Crowdfunding platforms operating in East Africa have raised an estimated 170 percent more funds in 2016 than they did in 2015, according to a recent study by FSD Africa, a non-profit company based in Nairobi, and London-based analytics firm Allied Crowds. The report studied 69 platforms operating in Kenya, Rwanda, Tanzania, Uganda, and South Africa as a reference.
Part of this massive growth is in response to high demand for alternative finance; despite relatively high rankings on Access to Credit indices, most east African countries still struggle with a large credit gap. Crowdfunding also makes it cheaper to send remittances from abroad and receive higher levels of aid, capital and even useful connections. Low electrification rates are also creative incentives for crowdfunding projects dedicated towards solar energy in East Africa specifically.
Yet the vast majority of crowd funding activity in East Africa takes place on international, not native platforms. This applies to all types of crowdfunding, although donation-based platforms have raised far more funds than lending- or equity-based platforms.
This means that most of the money raised through crowdfunding in East Africa is outside-in; going through international platforms to international backers and non-profits which run projects in East Africa. This is such a significant portion of overall crowdfunding activity that Kenya and Uganda are expected to surpass South Africa in terms of total money raised, even though South Africa has a more mature crowd-funding market and more ‘native’ platforms.
This trend draws attention to a large untapped market for ‘native’ crowd-funding in East Africa and the main challenges to its growth.
1. Limited internet penetration, especially in rural areas
Low internet penetration seriously limits the number of local backers that these platforms can reach. This is especially problematic for rural areas, which are the main targets of these platforms. According to the report, food and agriculture received the most funding across the board.
One way of addressing this is targeting mobile money, which has a higher penetration rate in rural areas especially. 58% of Kenyans and about 35% of Ugandans and Tanzanians reported having a mobile money account in 2014. Most native crowdfunding platforms accept mobile payments or are working on developing innovative services tailored to mobile money.
2. There is a strong demand for alternative finance, but the sector needs more early-stage support.
There is a strong demand for alternative sources of capital in East Africa’s MSMEs, but they need more support to become investment-ready and locate financiers. For one equity platform, only 6 out of 300 companies made it past due diligence. At the same time, most crowdfunding platform owners still rely on aid to stay financially viable, including platforms that have performed well so far.
3. Equity- and Lending- Based Platforms are still constrained by regulatory uncertainty.
Even though several individual platforms have reported strong cooperation with government officials, this is mostly on an individual basis compared to the sector as a whole. Still, there are some steps being taken in the right direction, including local in-depth research projects and a conference on crowdfunding regulation recently co-hosted by the Kenyan capital Markets Authority.
Read the full report here.
Contributed by Maha AbdelAzim.