FINTECH IN AFRICA: Understanding the continent’s regulatory ecosystem

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INTRODUCTION

Africa’s financial services sector has played a significant role in enabling the growth and development of the continent’s economy. Despite the economic challenges that have plagued the continent, Africa has benefitted from the emergence of technology-driven financial services, popularly known as “Fintech”.

FinTech in Africa has gotten a lot of attention and has disrupted the financial system, as it seeks to address significant gaps left unattended by traditional ‘brick and mortar’ financial institutions. With the use of cutting-edge technology, FinTech in Africa seeks to provide, mobility, convenience, and greater financial inclusion.

 

FINTECH PLAYERS IN AFRICA

Fintech in Africa, has in the past few years seen an increased number of players with pathbreaking solutions, leveraging on technology to achieve financial inclusion. For example, in Kenya, M-Pesa which has been referred to as Africa’s most successful mobile money service and the region’s largest FinTech platform provides a mechanism for users to store and transfer money through their mobile phones.

In Ghana, iPay gives users the power to receive payments from customers and make payments to suppliers in ONE account. As a result, iPay has positioned itself as a one-stop shop for a variety of payment alternatives. For South Africa, Jumo offers financial services to South Africans who do not use banks via the Jumo Digital App. Exuus in Rwanda is a FinTech startup that leverages the power of informal collective saving schemes through a digitalized and decentralized collective wallet for saving groups.

In Nigeria, payments and mobile money giants like Flutterwave, Paystack, Paga and Chippercash are revolutionizing the core pain-points in cross-continental financial services. The country has also seen the rise of savings and investment industry challengers like Piggyvest, providing users with an avenue through which they can save funds, weekly or monthly with their mobile phone on the app as opposed to going to a bank to create a fixed deposit or savings account. Similarly, Risevest, a fintech company, gives its users the opportunity to invest in US stocks, real estate, and Eurobonds from the comfort of their phones, tablets & PCs.

Over the last year, the continent also saw the rise of financial infrastructure providers looking to serve this bullish challenger market. These players include Open finance platform providers provisioning layered solutions for the development of next-level personalized financial services. This has been closely linked to the growth of the financial API economy globally.

 

EXAMINATION OF THE CONTINENT’S REGULATORY FRAMEWORK

As the continent continues to experience a rapid increase in the use of products offered by these FinTech companies, the risk and exposure that comes with the movement of money increases. The use of technology in the interaction with money poses several risks and drastically changes human behavior. These changes in interaction and human behavior usually initiates responses from various governments as they roll out laws and policies in regulating the activities of FinTech companies. Although there are no fintech specific legislations in most African countries, but a few countries have made significant efforts in that regard.

In Nigeria, the Central Bank introduced a requirement that switching, and payment processing companies and mobile money operators must deposit a refundable sum of 2,000,000,000 (Two Billion Naira) into the CBNs PSP Share Capital Deposit Account as an escrow. A part of the requirement is that the deposit for escrow must be paid in one lump sum and paid in the name of the company applying for the license.  The CBN also stated that to obtain either a Mobile Money Operator or Switching and Processing License, the FinTech Company must have another 2,000,000,000 (Two Billion Naira) shareholders funds unimpaired by losses. Looking at the current requirement a new entrant into the mobile money operator space will need at least 4,000,000,000 to start his business. Payment Terminal Service Providers are required to have a deposit of 100,000,000 (One Hundred Million Naira) and pay a sum of 1,000,000 (One Million Naira) upon getting the license. This is aside from other fees they will be required to pay.

Section 67-70 of the Nigerian Investments and Securities Act (2007) and Rules 414&415 of the Security Exchange Commission Rules and Regulations states that only foreign securities listed on any Exchange registered in Nigeria may be issued sold or offered for sale or subscription to the Nigerian Public. However, there have been adjustments to the regulation that barred platforms from trading international securities as the amendment to the Consolidated Rule and Regulations of the Securities Exchange Commission Rules now recognizes a sub-broker license to include a digital platform that serves and interacts with the sponsoring brokers. This amendment allowed for fintech companies like Chaka, an investment technology platform, to obtain a license from the Nigeria’s Securities and Exchange Commission to operate its digital platform for buying and selling stocks.

In February 2021, cryptocurrency transactions were the Central Bank of Nigeria (CBN) banned cryptocurrency transactions because “cryptocurrencies are issued by unregulated and unlicensed entities and as such the use of cryptocurrencies contravened existing laws”.  The effect of the ban is evident in the activities of some FinTech Companies. However, in an interesting turn of events, the CBN recently announced its “e-Naira” currency and modalities for release of the government-back cryptocurrency are expected to hit the market in the coming months.    

There is also the regulatory framework for the use of USSD for financial services in Nigeria. This took effect in October 2018, and the guidelines seek to reduce the risk associated with the use of USSD technology for offering financial services in Nigeria. A transactional limit of 100,000 per customer, per day, is placed on all transactions conducted through the USSD channel, and a customer desirous of a higher limit will be required to execute a documented indemnity.  The CBN issued the framework for Regulatory Sandbox Operation on January 13, 2021. The framework relates to payment solutions and emerging disruptive technology in the financial services scene. The regulatory sandbox allows FinTech innovators to conduct live tests of their products. The live tests are to be conducted within a highly controlled environment under the supervision of a regulator, the aim is to offer the regulators an understanding of how the innovation would work to regulate them. The regulatory sandbox is averse to risk, consumers and applicants are required to identify the potential risks that may arise from the testing of the products.

The CBN released a Regulatory Framework for Non-Bank Acquiring to all deposit money banks, payment service providers and financial institutions. The CBN also stated that the framework is to allow for a sound financial system and to facilitate the development of e-payment service in Nigeria.  The goal of the established framework is to establish Non-Bank Acquiring as a regulated service in Nigeria and to provide minimum standards and requirements for the operations of Non-Bank Acquiring in Nigeria. The participants of the Non-Bank Acquiring are categorized into three (3) – Acquiring banks, Card Schemes and Non-Bank Acquirer.

The CBN also released the Regulatory Framework for Open Banking in Nigeria on February 17th 2021, to regulate the emerging Open banking space in the country.  The Regulation addresses the categories of participants in the Open banking sector and the categories of data to be shared. The Regulation also categorizes the Participants in line permissible data sets that can be shared different entities and what access levels should generally look like. The Regulation must be commended as an earlier attempt by an African Regulator to define its regulatory perspectives on the Open Banking market.  

In Ghana, the Bank of Ghana has total supervisory and regulatory control in all matters concerning payment, clearing and settlement systems. The Payment Systems and Services Act, 2019 (Act 987) is the principal regulatory framework that applies to banks, specialized deposit-taking institutions, payment service providers, dedicated electronic money issuers, and their affiliates and/or agents. Under the Act, to carry out a payment service business or to issue electronic money, a license is to be applied for in the prescribed form and will be granted after considering that governance arrangements, appropriate fees, technology, security and controls, adherence with the universal principles of consumer protection and appropriate complaint procedure have been complied with. 

Following the influx of more innovation-based players in the country, the FinTech and Innovation Office of the Bank of Ghana was introduced last year.  This was to dive into the Bank’s cash-lite solution, e-payments and digitization agenda. Ghana also maintains a relative fair local content requirement of 30% equity participation in foreign applicant’s local corporate vehicle. Thus, every foreign applicant must ensure that a Ghanaian has at least 30% equity participation in the FinTech Company before they would be able to obtain any of the licenses provided by the Act. 

In Kenya, the National Payment System Act, the National Payment System Regulations 2014 and the Regulatory Sandbox Policy Guidance Note are the only sector-specific regimes governing FinTech. FinTech firms would invariably have to identify and adapt their undertakings with the regulations governing the precise area of business.  The National Payment Systems Act in Kenya regulates mobile money transactions, while the Money Remittance Regulations govern international transactions executed through players such as Western Union and Alipay. In the area of internet and e-commerce, no specific regulation exists yet, although parts of the Kenya Information and Communications Act apply regarding consumer protection. This is the same with regards to Distributed Ledgers Technology and Artificial Intelligence Task Force. The government has not embraced cryptocurrencies, as evidenced by the warning issued by the Central Bank of Kenya urging the public not to trade in cryptocurrencies, as they are not legal tender in Kenya.

In 2016, the Intergovernmental FinTech Working Group (IFWG) was established in South Africa to develop a common understanding among regulators and policymakers of Financial Technology developments, and policy and regulatory implications for the financial sector and economy. Early in 2018, a joint working party was formed under the auspices of the IFWG to specifically review the position on cryptocurrencies. The working group is called the Crypto Assets Regulatory Working Group (CARWG). The IFWG Innovation Hub consists of a regulatory guidance unit, a regulatory sandbox unit and an innovation accelerator. The regulatory guidance unit helps market innovators resolve specific queries as it relates to policy landscape and regulatory requirements. It also provides a central point of entry for market innovators to submit enquiries associated with FinTech and innovation-oriented policies and regulations. The regulatory sandbox unit provides market innovators with a check and tests new products and services that challenge the formulation or application of existing regulation under the supervision of relevant regulators.

The African regulatory eco-system on financial technology has not been the most enabling component of the sector’s growth. Ghana’s FinTech and Innovation Officer of the Bank of Ghana as created by the establishing Act can be seen as an enabler as it helps coordinate the activities in that sector. In a much broader sense, the regulatory sandbox in Nigeria and South Africa are both enablers as they provide market innovators with an opportunity to test new products and the financial sector regulations to learn from and work with each other on emerging innovations in the industry.

 

RECOMMENDATIONS

FinTech in Africa has transformed the terms of trade and as such forced government to regulate the activities and processes of these companies. Consequent upon this, there are a few things that should be considered in creating an enabling environment for the growth of FinTech companies.

1.     Policy dialogue with stakeholders: One of the biggest barriers to foreign direct investment in Africa is the unpredictability of government policy. Most times, cripling regulation creep on innovators, with very little regard for investor confidence in the clime.  In some cases, the compliance mandates from the regulators wipe out entire possibilities of leveraging some new technologies. Some startups and financial intermediaries have fallen prey to this at some point in time. One would assume that the obvious strategy would be integrated policy consultations with industry stakeholders when implementing a new policy, which breeds progressive policy and regulatory environment. This way, stakeholders feel more involved and are better prepared for such decisions, in the event that it has a negative effect on their company.

2.     Interface regulators and players: More regulatory bodies across the continent may adopt robust structures to support technology Companies within their regulatory framework like the Regulatory Sandbox and other public-private funded Reg-Innovation Hubs to encourage innovation and experimentation while managing risk. Nigeria and South Africa seem to be the fore runners on the continent in this direction, but more action is required to ensure that it delivers on its promise to stakeholders. This could include fast-tracking product-approval processes to help FinTech players take financial inclusion initiatives to market faster, regular updates, reviews of policies, and streamlining the licensing procedures, among other advantages. The government could also consider having a joint committee of FinTech leaders deliberate on their priorities—similar to what Singapore has implemented to promote its FinTech agenda. Such a tool will help the regulator stay on top of technology changes and adapt its policies accordingly.

3.     Improve Digital Infrastructure: Infrastructural constraints in Africa are huge and the cost to overcome such constraints are enormous. In terms of infrastructure to support technology, the cost of running the tech companies on the continent is constantly on the rise.   There is the need for an improvement in infrastructure, particularly telecommunication channels in a way that can help connect the continent in the most efficient, cost-saving and timeous manner.  Internet Service Providers play the most critical role in the efficiency of these companies and there’s a need for all stakeholders to collaborate and design a roadmap alongside the government in developing the needed infrastructure. The limited digital infrastructure has made the cost of running FinTech companies more expensive and such makes it difficult to break even soon. 

4.     Ease of doing Cross-Border Business: The ECOWAS Countries and even the AU as a whole need to collaborate and discuss how the countries on the continent can create enabling environment for Tech companies. The ease of doing business across Africa will help scale up their presence across the continent, fill significant gaps and contribute to the African economy. For example, in 2019, PalmPay and OPAy raised over $200,000,000 (Two Hundred Million Dollars) in two rounds of funding from Chinese Investors to scale up their business.  Thus, Laws, policies and regulations need to be discussed at length in order to ensure that Africa as a continent and not some regions/countries is an investment destination for FinTech.

5.     Introduction of Incentives and Sector-Specific Initiatives: The introduction of incentives such as tax incentives, tax breaks, pioneer status incentive (PSI) are ways the government can create an enabling environment for FinTech in Africa. It is also important that the government is proactive to introduce regulations that address sector-specific issues. There can also be necessary adjustments to existing FinTech regulations. This will help create an enabling environment for FinTech innovation. 

 

Final thoughts

While our hopes for the Fintech growth and adoption in Africa remains bullish. It goes without saying that all stakeholders have crucial roles to play in the seeing the Sector deliver on its promise as the future of financial services in the Continent. Bearing this in mind, FinTech Companies must work with them to ensure they are kept abreast of any change in laws and policies. Their lawyers must also ensure they comply with these laws and never run foul less they run the risk of facing stiff penalties. Also, lawyers, investment analysts, compliance professionals alongside the management of these companies can serve as the interface with regulatory agencies to ensure these agencies are constantly intimated on significant changes in the companies’ processes. This will help educate the policymakers and in turn, present these companies as consultants to government agencies.

This article was written by Mobolaji Oriola, a Founding Partner and Head of the Fintech Practice at Allen & Brooks. With contributions from Oluwadamilola Oniyire, Ewomazino Oyibotha, Chinweifenu Agusiobo of the same firm and Akinpelu Habib (Independent Fintech Consultant). For further enquiries, please send a mail to our Fintech desk on: enq@allenandbrooks.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobolaji Oriola

Mobolaji Oriola

Mobolaji Oriola is a Lawyer, Arbitrator and Humanitarian. He is one of the Founding Partners at Allen & Brooks and has advised a broad range of clients across Fintech, Entertainment, Real Estate, Oil & Gas, Arbitration, Project Finance. Mobolaji Oriola is a recipient of Unity Bank's Humanitarian Award and is an alumni of the prestigious Harvard Business School.

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