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Nigeria

Fintech is not immune to Nigeria’s governance woes; valuations could suffer

  • Flutterwave, Africa’s most valuable unicorn, has been accused of wrongdoing in several areas. The firm is yet to respond

  • Nigeria VC fintech funding has been a rare bright spot for a country that is literally struggling to keep the lights on

  • Closer scrutiny of governance and broader global issues (higher rates, lower growth) could see fintech valuations fall

Fintech is not immune to Nigeria’s governance woes; valuations could suffer
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Contributors
Rabail Adwani
Rohit Kumar
Tellimer Research
21 April 2022
Published byTellimer Research

Greed, impersonation, deception, fraud, insider trading and sexual harassment. Not the plotline for the next Netflix blockbuster but just some of the allegations recently levelled against Flutterwave, the US-registered Nigerian digital payments firm, by local investigative journalist, David Hundeyin.

In this note, we consider the long-term implications for fintechs in the context of a market where governance concerns have led to chronic and widespread underinvestment across whole swathes of the economy.

Last week, Nigerian VC-darling Flutterwave became subject to several claims of serious wrongdoing, to which the firm has yet to respond. Even if the company can successfully refute the allegations levelled against it, we think its last funding round (in February 2022, which gave it a US$3bn valuation) may prove to be a high watermark for local fintech valuations in the current cycle. Investors will surely place greater weight on governance issues in future, an area where Nigeria does not have a strong track record.

But broader global forces are also at play; the end to the big central banks’ balance sheet expansion, higher interest rates, the negative effect of higher commodity prices on global growth, and the more challenging environment for IPO exits are all likely to place downward pressure on funding volumes and investee firm valuations.

VC funding has been a lone bright spot in an otherwise bleak investment environment

Africa VC funding broke records last year, with US$4.3bn invested in the country’s startups. Nigeria was the main destination for these funds, with a 33% share. By industry, fintech was the key focus area for investors, with the sector capturing 53% of the pie. Nigerian fintechs alone captured 20% of total VC investment on the continent.

Africa 2021 start-up funding mix

VC funding in Q1 has also held up well, but these Flutterwave accusations, together with the more difficult global environment, could see the picture turn. US VC funding volumes have already started declining.

Governance concerns provide investors with yet another reason to steer clear of Nigeria

On paper, Nigeria should provide a compelling investment story for long-term investors. It has a large, young and growing population with emerging technologies that can help address traditional bottlenecks – fintech certainly fits within this category. Nigeria represents the world’s fifth-largest financial inclusion opportunity.

The world's biggest financial inclusion opportunities

But elsewhere, investors remain sceptical. Capital inflows in the public equity and fixed income markets remain minuscule.

Nigeria's declining capital importation (US$'bn)

And despite high oil prices and plentiful reserves, we have seen a trend of international oil companies exiting the country. A lack of investment means Nigeria’s oil production capacity is a third lower than it was a decade ago, with the result that the country is unable to pump its OPEC allocation. Meanwhile, a lack of refining capacity is seeing Africa’s largest oil producer incur huge import bills for diesel, petrol and other oil derivatives. Nigeria’s petrol subsidies now account for around a quarter of all government spending, which is putting pressure on the budget deficit.

Nigeria oil spill and oil production

While investors that we speak to typically point to specific issues such as parallel exchange rates and capital controls to indicate why Nigeria is not a compelling destination for capital (despite highly discounted valuations), the broader reason for the country’s malaise likely comes down to chronic and pervasive poor governance.

In a continent not renowned for best practices in this area, Nigeria still scores poorly relative to its regional peers.

In 2021 the country obtained a score of less than a quarter of the possible top mark, based on Transparency International’s composite survey, placing it in the lowest 15% of 180 surveyed countries. Perhaps more worryingly, there are very few signs of positive progress.

Nigeria's corruption statistics are deteriorating

There is massive underinvestment throughout the Nigerian economy

The story we have seen in the oil industry is played out in many other areas of the economy. Nigerians have been enduring blackouts due to a lack of electricity generation capacity and poor distribution infrastructure.

Electric power consumption (kWh per capita)

Despite its plentiful land and good water access, Nigeria is a big food importer. The data below is for wheat, but there is insufficient domestic production in other staples also. 

Nigeria is one of the top emerging market wheat importers

Lack of proper storage and transport infrastructure leads to significant food wastage – over 200kg per person is wasted each year in Nigeria, one of the highest levels globally.

Food wastage in selected emerging markets

 

The absence of investment is also reflected in the low sophistication of Nigeria’s economy, which has ranked at the bottom of Harvard University’s Atlas of Economic Complexity (which covers 133 countries across the globe) in 10 of the last 20 years of the survey, including the most three recent surveys.

The country has not been able to invest its oil wealth to improve education, healthcare or physical infrastructure to the extent it could.

Conclusion

Clearly, there is no single quick fix for these long-standing and broad-based issues. But until recently, VC investors may have believed that their investee firms would be able to use technology to steer around the myriad roadblocks that exist in the Nigerian economy. The recent accusations against the standard-bearer for the sector, and the separate earlier allegations against e-commerce star, Jumia, could lead to a wholesale re-evaluation of that view.

In conjunction with the more difficult global investment environment, we think there is limited potential for the recent positive VC funding trends to continue.