The global economic slowdown has forcefully hit the Middle East and Africa (MEA), resulting in high inflation and general economic uncertainty. While the Middle East is actually poised for growth, Africa is feeling the brunt of the downturn. Regardless, fintech is booming across the region, engaging underserved populations and offering consumers more options as recession looms. Adrian Pillay, Provernir’s GM of the Middle East and Africa, shares the challenges and opportunities MEA faces during this period of economic instability.
The current banking/lending landscape: concerns in Africa and growth in the Middle East
Economic uncertainty is currently a global concern, and it is more so within the African continent. With many African countries dependent on international funding, the strengthening of western currencies against African currencies has resulted in a higher cost of borrowing, which is compounded by an increase in interest rates and a relative scarcity of funding. In Sub-Saharan Africa in 2022, GDP growth will be down 23% versus 2021, with no forecast of any meaningful recovery in 2023. Inflation in 2022 is the highest it has been in years which is further fueling the economic uncertainty sentiment.
The situation in the Middle East is somewhat different, with the Ukrainian conflict resulting in shortages of crude oil. The price of crude oil was up 73% YoY in May 2022. That, coupled with the relatively stable governments and pegged currencies, have resulted in a much more favorable economic outlook for the region. In the Middle East in 2022, GDP growth will be up 40% versus 2021. While inflation is equally the highest it has been in years, the robust economy is abating the economic uncertainty sentiment.
The impact on lenders/consumers: increased need for credit met by fintechs and nano loans
As expected, there is a focus on financial conservation for both lenders and consumers. In a recent study by TransUnion Africa, 60% of households surveyed indicated that they are focused on cutting back on discretionary spending, which is up 4% from the previous quarter. These sentiments are shared across generations (Gen Z; 46%, Millennials; 54%, Gen X; 54% and Baby Boomers; 57%).
In addition to cutbacks, appetite for credit always increases during economically challenging times, and it is good to see that the region is able to service this increased demand. Across the entire region, total loan value has grown almost 10% YoY at the end of Q3 2022, with almost 14% in Africa. This is enabled by the rise in lending within the underbanked and unbanked categories, driven by the rapidly growing fintech sectors. Africa has seen an almost 150% growth in the number of fintech operating in the continent since 2021 alone.
Within the more traditional lending segments, we are seeing the usual indicators that are implemented under the threat of a recession. However, what’s interesting is how fintechs in the region are continuing to service and penetrate the short-term, nano loan segment. Fintechs are providing a critical bridge for the gap that the recession creates for some borrowers.
How fintechs/FIs can support their customers: closer account management and innovative problem solving
Traditional risk strategies are not always effective for shifts during economic uncertainty and recession. Banks are likely to continue taking a more conservative approach, tightening lending initially and loosening up as market indicators become more insightful. Regular and ongoing Account Management reviews will ensure that lenders effectively track any shifts in the financial positions of their existing customers, and are able to quickly respond to any negative indicators – be it in slowing down lending to such customers or reducing OTB lines of credit. For new customers, regular and ongoing reviews of lending strategies will be crucial for lenders to stay ahead of any headwind and ensure that NPLs do not dramatically rise.
Fintechs will continue to lead the way with innovation, but more as a matter of necessity. Fintechs can support their customers by finding new ways to evaluate risk and unlocking new, untapped lending segments to drive their growth and serve new populations.
Outlook in MEA: economic slowdown is here but leaves gaps that fintechs can fill
Despite positive growth in the Middle East, slowdown in the larger region is the reality, and it’s not likely that will change soon. Unless the instability in Eastern Europe comes to a swift end and we start seeing signs of a recovery from the recession, we will continue to see an economic slowdown, including in fintech investments. Those that remain and survive will be the ones that are able to innovate and address the gaps created by the slowdown from mainstream lending.
Get the global perspective
Want to dive deeper into MEA insights with even more breakdowns and predictions? Curious about how other regions will fare during economic uncertainty? Get the full picture from Provenir’s experts, who cover everything from the current landscape to tips for FIs looking to weather the global slowdown.