“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” – Adam Smith

Recently, Nigeria has been grappling with a tough macro and political environment, the effects of which have stifled consumer expenditure significantly. This has been apparent from the deterioration of company earnings in the consumer sector. However, these headwinds are not unique to Nigeria, they are being faced by numerous frontier economies. Political, economic, security and climate hurdles tend to be widespread in frontier markets, particularly in Sub-Saharan Africa.However, we believe the need to fulfill basic human requirements will support consumption growth only if consumers are able to make purchases.

This is where we think financial technology is critical for frontier markets, including Nigeria. In East Africa, for instance, and specifically Kenya, the availability of M-PESA has allowed consumption growth to remain elevated even despite the numerous headwinds the country has faced in the recent past, as consumers have the option of spending even if they have dwindling disposable incomes and a lack of cash in their pockets. As of 2014, M-PESA’s customer base stood at 21.6 million people. According to Think M-PESA, as of the first half of FY13, the monthly value of person-to-person transfers stood at $780 million, the monthly value of person-to-business transfers stood at $100 million, and the value of business-to-person transfers stood at $80 million.

We believe promoting the cashless economy must be a key priority for the Nigerian government if consumers are to be empowered to spend. Access to basic banking is extremely limited in Nigeria, where less than 30% of the population above the age of 15 have a bank account, largely owing to underdeveloped infrastructure and the widely dispersed nature of the population. However, with mobile penetration at just over 70%, we think financial technology companies focused on mobile money (and therefore the cashless economy) have a strong base from which to boost consumers’ purchasing power. According to KPMG, in 2014 there was also a rise in the adoption of other non-traditional banking channels:there was an increase in the number of customers using internet banking (18%of total bank customers, compared with 13% in 2013), mobile banking (14%, from 10%) and mobile payments (8%, from 6%). In 2014, 27% of retail customers also reported using point-of-sale electronic transfer, compared with 15% in 2013. The internet retail market, which is more targeted towards the middle and upper classes and dominated by players such as Konga, Jumia and Deal Dey, saw a sales CAGR of 115% in 2009-2014.

Nestlé recently made statements about the lack of a middle class in Africa, and said the middle class has seen only limited growth. Though we believe this is a broad-based statement, we agree with its implication that it is not the middle class that should be the centre of focus in SSA, and specifically Nigeria. The focus instead should be on the low-end consumer, in our view, as close to 100 million people in Nigeria, or 56% of the population, live on less than $1 a day, according to the World Bank. We believe financial technology that is specifically focussed on the cashless economy will boost consumers’ ability to spend at a faster pace than Nigeria has so far seen. Companies in Nigeria that have begun to penetrate the cashless economy include private players such as Paga and Interswitch. Paga launched in 2009 and now has 3 million customers. Interswitch was launched in 2002, but has had limited traction. The problem we see is that unless financial technology companies are supported by government directives and action, growth will remain below its potential.

We acknowledge the difficult macro situation in Nigeria, but believe the consumer story is not over – merely that consumers lack the ability to spend. We believe this issue could be helped via government directives that focus on empowering consumers via financial technologies, and specifically mobile money and the cashless economy. The consumer wants to spend, so give him/her the platform to do so. Promote the consumer.

Omair Ansari is Renaissance Capital’s Frontier Consumer Sector analyst. Prior to joining Renaissance in April 2014, Omair had over nine years of experience on both the buy and sell sides, covering frontier and emerging equity/derivatives markets. He worked with firms such as Religare Capital Markets and Marshall Wace Investment Management, and on funds that were nominated numerous times for best hedge fund by Eureka Hedge and Asia Hedge. Omair graduated with honours from McMaster University, with a specialisation in Finance and International Relations.


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