Accelerated Digitalisation in Africa: a Welcome Outcome of the Pandemic
By Thabo Makoko, Head of Cash Management and Transactional Banking, Absa CIB
Digitisation of treasury processes had been developing slowly but surely across Africa until the pandemic hit. Now it has taken off in a big way. The results are impressive, as Thabo Makoko, Head of Cash Management and Transactional Banking, Absa CIB, explains.
To find the most exciting developments in digitalisation, many companies used to look only to developed economies. While these go-to countries and regions might boast complex (or perhaps so-called state-of-the-art) systems, the adversity borne from the pandemic has accelerated the proliferation and advancement of digitalisation in Africa. It’s an interesting development that shouldn’t be ignored.
Characterised by increased mobile phone use, a young and ambitious population, and rapid urbanisation, Africa’s booming digital sector offers a rare opportunity for governments, as well as public and private companies, to harness the new developments we have seen grow as a result of the pandemic. It’s certainly not a question of if but rather a question of how.
Name of the game
As governments looked to contain Covid-19 infection rates, it generated a unique blow to African businesses as disrupted supply chains led to cash flow problems. The closure of borders was one of the more acute impacts of the pandemic, with periodic lockdowns halting the mobility of goods and services.
In order to meet demand and overcome this disruption, businesses turned to new suppliers. Though in theory this is a simple solution, it has been complicated and costly in practice. A prominent barrier was cash flow – many new suppliers wouldn’t issue payment terms to businesses on short notice, increasing pressure on cash flow management.
A profound shift in mentality across the continent followed this revelation. Throughout Africa, multinational corporates and SMEs recognised that relying on just one or two suppliers was no longer conducive to good business. The pandemic revealed the importance of a diverse supplier and customer base and, in order to achieve this, businesses needed to look to digitalisation.
Adapt to survive
Digitalisation can help companies develop resilient supply chains through the combination of data-driven solutions and AI to identify opportunities, potential risks, and underperformance. Many multinationals in Africa are currently using digital technology to map out their networks, gaining an understanding of the geographic location of suppliers and their potential vulnerabilities. This technology and understanding will help to defend against additional unexpected shocks.
The economic fallout of Covid-19 has created a paradoxical dynamic whereby it has bred digital innovation and adoption in those countries that have been worst affected. Nations such as Ghana and Nigeria, which were among the worst affected by Covid-19, have accelerated the adoption of digitalisation far quicker than their counterparts elsewhere in Africa.
By removing some of the cultural and financial barriers to digitalisation, the pandemic has challenged entrenched behaviours and attitudes. Pre-pandemic, treasury processes relied on a combination of manual inputs and digital and non-digital formats. These cannot support real-time information and companies could not adapt and, as a result, were facing increasing operational costs. Where it has been adopted, digitalisation has enabled businesses to tackle the type of disruptions seen during the pandemic head on.
Countries that were not as badly impacted by Covid-19, such as The Gambia, had less incentive to digitalise treasury processes. But as others necessarily realised the benefits of digitalisation – such as simplifying reconciliation, providing more data on customer behaviour, and predicting liquidity requirements – their business communities began embedding digital processes – and they are not looking back.
In every circumstance, digitalisation remains reliant on robust infrastructure to assist the movement of goods in-country and around the continent. To support general economic growth in Africa and reduce the friction of adopting and applying digital processes, the continent’s infrastructure funding gap must be plugged by concessionary and blended finance.
Private organisations are already playing their role in strengthening infrastructure across the continent. For instance, the Pan-African Payment and Settlement System (PAPSS) is providing the infrastructure to facilitate the payment, clearance, and settlement for intra-African trade payments.
To further break down barriers to the adoption of digitalisation, marrying reliable infrastructure and effective policy implementation – like the African Continental Free Trade Area (AfCFTA) – is necessary. Not only has the AfCFTA reduced tariff and non-tariff barriers to intra-African trade, but it has helped identify existing policies that are frustrating growth and innovation in different markets throughout Africa. Pinpointing bottlenecks will support the digital sector as it will create an environment conducive to flourishing innovation – and will subsequently disrupt the status-quo.
Indeed, the benefits of digitalisation are already materialising in Africa. The continent is more connected than ever, which has enabled SMEs to widen their pool of customers, thanks to infrastructure improvements. Disruptive start-ups are further building on this by providing solutions to unmet needs. As fintechs have made services more accessible, while reducing operational costs for providers, the impact has been felt strongly across the payments sector. The transition towards a digital economy will further deepen as capital injected into fintechs in Africa continues to increase from the almost $5bn raised in 2021 alone.
However, there is work still to be done to turn Africa into a digital utopia. Some businesses and multinationals remain hesitant to direct capital towards developing digitalisation infrastructure, particularly in those areas where the pandemic’s impact hasn’t been so dramatic. Digital innovation is also being held back by the infrastructure gap that persists in many parts of the continent. Fostering transparency in building digital infrastructures and developing digital literacy will take some time but both will serve to narrow the infrastructure gap.
Indeed, as financial markets in Africa continue to evolve in new and innovative ways, failure to recognise the opportunity of digitalisation could lead to some countries falling behind. As it stands, it’s a hopeful outlook for the growth of digitalisation in Africa. One thing is clear – countries that are digitalising will be better placed to withstand any additional shock impacts as the continent’s economy recovers.