For centuries, African economies functioned without modern banks, interest rates, or rigid collateral systems. Trade routes linked West Africa to North Africa and the Middle East. The trans-Saharan trade thrived on trust, reputation, and shared risk. In East Africa, Indian Ocean trade connected African merchants to Arabia and Asia through partnership-based commerce. Capital moved through people, not paperwork.
This form of financing was shaped by context, scarcity, and survival. Where risk was understood collectively, capital was patient, and outcomes were shared.
However, over the last century, Africa adopted a different financing system bespoke for the Western world. Western finance, designed for industrialized economies with surplus capital, stable infrastructure, and predictable legal systems, was imported almost wholesale into African markets. This model assumed low currency volatility, reliable power, efficient transport, and strong asset registries, of which most African economies had none of these conditions.
The result of this adoption has been a widening gap between how African businesses actually operate and how they are financed. This gap is not theoretical. It is visible in SME failure rates, under-industrialization, and the persistent inability of local businesses to scale despite strong demand.
Understanding this difference is central to Africa’s economic future.
Is the Core Difference Relationship or Transaction?
At its core, African finance has historically been relationship-based, while Western finance is transaction-based. Traditional African finance resembled what modern economists would call risk-sharing arrangements, similar to equity partnerships. Capital providers and business owners shared outcomes. If a harvest failed, repayment adjusted. If trade was disrupted, terms were renegotiated. This mirrors principles found in Islamic finance today, where profit-and-loss sharing replaces fixed interest obligations.
Western finance, by contrast, is built around risk transfer. Capital is lent at a fixed cost. Returns are predefined. The lender is insulated from the borrower’s operational reality. This structure works well in stable economies. In volatile environments, it can be destructive.
Africa’s SMEs operate amid currency swings, fuel price shocks, policy changes, and infrastructure gaps. A rigid system that demands repayment regardless of context often amplifies risk instead of managing it. This is why many African businesses collapse not during downturns, but during periods of expansion when debt obligations outpace cash flow.
Should Collateral Matter More Than Character and Cash Flow?
Western finance places collateral at the centre of credit decisions. Land, buildings, and legally enforceable assets signal safety. This approach assumes that asset ownership is widespread and formalised.
In Africa, this assumption often fails. According to the World Bank, over 70% of African SMEs operate without formally registered land or buildings, despite being commercially active. Yet these businesses move inventory daily, serve real customers, and generate steady cash flows.
African finance historically prioritised different signals: character, reputation, and trading history. Informal credit systems across Nigeria, Kenya, and Ghana still rely on these principles today. Rotating savings groups, cooperative societies, and trade credit arrangements fund millions who would never qualify under formal collateral-based systems.
Modern examples exist. Trade finance models that fund purchase orders or inventory based on confirmed demand have proven more effective for African SMEs than balance-sheet lending. These models ask a simple question: can this business trade, deliver, and repay? Traditional systems often ask a different one: what can we seize if it fails?
Is Pressure More Important Than Patience?
Western finance is time-bound. Interest accrues daily. Repayment schedules are fixed. Capital becomes more expensive simply with time.
African commerce has always been cyclical. Agriculture depends on seasons. Trade depends on shipment cycles. Manufacturing depends on power availability and logistics. African finance was historically patient because it had to be. Returns followed performance, not calendars.
This aligns with what development economists describe as patient capital, a concept promoted by institutions like the Global Impact Investing Network (GIIN). Patient capital recognises that in emerging markets, rigid timelines can destroy value rather than create it.
Many African SMEs fail not because they are unprofitable, but because debt structures overwhelm them. Fixed repayments during currency shocks or delayed receivables quickly turn viable businesses into distressed ones.
Should Risk Be Shared or Transferred?
In African finance, risk was shared. When one party suffered, the other adjusted. This alignment encouraged discipline, monitoring, and long-term thinking.
Western finance largely transfers risk to the borrower. The financier’s return is protected regardless of outcome. This can encourage short-term extraction rather than partnership.
In fragile markets, risk-sharing is stabilising. It forces financiers to understand businesses deeply, support governance, and stay engaged beyond capital alone. This principle underpins successful venture capital, private equity, and project finance globally, yet is often absent in SME financing across Africa.
Has African-Style Finance Ever Worked?
This model is not theoretical.
Pre-colonial African trade networks pooled capital and shared profits across long-distance routes. Cooperative societies financed early agricultural expansion in post-independence Africa. Informal trade credit remains the largest source of working capital for SMEs today.
Modern equivalents exist. Supply-chain finance platforms that fund goods rather than balance sheets. Commodity-backed financing structures that follow cash flows. Islamic finance institutions that prioritise asset-backed, risk-sharing models.
These systems work because they are designed around how African commerce actually functions.
Why Might African Finance Be Africa’s Future?
Africa does not lack entrepreneurs. It lacks capital that fits its reality.
As the continent urbanises, digitizes, and industrializes, SMEs will remain the backbone of growth. Financing them with misaligned systems will continue to limit scale. Financing them with models rooted in African realities will unlock it.
African finance is not anti-modern. It embraces transparency, governance, and discipline. What it rejects is rigidity divorced from context. Africa’s next growth phase will not come from copying systems built elsewhere. It will come from refining its own, using modern tools, data, and regulation, while staying true to principles that prioritise partnership over pressure.
This is not nostalgia.
It is strategy.
Africa’s next economic chapter will be written by capital that understands Africa, not just capital that operates within it.
by Gideon Haruna
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