#91 - The M-Kopa vs. Lipa Later Paradox (Free to Read)

Decoding African Lending with the Type A (Asset-Financing) vs. Type B (Consumption) Framework

Illustration by Mary Mogoi

Hi all - This is the 90th edition of Frontier Fintech. 10 more to 100 articles! A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. Support Frontier Fintech by becoming a paid subscriber🚀

Want to reach Africa’s top fintech decision-makers? We’ve updated our offering with premium content, executive visibility, and strategic advisory options.
Click the link below for media enquiries

Click the link below for consulting and advisory enquiries. We’ve worked with past clients on Go-to market, market mapping, investment advisory support and general fintech strategy support.

Introduction

Recently, a number of events left the broader Fintech ecosystem with conflicting narratives around the nature of digital lending ian Africa. M-Kopa announced that it had sold over 1 million of its own manufactured smartphones in the market. Watu similarly announced that it had achieved the 3 million milestone in terms of total devices financed across the continent. At the same time, Wabeh a BNPL provider, announced that it was significantly scaling down operations in Kenya, whilst Engage Capital announced that it was acquiring Lipa Later, a BNPL that has been going through its own challenges.

As expected, the narratives around Lipa Later and Wabeh were about how digital lending struggles in Kenya specifically because people don’t pay loans or don’t have money. In fact an article was going around in the local media about how the existing administration has played a role in the collapse of players like Lipa Later. The exact mechanics are that a collapsing economy has given rise to increasing consumer defaults.

Unfortunately, this is narrative fallacy because if Lipa Later and Wabeh are struggling because of a declining economy and a high propensity to default, how come M-Kopa is seemingly thriving as attested to by the 1 million devices milestone and the earlier announcement that it crossed the US$ 400 million ARR mark? If people naturally default, how come Watu has financed over 3 million devices?

There’s nuance to the digital lending business in Africa that depends on not just Product-Market Fit but Product Market-Ecosystem fit.

This week’s article will analyse the underlying drivers of digital lending in the continent, evaluate the demand side drivers of consumer lending and define a framework for evaluating product-market ecosystem fit. There are two types of consumer lenders in Africa - There’s a Type A model that focuses on productive asset-financing that includes the likes of M-Kopa, Asaak and Watu. There’s also a Type B model that focuses on BNPL based consumer lending which is more targeted at consumption smoothing and lifestyle enhancing purchases. Type B players include Payflex, Lipa Later and Payjustnow. None is better than the other, what matters is the underlying economic context. This article will break this down and give investors and operators a framework for understanding when each type thrives.

Understanding the Different Consumer Lending Archetypes - Type A or Type B

It’s important to first start by defining the scope. This article focuses on the broader BNPL sector which is characterised by technology driven models, repayment in instalments and a consumer focus as opposed to vendor or SME lending. It also excludes micro-lending.

Modern Buy Now, Pay Later (BNPL) is a technologically advanced form of point-of-sale installment lending, defined by its seamless integration into retail checkouts and an economic model where merchants pay a fee to boost sales conversion and increase order values. This structure allows a third-party fintech to manage credit risk, offering consumers immediate access to goods through fixed, often interest-free, installments. BNPL is distinct from its financial relatives: unlike traditional hire-purchase, it is typically short-term and interest-free with immediate product possession; it reverses the layaway model by providing goods before payment is complete; and it differs from nano-lending, which offers untied cash loans for general liquidity rather than financing a specific purchase.

BNPL has not been a one-size fits all market. Globally, a unified model based on the likes of Affirm and Zip have emerged. In Africa, a significant bifurcation has occurred, creating two fundamentally distinct business models driven by disparate economic realities and consumer needs.

The Two Faces of BNPL

The Asset-Financing Model (Type A) is an economic empowerment tool, not a retail finance product.

• Target Market: Its focus is the vast, underserved market of unbanked and underbanked individuals in the informal or gig economy. These "Everyday Earners" lack formal credit histories, making them invisible to traditional lenders. We wrote some weeks back about the barbell economy with a vast gig-work or everyday worker labour force. In the same article, we spoke about the need for productive finance particularly for assets that enable people to earn an income.

• Core Proposition: This model finances the acquisition of productive or life-enhancing assets; such as smartphones for business, solar power systems to replace expensive kerosene, or motorbikes for transport services. The purchase is framed as an investment designed to generate income or create significant cost savings, directly improving the customer's financial standing.

• Strategic Engine: The model's key innovation is its risk mitigation strategy. By embedding IoT technology into the assets, the provider can remotely disable the device in case of non-payment. This turns the asset itself into effective collateral, solving the primary challenge of lending to a population without traditional credit data. Operationally, it relies on a high-touch, direct-to-consumer agent network, which builds trust and serves as the primary channel for acquisition and support. The initial asset loan is strategically positioned as a gateway product; successful repayment builds a proprietary credit history, unlocking the ability to cross-sell higher-margin products like cash loans and insurance.

• Examples: Examples in Africa include the likes of M-Kopa, Watu Credit, Asaak and even Moove;

The POS-Integrated Consumption Model (Type B) is an evolution of retail finance, built for speed and convenience within a formal economy.

• Target Market: This model serves banked, salaried, middle-class consumers who have access to other forms of credit but prefer BNPL for its transparency and simplicity.

• Core Proposition: Its function is consumption smoothing for discretionary goods like fashion, electronics, and travel. It offers customers a simple way to manage their budget by splitting purchases into a few interest-free installments, typically a "Pay-in-4" structure over six weeks.

• Strategic Engine: This is a technology-driven, low-friction model. Its success hinges on seamless integration into merchant checkout flows, both online and in-store. Underwriting is automated, relying on "soft" credit checks and alternative data analysis available in developed data ecosystems. The business is funded not by the consumer, but by the merchant, who pays a Merchant Discount Rate (MDR) in exchange for higher sales conversion and average order values.

• Examples: Examples in Africa include Payflex, Payjustnow, Lipa Later and Credpal although the latter is expanding into a broader suite of services viz companies like Payflex;

A Tale of Two Unit Economics: Margin vs. Velocity

The strategic differences are starkly reflected in the unit economics, presenting a classic trade-off between margin and velocity.

• Type A (Asset-Financing) is a high-margin, low-velocity business.

  • It incurs a high Customer Acquisition Cost (CAC) due to its physical agent network.

  • Profitability is driven by high Lifetime Value (LTV) from cross-selling future financial products or selling additional assets.

  • The capital cycle is slow, with funds tied up in a loan book for a year or more. This necessitates patient, long-term debt, often from Development Finance Institutions (DFIs) and impact investors. The core strategy is to invest heavily upfront to own a long-term, high-value customer relationship.

  • Players in this space also have to build significant distribution as they own the customer touch points;

• Type B (POS-Integrated Consumption) is a low-margin, high-velocity business.

  • It achieves a low CAC by leveraging its merchant partners' customer bases.

  • Profitability relies on volume and an extremely fast capital cycle, with receivables turning over in under 90 days. This allows a single dollar of capital to be redeployed multiple times a year, driving a high Return on Assets. This scalability is highly attractive to venture capital.

  • Funding is best done by securitising receivables - this then means that such businesses thrive where capital markets are more advanced.

  • The primary risk is not individual default but systemic "debt stacking," where consumers accumulate debt across multiple BNPL platforms that do not report to credit bureaus—a growing concern for regulators.

  • For Type B players - growth is more software like given that merchant partners are the key drivers of adoption. The core focus is on being present in the check-out process or integrating into the POS machine.

In essence, these are two different businesses operating under the same BNPL banner. The Asset-Financing model is fundamentally a data and lending company using hardware to acquire customers and de-risk lending in new frontiers. The Consumption model is a payments and sales-conversion company using data to filter risk in mature markets. One sells economic progress; the other sells lifestyle.

Understanding TAM and Ecosystem in African Consumer Expenditure

We now move from definition to diagnosis of each market type. By definition, the core thing to understand is “what is the big societal job to be done from a consumer lending perspective?”. Is it to smooth consumption or empower people to participate in the economic ladder? When you break this down further, the big thing is - what does the underlying economy look like?

A systematic evaluation of market suitability requires an analysis of three key drivers;

1. How big is the size of the market in terms of consumer expenditure?

2. How formal is the market given that BNPL fits into existing check-out mechanisms and infrastructure;

3. What do people spend their money on? This answers whether the underlying consumption lends itself to BNPL.

Thereafter, we can create a composite framework that enables us to determine which financing model works best for which market.

How Big is the Consumer Expenditure Market

To determine attractiveness to either investors or operators, it’s important to start mapping out the TAM. One way to look at this is to evaluate the size of the retail market in each economy. However, this often falls short as a robust tool because retail market studies miss some nuance such as business that is being done in informal markets. Moreover, it tends to index on what retail outlets report as their turnover. A better way to understand the size of consumer markets is to look at household consumption expenditure which is reported by the World Bank and each country’s statistical agency. The chart below shows household final consumption expenditure per country covering Nigeria, Kenya, Egypt, South Africa and Ghana.

Nigeria as per World Bank data has over US$ 400 billion in final consumer expenditure leading markets like Egypt and South Africa with US$ 386 billion and US$ 250 billion respectively. Kenya and Ghana have US$ 82 billion and US$ 56 billion in consumer expenditure respectively. To have a more meaningful metric, it makes sense to convert these into per capital measures which we show below.

When adjusted for population size, South Africa has the highest per capita household consumption expenditure at just under US$ 4,000. Nigeria drops to third on the list with a shade under US$ 2,000. Ghana and Kenya trail with US$ 1,656 and US$ 1,486 respectively. For perspective, the same metric for the United States of America is US$ 49,714 more than 10x South Africa’s level.

How Formal is The Market

On top of market sizing, it’s important to understand the level of formality. If we agree that there are two types, one that lends itself to asset finance and one that lends itself to existing formal structures, then the prevalence of those formal structures matters. Africa is characterised by largely informal markets - these are roadside kiosks, open air markets and neighbourhood dukas. They account for a large share of the total retail markets. In Nigeria, formal commerce accounts for close to 5% of total retail. In Kenya, it’s 30% of the market, an almost similar rate to Egypt which stands at 25%. South Africa is an outlier with over 60% of retail spending happening in formal establishments. This is a market with over 2,000 malls and the highest retail acreage in Africa.

Anecdotally, I remember my time in South Africa as a student. There was once I went to the local mini-mall, it was called Featherbrooke in a suburb called Ruimsig. I came across some construction workers who had taken a lunch break. This memory is permanently imprinted in my brain. During their break, these three gentlemen, all in uniform, had gone to the Pick N’Pay at the mall and bought a 2 litre Pepsi, a large baguette and slices of salami. They made three sandwiches from the baguette and shared the Pepsi. That construction workers were not only buying their lunch at a mall, but they were also buying branded products spoke volumes to me as a young econ student about consumer purchasing power and the depth of formal retail. In Kenya, these workers wouldn’t have uniform and they’d be buying lunch from a roadside vendor like the one below.

A roadside food vendor in Kenya - Image Source - Whetstone Magazine

How do People Spend their Money

Household spending structure signals how much room exists for discretionary purchases that Type B models rely on. Statistical agencies derive Consumer Price Index (CPI) weights from periodic household budget surveys. Those weights show what share of total household expenditure goes to each category. We use the food weight as a simple inverse proxy for discretionary capacity: the higher the food share the tighter the residual wallet for lifestyle or non essential retail. Across our five markets food still absorbs a large portion of budgets. Nigeria and Ghana sit near forty percent which implies limited headroom for short duration discretionary installments. Kenya and Egypt cluster in the low thirties, indicating some emerging flexibility but still a heavy essential spend burden. South Africa stands apart at about eighteen percent, meaning more than four fifths of spend is available for non food categories. A practical working threshold for scalable pure Type B BNPL adoption is a sustained food share below roughly twenty five percent. Above thirty percent the consumption smoothing value proposition weakens unless the ticket size is very low or the financed item displaces another essential cost. This lens reinforces the earlier formality signal: South Africa combines formal retail rails with meaningful discretionary share. The higher food shares in Nigeria, Kenya and Ghana push their ecosystems toward Type A productive asset lending where the financed item directly unlocks income or reduces core costs.

In countries like the USA, only 8% of household expenditure goes to food effectively showing that Americans have much higher discretionary spending. The chart below shows the results for the five African countries.

Tying it all Together

Ultimately we have to create a metric that captures all these previous figures. This metric should show a singular number that communicates how much money there is to be spent on consumer goods, whether that money is being spent in formal retail and how much of this is discretionary i.e. non-food expenditure. This number should effectively tell us how ripe a market is for Type B (BNPL) consumer models or whether it’s better suited for Type A (Asset-Finance models). To do this, we normalise all metrics on a scale of 1-10 and add them up. For instance;

1. Normalise Household Consumption Expenditure on a scale of 1-10 with 10 being the highest - Nigeria gets 10;

2. Normalise Market Formality on a scale of 1-10 with South Africa getting the highest rating;

3. Normalise discretionary income - the more that is spent on food, the lower the ranking out of 10;

​​

South Africa is an outlier getting a composite score of 25 out of 30 meaning that it’s best suited for Type B models - it has higher consumption expenditure, this money is spent in formal retail lending itself to type B models that layer on top of existing retail and there’s discretionary income given that only 18% of household expenditure is spent on food. Ghana comes last in the ranking meaning that Type B (BNPL) models would struggle in this market. The same can be said of Kenya and Nigeria. Nonetheless, this ranking helps explain why BNPL thrives in South Africa but struggles in Kenya.

Case Studies - M-Kopa, Pepkor and Payjustnow

An examination of key emerging markets provides clear, real-world validation of the dual BNPL model hypothesis. The interplay between a country's retail structure and its consumer income profile consistently determines which model; Asset-Financing (Type A) or Consumption-Smoothing (Type B) prevails. The divergence is most starkly illustrated by comparing the African markets of Kenya and South Africa.

Kenya: The Archetype for Asset-Financing (Type A)

Source: M-Kopa Website

Kenya's economic landscape is the ideal incubator for the Asset-Financing model. Its retail market is overwhelmingly informal (approx. 70%). Moreover, the bulk of consumer expenditure is spent on food. This creates a structural barrier for point-of-sale integrated solutions. The consumer base is dominated by lower-income "everyday earners" whose primary financial need is not for discretionary lifestyle goods, but for productive assets that can generate income or reduce essential costs. Combined with the deep penetration of mobile money via M-Pesa, the ecosystem is perfectly suited for a model that bypasses formal retail. The market is led by M-KOPA, the quintessential Type A player, which has built a multi-million dollar revenue business providing pay-as-you-go financing for smartphones and solar systems, secured by IoT technology and collected via mobile money. Other players like Watu and Asaak follow a similar pattern, also focusing on financing productive assets like motorcycles for the transport economy and mobile phones.

South Africa: The Hub for Consumption-Smoothing (Type B)

In stark contrast, South Africa represents the perfect environment for the POS-Integrated Consumption model. It boasts the continent's most developed formal retail sector, with over 60% of sales occurring in sophisticated national chains. This provides the ideal infrastructure for integrating BNPL at checkout. The country has a large, banked middle class with significant discretionary spending power and high card usage, creating demand for budget management tools for lifestyle purchases. Consequently, the market is dominated by Type B players like PayJustNow, Payflex, and LayUp, which have built extensive networks by partnering with the country's leading formal retailers to offer simple, interest-free installment plans.

Interestingly, South Africa is seeing the rise of incumbent companies that are leveraging their distribution and brand to create Fintech powerhouses.

Pepkor shows how a large incumbent retailer can convert distribution into Fintech scale. In HY 2025, its Fintech services produced about USD 445 million in revenue which was 16 percent of group revenue. On a simple annualised basis that implies roughly USD 900 million. Within this Fintech figure about 42 percent came from lending (including FoneYam which resembles the mobile device financing model of M Kopa) and the balance from the Flash point of sale and value added services platform. For context M Kopa previously disclosed about USD 400 million in annual recurring revenue. Pepkor’s Fintech arm therefore operates at more than double that scale on a run rate basis.

Source: Pepkor HY 2025 Results

In South Africa, there may be demand for Type A finance for productive assets, the challenge is that incumbents are repurposing their existing strong distribution to serve this market and are winning. The distribution advantage that an M-Kopa could have in Kenya wouldn’t have the same impact in South Africa.

Source: Homechoice International FY 2024 Results

Homechoice International - h/t to Judson Traphagen for telling me about them, is another example of an incumbent retailer leveraging Fintech. Through Weaver, their Fintech arm, they are now generating US$ 142 million from their Fintech business. To put this into perspective, Fintech now accounts for 57% of their total revenues up from less than 20% five years ago. What’s even more impressive is that Fintech accounts for over 90% of operating profit. Homechoice is now a Fintech business.

Digital lending in South Africa will be driven by either BNPL models like Payjustnow or FoneYam of Pepkor.

Global Examples and Hybrid Markets

This pattern holds true globally. Markets with strong formal retail and robust digital payment systems, like Brazil and Malaysia, see Type B models flourish. In Brazil, players like Mercado Pago and Nubank leverage the formal e-commerce sector and the Pix instant payment system. In Malaysia, Atome and Grab PayLater are deeply integrated into the formal retail ecosystem.

However, many large emerging markets are hybrids, complex enough to support both models simultaneously. Countries like Indonesia, Nigeria, and Mexico feature massive informal economies, creating a clear opportunity for Type A asset financing, which M-KOPA is pursuing in Nigeria. Simultaneously, their large, young, and increasingly urban populations are fuelling a vibrant e-commerce scene, allowing Type B players like Kredivo (Indonesia), CredPal (Nigeria), and Kueski (Mexico) to thrive by serving a growing consumer class through formal channels. In these hybrid markets, the two models coexist by targeting entirely different customer segments, distribution channels, and underlying needs. In Nigeria specifically, companies like Credpal and other BNPL players may not achieve the scale of an M-Kopa.

Key Take-Outs

Digital lending in Africa is about Product-Market-Ecosystem Fit. Investors and Operators need to understand this in detail. At an investor level, rather than taking a view on BNPL or Asset Finance, the core job to be done is to understand whether a market is a Type-A market or a Type-B market. Both can win, but they require deeper market context. For investors, it may make sense to have digital lending as a broad theme and then map out the continent from a Type-A or Type-B perspective. Invest according to the market.

For banks, it’s also critical to understand the market. Banks in Kenya and Nigeria have all tried to participate in BNPL but without much real success. At a core level, where customers have alternative credit lines, zero interest installment novelty is weaker. In these markets, banking an M-Kopa or Watu at a corporate banking level may be the smart thing to do. Having said that, BNPL initiatives will still be executed due to the managerial imperative to do something. Unfortunately, there’s no product-market-ecosystem fit. In South Africa, BNPL by banks could work. The key is to build the technology and the team that will ensure that your bank’s BNPL product shows up in as many check-out processes as possible.

The same advice would work for operators - the reason Lipa Later struggles in Kenya is because of what we’ve described in the article. Engage may face the same ecosystem fit issues that have bedevilled players in the space. Given global investor capital can invest anywhere, Kenya may end up being a no go zone for BNPL lending. It may make sense to pivot.