Next Wave: Neobanks are coming for small banks, not big ones

Africa’s neobanks are not “challenging” the big banks. That war never started, and likely never will.

Standard Bank, Ecobank, KCB, GTBank, and the National Bank of Egypt — these institutions are too entrenched. They’re politically connected, well-capitalised, and integral to state economies. They handle government salaries, disburse donor funds, and sit at the centre of domestic clearing and cross-border payments. No neobank, however well-funded or ambitious, is coming for their lunch, at least not yet.

But something far more urgent and disruptive is happening beneath that top tier. Across the continent, the base of Africa’s financial ecosystem — microfinance banks, credit-only lenders, SACCOs, and Tier 3 and 4 commercial banks — is quietly slumping. This underlayer has long been the primary interface between formal finance and the informal economy. And as it breaks down, it creates a vacuum that neobanks are now racing to fill.

This is not a story of fintech versus banks. It’s a story of systemic transition — a slow-motion implosion at the bottom of the banking pyramid and the scramble to build something better in its place.

A broken business model

Let’s start with the fundamentals: about 50% of Africa’s formal financial institutions are no longer viable at scale.

Across East Africa, average non-performing loan (NPL) ratios at microfinance institutions (MFIs) now exceed 30%. In Kenya, the Central Bank’s latest Banking Sector Report notes that some licensed MFIs and Tier II and III banks have NPLs as high as 20%, with some undercapitalised and technically insolvent. In Uganda, the situation is similar — Tier 4 institutions report average portfolio-at-risk (PAR), the percentage of loans overdue in a period, figures above 25%. These are not temporary shocks but structural failures.

The economics of traditional microfinance are breaking down. These institutions rely heavily on physical branches, manual credit assessments, and paper-heavy customer onboarding. That means higher cost-to-income ratios and poor scalability, especially when serving low-ticket borrowers. Some Savings and Credit Cooperatives (SACCOs), for example, spend upwards of 60% of their revenue just to maintain their physical infrastructure and staff.

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Regulators are also piling on compliance costs, enforcing banking-grade reporting requirements on institutions still operating with off-the-shelf core banking software and Excel spreadsheets. Most of these lenders lack robust APIs or cloud infrastructure. Few can support instant payments, embedded finance, or mobile onboarding. The gap between what the informal economy needs and what the formal sector can deliver is growing daily.

Regulators are stretched thin

Compounding the problem is regulatory fatigue. Many African central banks do not have the capacity or tools to monitor hundreds of small financial institutions effectively. In Kenya, the Central Bank (CBK) regulates licensed commercial and microfinance banks and payment service providers (PSPs). Meanwhile, the Sacco Societies Regulatory Authority (SASRA) — which lacks the technical capacity — oversees more than 1,000 SACCOs and dozens of digital lenders, many of which submit only quarterly reports, often in Excel spreadsheets. There’s little room for proactive supervision, let alone innovation.

The result is a foundational collapse of the institutions most responsible for reaching Africa’s underbanked populations.

Demand has shifted

While small legacy lenders scramble, the informal economy, which makes up more than 85% of Africa’s workforce, is modernising from the bottom up.

Today’s traders, farmers, logistics riders, or gig workers don’t want to queue at a branch. They want mobile-first accounts, instant disbursements, seamless payments, and transparent credit scoring. They want to save, borrow, and insure using the same app they use to shop or order a ride.

Most small traditional lenders can’t offer that. And that’s exactly where neobanks are stepping in.

Neobanks as the new base

Neobanks like Moniepoint (Nigeria), Kuda, Umba, Finclusion, and Carbon are not fighting for elite customers in boardrooms and golf courses. They are building infrastructure to serve the next 100 million financially active Africans — the street vendors, informal traders, kiosk owners, and smallholder farmers abandoned by failing MFIs and SACCOs.

Take Moniepoint’s recent bid to acquire Kenya’s Sumac Microfinance Bank — a small, Nairobi-based lender with roughly 30,000 customers and a branch-heavy legacy model. The deal, approved by Kenya’s competition authority and now awaiting Central Bank clearance, is not about expanding into traditional banking. It’s about retooling the inclusion infrastructure.

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Moniepoint already serves over 2 million businesses in Nigeria, providing them with payment terminals, working capital loans, and business accounts through an all-digital platform. Its move into Kenya via Sumac is a bet that the future of microfinance is digital-first, mobile-native, and API-driven. It’s not alone.

Umba, a Kenyan neobank, acquired Kenya’s Daraja Microfinance Bank in 2022. The goal was to use a banking license not to run legacy operations but to launch embedded lending products, API-integrated payment services, and digital savings tools tailored for informal customers.

In Egypt, fintechs like Khazna and ValU are bundling BNPL, salary advances, and insurance into mobile apps that speak directly to gig workers and low-income earners — the same demographic MFIs once dominated.

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In Ghana and Uganda, startups like Fido, Eversend, and Numida are doing similar things—blending digital wallets, alternative credit scoring, and real-time disbursements to reach informal SMEs that traditional banks can’t profitably serve.

The competition is for infrastructure

It’s tempting to frame this as a David-versus-Goliath battle between fintech and banks. But that misses the point. The real competition is not between startups and big incumbents. It’s about who controls the rails for financial access at the pyramid’s base.

Neobanks don’t want to become the next Standard Bank. They want to replace the broken infrastructure MFIs used to provide onboarding informal merchants, manage working capital, and build distribution networks across peri-urban and rural areas.

And unlike SACCOs or Tier 4 banks, they can scale fast. They can acquire customers digitally, assess credit risk using alternative data, and underwrite small loans at marginal cost. They don’t need to open 100 branches to serve 100,000 people. They need a smartphone and a smart model.

What it means for policymakers

This shift has major implications for regulators, donors, and policymakers focused on financial inclusion. Licensing regimes need to be updated. Many fintechs still operate in legal grey zones across the continent, as non-deposit-taking entities, technical service providers, or under vague sandbox frameworks. If they replace MFIs, they need licenses that reflect their agile, modular, and digital-first business models.

Regulators also need real-time visibility into neobank activity. Waiting three months for a static report doesn’t work when credit is disbursed and repaid within days. Central banks must modernise their supervisory tools — APIs, dashboards, and granular risk scoring — to match the speed of fintech.

Donor agencies’ money needs to follow the shift. Billions in concessional funding still flow into legacy microfinance institutions whose models are no longer fit for purpose. That capital should be redirected toward digital financial infrastructure—risk engines, credit scoring models, digital ID integration, and interoperable payment networks.

The stakes are high

If neobanks succeed, Africa could leap into a more inclusive, scalable, and efficient financial future. Millions of informal workers could gain access to working capital, savings, and insurance, without ever stepping into a bank branch.

If they fail — or are choked by outdated regulations and politics — the collapse of traditional microfinance could leave a dangerous gap. Financial exclusion would deepen, and the informal economy would slide further into cash and chaos.

Either way, the ground is shifting. Not at the top, where big banks remain unchallenged. But at the base, the real battle for Africa’s financial future is underway.

Adonijah Ndege

Senior Reporter,

Thank you for reading this far. Feel free to email adonijah[at]bigcabal.com, with your thoughts about this edition of NextWave. Or just click reply to share your thoughts and feedback.