African Banks' Potential to Take Over Startup Financing role?
In a significant shift, African banks are increasingly participating in the financing of startups and small-to-medium enterprises (SMEs), moving away from their traditional passive roles. This transition is driven by a slowdown in venture capital funding and more selective support from development finance institutions (DFIs), creating a gap that banks are now poised to fill.
One innovative approach banks are adopting is securitization deals and syndicated loans. A prime example is Sun King's $156 million securitization in Kenya, led by commercial banks such as ABSA, Citi, Co-operative Bank of Kenya, KCB, and Stanbic Kenya. This transaction, one of the largest bank-backed securitizations outside South Africa, is designed to finance off-grid solar products and smartphones, demonstrating a scalable, bankable model for impact.
Another strategy is the creation of dedicated funds for startups and SMEs. Stanbic Bank in Kenya is launching a $100 million Catalytic Fund aimed at financing startups and SMEs, focusing on sectors often overlooked by venture capital like agritech, creative economy, healthtech, and manufacturing.
Banks are also forming partnerships with venture capital and alternative financing tools. While VC remains dominant, banks are increasingly using alternative instruments such as debt financing, corporate bonds, and Islamic finance tools (e.g., Sukuk), reflecting a maturing funding environment that supports later-stage companies and complements equity funding.
The focus on fintech and digital banking is another key area. Fintech is the leading sector for African startup funding, supported by digital banking adoption, government regulatory encouragement, and innovation-friendly environments, particularly in markets like South Africa and Nigeria. Banks are collaborating with fintech startups to advance financial inclusion, online payments, lending, and insurance solutions.
Regulatory engagement and financial literacy are also essential components of this transition. Banks are responding to evolving national fintech regulatory frameworks designed to enhance consumer protection and security, while also supporting financial education to foster trust and adoption of new financial products.
In addition to these strategies, African banks are exploring other innovative financing methods such as milestone-linked term loans, anchor-offtaker financing, and revenue-based financing (RBF). RBF extends runway for founders without ownership dilution, while lenders amortise risk over time. Banks can also offer patient capital, something the VC model often can't, and their capital is structured to the realities of African operating environments.
Kenya's state-backed credit guarantee scheme had disbursed about KES 6.3 billion by mid-2024, and sector-specific variants could expand this base. Blended guarantees can reduce risk for first-time borrowers, and partnering with development finance institutions (DFIs) and government programs could help banks scale this approach.
The International Finance Corporation (IFC) acknowledges a 2022-2024 funding swoon in Africa, arguing the deeper problem is structural due to the continent's lack of domestic equity financing and reliance on foreign cycles. However, with banks now actively engaging in startup and SME financing, there are real green shoots in Africa's venture market, as shown by the $1.4 billion raised by mid-year 2025.
In conclusion, African banks are transitioning from passive observers to active, strategic players in startup and SME financing by employing innovative financial instruments, creating dedicated funds, and leveraging partnerships within growing startup ecosystems, especially in fintech and underserved sectors. This shift not only promises to unlock significant growth potential but also to foster financial inclusion and economic development across the continent.
- African banks are moving away from passive roles and increasingly participating in startups and SMEs financing, driven by a slowdown in venture capital funding and selective support from development finance institutions (DFIs).
- Banks are adopting innovative strategies such as securitization deals, syndicated loans, and dedicated funds for startups and SMEs in sectors like agritech, creative economy, healthtech, and manufacturing.
- Partnerships with venture capital and alternative financing tools, like debt financing, corporate bonds, and Islamic finance tools, are increasingly prevalent, reflecting a maturing funding environment that supports later-stage companies.
- The focus on fintech and digital banking is another key area where banks are collaborating with fintech startups to advance financial inclusion, online payments, lending, and insurance solutions.
- Regulatory engagement and financial literacy are essential components of this transition, with banks responding to evolving national fintech regulatory frameworks designed to enhance consumer protection and security.
- African banks are exploring other innovative financing methods such as milestone-linked term loans, anchor-offtaker financing, revenue-based financing, and offering patient capital, allowing them to structure capital to the realities of African operating environments.
