Stringent collateral requirements, limited financial records and the cost of underwriting small loans all contribute to the financing shortfall. The International Finance Corporation estimates unmet financing demand among MSMEs in sub-Saharan Africa at $331bn. Many smaller businesses lack the assets and documentation required by conventional credit models and are therefore perceived by banks as costly or difficult to serve.
Microfinance institutions and digital lenders provide alternatives, but some products carry high borrowing costs, short tenors or repayment structures poorly suited to business investment.
Seasonal business cycles and uneven cashflows also make inflexible lending products unsuitable for many enterprises. Poorly matched repayment schedules can weaken loan performance and reinforce the perception that MSMEs are inherently risky.
Data as collateral
Many MSMEs that lack collateral have strong sales and reliable cashflow, whether steady or cyclical. The proliferation of digital wallets and other fintech applications across Africa, alongside established electronic payment channels, is creating financial records that lenders can use to assess cash generation and repayment capacity.
Across markets in which it is viable, data-powered lending to MSMEs is shown to shorten processing times, lower costs and improve the quality of credit decisions.
“When underwriting is built properly and supported by reliable information, understanding a business’s cashflow can expand access to finance while supporting sound credit decisions,” says Abiodun Olubitan, group head of SME banking at Access Bank. Olubitan emphasises that “moving beyond a purely collateral-led approach does not necessarily mean taking on poorer credit risk.”
In addition to transaction data, banks can base credit decisions for MSMEs on operational factors. Egypt’s Commercial International Bank (CIB) structures cashflow‑based lending by focusing on transaction flows and business cycles. “In this context, facilities can be linked to receivables, purchase orders, contracts or post‑dated cheques, while offering flexible repayment terms and tenors of up to five years, depending on the type of facility,” says Islam Zekry, group chief finance and operations officer and executive board member at CIB.
Tailoring credit to business cycles
Products designed around sector-specific cashflows can widen banks’ addressable markets and support businesses throughout a value chain. Cashflow patterns for farms, for instance, differ from those for agri-processors. Repayment terms can therefore be structured around harvest and post-harvest production times, respectively, informed by predictable cash cycles and capped at a reasonable, achievable proportion of monthly incomings.
Precise models will vary sector to sector, while reflecting the capabilities and limitations of each market. “In Egypt, MSMEs focus on trade, manufacturing, agriculture and services linked to import-export flows, making them highly sensitive to foreign exchange volatility, inflation and seasonal demand cycles,” Zekry says. “This leads CIB to tailor financial solutions to customer needs.”
Elsewhere, South Africa’s Standard Bank, through its digital SME banking platform – BizFlex – operates a flexible financing facility that establishes automatic repayments as a proportion of daily point-of-sales transactions and revenues arriving in borrowers’ business accounts. That system harnesses South Africa’s relatively developed banking infrastructure and formal service economy.
Partnerships between banks and development finance institutions are key in spreading risk, extending finance and responding to socioeconomic needs. Equity Bank’s director of SME, Collins Wanyonyi, says that through partnerships such as the German Desk with DEG, Equity helps East African SMEs access trade and financing pathways with European counterparties. “Cashflow-based lending strengthens this by allowing the assessment of SMEs against real trading activity such as orders, invoices, revenue and settlement patterns, rather than fixed collateral alone,” Wanyonyi adds.
Some socioeconomic challenges are common across the continent. For example, women-led businesses account for around 40% of MSMEs across Africa but are disproportionately underfunded. Against this background, a growing number of bank and development finance programmes specifically target women-owned businesses. According to Access Bank, its Nigerian cashflow lending proposition recorded a 99% repayment rate over 32 months – a figure that was independently verified as part of its participation in the Women Entrepreneurs Finance Initiative.
Limitations and operational imperatives
While optimism abounds regarding cashflow lending’s potential, it is not yet viable at scale in some African economies. Its expansion “will vary by market, tracking open banking maturity and transaction-data density more than it tracks our appetite to roll it out,” says Kafui Bimpe, head of SME business at Access Bank’s African subsidiaries.
Banks and their partners are therefore also helping MSMEs formalise their operations, digitise payments and improve record-keeping so that lenders have sufficient information on which to base credit decisions.
Zekry stresses that “managing portfolio risk requires continuous monitoring, diversification, and strong governance to avoid overextension and concentration risk, and maintain portfolio resilience.”
Building on that, Zekry highlights the importance of “establishing robust early-warning systems to detect irregularities in receivables, payment delays or sudden drops in transaction volumes,” noting that collections present additional challenges, as repayment depends on ongoing cashflows rather than fixed collateral – making recovery more difficult.
This places a premium on credit officers who can interpret transaction data in the context of a company’s sector and business model, investigate anomalies and challenge automated decisions. Their judgement will remain an important complement to technology.
Where reliable information and robust controls exist, cashflow-based lending can help banks distinguish viable businesses from genuine risks. That makes it an increasingly important means of widening access to finance without abandoning underwriting discipline – and of supporting enterprises that are central to employment and economic growth across Africa.