How Traditional Banks Can Better Serve MSMEs in Africa

Written By: Flipbz.org

Traditional banks across Africa are at a crossroads: With micro, small, and medium-sized enterprises (MSMEs) driving nearly half the continent's GDP and forming 95% of all registered businesses, these institutions must overhaul their approaches to serve this vital sector more effectively—or risk losing ground to agile fintechs, digital challengers, and telecom giants.

The call to action comes amid a stark financing chasm, where a staggering $331 billion gap leaves 28% of MSMEs without credit access and 51% craving more funding, according to the International Finance Corporation. Despite 80% of these businesses holding bank accounts, 70% muddle through by mixing personal and business finances, leaving 40% of their core needs—especially in lending—unmet, as highlighted by the Centre for Strategic and International Studies. Banks' reluctance stems from inherent risks: Many MSMEs lack robust financial histories, collateral, or resilience against economic shocks, making them tricky propositions for conservative lenders.

To bridge this divide, experts recommend a multifaceted pivot. First, banks should scrutinize their existing models to pinpoint which MSME tiers—micro, small, or medium—they can realistically target without upending profitable core operations. While traditional players often shine with medium-sized firms, smaller ones remain underserved, a niche where fintechs like Lula (evolving from lending to full banking) and Yoco (shifting from payments to cash-flow-based loans) are making rapid inroads.

Key to success lies in crafting bespoke products that go beyond basic loans. This includes personalized financing, advisory guidance, and non-financial perks like paperwork help, operational coaching, staff training, and data-driven insights to streamline daily hurdles. Digital innovation is non-negotiable: By harnessing AI-powered scoring, alternative data sources, and advanced algorithms, banks can tame risks tied to sparse records, much like TymeBank's AI tools for financial oversight or Capitec's revamped business arm, which uses commission-based POS systems post its Mercantile acquisition.

Partnerships emerge as a powerhouse strategy. Teaming up with fintech specialists allows banks to bolt on cutting-edge capabilities, diversify offerings, and tap fresh revenue while letting experts handle niche MSME demands. "Traditional banks need to quickly figure out ways to serve MSMEs if they want to remain competitive," says Pierre Romagny, a partner at Oliver Wyman. "This segment offers higher lending margins and the chance to build lasting customer ties."

Refining risk frameworks is equally crucial. Banks must recalibrate their appetites to embrace MSME realities, using non-traditional data to fuel smarter lending decisions and foster long-term loyalty. Mobile operators and big tech firms are already circling this space, intensifying the race.

Ultimately, empowering MSMEs isn't just smart business—it's an economic imperative. By formalizing operations, spurring job creation, and diversifying growth, banks can help fortify Africa's resilience against global headwinds, turning a $331 billion challenge into a launchpad for prosperity.