterprises.

We’re curious to know if there are other ways you think fintech and digital companies could further enhance the growth of Nigeria’s family-owned businesses. We welcome your thoughts. In the meantime, feel free to download Moniepoint’s Case Study on Family Businesses here



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