African Neo Banks: The Venture Capital Effect
Venture capital is known for taking big risks on early-stage start-ups, and Neo banks in Africa are no exception. Take Nigeria’s Kuda, for instance. In November 2021, Kuda raised $55 million in a Series B funding round, demonstrating the powerful role VC can play in the growth and scalability of Neo banks. This funding gives Kuda the financial boost needed to disrupt the banking sector through tech innovation, without worrying excessively about immediate profitability.
Similarly, OPay has also enjoyed a robust influx of VC funding raising US$540 Million to date, facilitating its evolution into a potent disruptor in the Nigerian banking industry.
Venture capital is seen as ‘quality’ funding due to the strategic value it brings, such as industry expertise and solid network connections, along with the capital injection. However, VCs typically expect high returns, which can place significant pressure on Neo banks to scale rapidly. Additionally, VC funding often involves relinquishing some control to external parties, which can sometimes result in strategic disagreements.
Traditional Banks and Shareholders’ Funds: The Steady Pillar
Traditional Nigerian banks such as Zenith Bank, First Bank, and GTBank, have relied on shareholders’ funds for generations. These funds, typically a mix of equity capital, retained earnings, and other comprehensive income, offer a stable foundation for strategic planning and steady growth.
Shareholders’ funds provide a safety net that allows traditional banks to invest in long-term projects, weather financial downturns, and maintain steady growth without the pressure for immediate high returns. However, this source of funding can limit these banks from diving into riskier, innovative projects. Additionally, raising extra capital by issuing more shares can lead to dilution of ownership for existing shareholders.
Apples to Oranges: Venture Capital Vs. Shareholders’ Funds
So, which is better – venture capital in Neo banks or shareholders’ funds in traditional banks? It’s kind of like comparing apples to oranges. Each type of funding suits the particular environment of the bank. Neo banks thrive on the rocket fuel of venture capital, allowing them to disrupt and innovate. Meanwhile, traditional banks prefer the steady cruise control offered by shareholders’ funds.
Both these funding types come with strings attached: VC funding creates pressure for high growth and returns, while shareholders’ funds necessitate consistent dividends and stability. These pressures can often dictate the strategic decisions and risk appetite of banks.
A Convergence on the Horizon?
In an exciting twist, the lines between these two forms of banking are starting to blur. Nigerian Neo banks, such as Kuda and Opay, may consider going public, adding a mix of shareholders’ funds to their capital structure. At the same time, traditional banks like Access Bank, Zenith Bank, First Bank, and GTBank are exploring partnerships with fintech companies or setting up their own venture capital arms to to infuse agility and innovation into their operations.
Ultimately, the quality of funding, be it venture capital or shareholders’ funds, depends on how well it aligns with a bank’s strategic goals, risk appetite, and vision for the future. In a rapidly changing financial landscape, both Neo and traditional banks will need to strike a balance between innovation and stability to thrive. The future of banking in Nigeria is indeed an exciting space to watch!
