Part 2: Regulating Fintech in Africa
How do approaches to `Fintech policy and regulation vary across Africa?
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Fintech regulation and policy variation 🪢
Following our previous blog, we continue with the theme of Fintech. However, where the last piece explored the trends and actors shaping Fintech innovation across Africa, this piece instead seeks to examine the different approaches African governments and state institutions have taken to Fintech innovation.
We aim to do this by offering region by region comparisons breaking down key concepts like “sandboxes” and how regulation can stifle or foster growth. Investments in the sector will be used primarily to highlight the effects of a positive regulatory system.
What is regulation, and why is it needed in this context?
One of the most notable observations of Fintech, and more broadly wider digital solutions with a strong consumer appeal, has been the variation in how these solutions have been embraced in different parts of Africa.
It is well known that Africa presents a unique proposition for financial innovation, particularly because of its growing, young population that is largely ‘unbanked’.
It is often said that for those who operate at the highest echelons of innovation there will always be a lag between cutting edge activity and the ability for governments and institutions to develop and implement regulations that are appropriate for innovative solutions. In the case of Fintech, this has been no different. Typically, first movers in the space have enjoyed periods of free reign to develop and tailor their products. The FinTech case is no different and with regulatory institutions often playing catch up to the rapidly growing sector.
Yet that is not to say that regulation is an inherently bad thing for innovation, and particularly fintech. Rather, regulation should also be considered an innovation enabler, just as access to capital, talent, and resources are.
Ultimately, Fintech companies are a major attraction for investors from abroad, such actors look for well documented, clear, and precise regulation. This ensures that their investment will be protected and any major risks associated with a lack of regulation could be mitigated.
FinTech is a financial service and like any other requires regulation to prevent the loss of savings, firms falling into default, monopolization of sectors, and fraud. Given the integral role that digital technology places on often bespoke software and storing personal data, there is a growing need for intellectual property protection.
Without such regulation, FinTech could risk becoming something of a “wild west” and offer little protection to investors and consumers alike.
Whilst fintech has been said to be the answer to the democratization of finance, there are several high-risk concerns that governments tend to look out for.
By its nature fintech empowers consumers - information asymmetry can lead consumers astray
Fintech can be prone to fraud and hacking - digital wallets have been hacked in the past
Consumer data can be used maliciously
However, excessive, extractive, and overbearing regulation, which has been common in developing economies, can often stifle growth. There is a real risk that governments can view FinTech as a potential cash cow and thus overtax it, forcing many companies to relocate and limit their growth or prevent customer growth.
Moreover, many established players in the market may, instead of embracing FinTech, rally against it and intend to stick to the status quo lobbying regulators against new firms of innovation. Excessive regulation can slow down administrative tasks and make compliance an expensive and time-consuming procedure. Lastly, there is the risk that regulation can be used to extract rents whereby regulation becomes a “negative” form of corruption when regulatory fees and taxes are used as a means of enrichment.
Therefore, a balance obviously needs to be found between a lack and excess, and governments, particularly in emerging markets play a critical role in managing risks.
What is a sandbox?
When it comes to creating an environment for innovation, a key regulatory policy mechanism that has been implemented by various governments across the continent is the use of “regulatory sandboxes”.
Simply put, a regulatory sandbox enables the development and testing of new products and services in a controlled environment. Sandboxes are limited in scope and can also help balance regulators’ concerns with the inherent riskiness of innovations.
But regulatory sandboxes are not risk-free and preparation is a crucial factor in their effectiveness. Sectoral stakeholders, as well as regulators, require a degree of understanding of how these technologies will work to fully appreciate their risks prior to testing in a live environment.
However, there is also a risk that there are sector-specific regulations, as is common in Kenya, which results in regulation being employed in response to new technology in just one of the sectors it was used in. In order for regulations to be successful when it comes to “sandboxes” is the rollout of cross-sector regulation.
As of 2021, almost all African countries from Mozambique to Morocco have implemented a regulatory sandbox for fostering fintech which presents a perfect opportunity for comparative analysis.
In addition to regulatory sandboxes devised by central banks, attention should also be paid to the digital and data strategies adopted by governments. Many African countries have launched ambitious developmental programs with a view to long-term economic and human development. In every case, the digitalization economy and fostering financial inclusion is a key tenant of the developmental program. As seen with the Ghana Beyond Aid and the Kenya Vision 2030 governments are taking an active role in promoting and incorporating financial technology into economic policy, at least in rhetoric.
Rwanda, for example, has implemented an array of mid-term strategies that serve to improve financial infrastructure and central bank oversight of payment inclusion services to greatly increase financial inclusivity.
As financial technology and services, like open banking, rely heavily on data there has been a drive-by African government to bolster data-sharing practices at both communal and big data levels. Kenya and Ghana, for example, view data collaboration between private firms and the public sphere as a sector for proliferation and a keystone process for increasing service delivery. Ghana has even gone so far as to introduce a nationwide open data network.
Regulation across the continent
The signing of the AFCTA: A turning point for regional cooperation?
So far no continent-wide regulation exists when it comes to fintech and its respective sectors like data and finance. However, we can expect an increase in cooperation, albeit at a slow pace, following the signing of AFCTA. Moreover, the rapid spread of fintech firms across borders, as seen with the likes of Mpesa and Flutterwave, has resulted in a need for wider, more comprehensive regulation.
By and large, regulation remains fragmented. What is more, national level regulation varies across Africa, with some countries adapting to match ongoing fintech developments at a faster rate than others.
Kenya 🇰🇪
“A leading fintech hub supported by strong developmental government policies”
The Fintech epicenter of East Africa’s, and arguably of Africa is Kenya. Nairobi is Africa’s second-largest Fintech hub and is ranked 63rd globally according to Findexable Global Rankings 2020. Currently, 20% of African fintech firms are based in the Kenyan capital which has become an emerging hub for entrepreneurs and investors alike. Simultaneously, Nairobi has caught the attention of global technology firms, such as Google and Facebook, which have both recently established regional headquarters in the city.
Kenya has pioneered many of the developments that have promoted the expansion of financial inclusion across East Africa. For instance, Kenya was one of the earliest adopters of mobile payments. Something that has now become the primary medium for financial transactions in the East African state.
Whilst much of this development is thanks to innovators such as M-Pesa, there is certainly much to suggest that the Kenyan government has played a fairly critical role in fostering such developments.
For starters, the Kenyan government has taken a fairly active role in committing to financial and technological development. This commitment has been contained in the Digital Blueprint - “Kenya Vision 2030”. In this document, the government has targeted the digitalization of sectors to drive sustained national development. To support this objective, the government, by and large, has taken a fairly open role in facilitating innovation drives. For instance, legislation has been passed that commits the Kenyan Central Bank (CBK) to support Open Banking measures that would see the ability to share data between consumers to there have been suggestions that the government is willing to act as a mediator in data-sharing agreements between not just private sector firms but also between public services in an attempt to aggregate and centralize data. Whilst these commitments are still unfolding, the more traction that they produce, the more the Fintech sector is likely to benefit.
“Open banking is a system where banks allow or authorize third parties, such as financial technology or fintech companies, to access their clients’ financial data to build applications or services. Anchored on providing better customer experiences, open banking has stirred a lot of interest in Africa, including banking apps with detailed analytics of finances, the ability to send money from one bank to another using mobile phone, or the ability to transfer money from one telecoms network to another.”
But how has Fintech been regulated in Kenya and what mechanisms are in place to support new developments? Well, the primary regulatory system in place that manages Kenya’s financial sector is the Central Bank of Kenya. This body regulates alongside the National Payment System Act and the National Payment System Regulations Act of 2014. More recently, the Kenya government, working closely with the Capital Markets Authority of Kenya (CMA) established a Regulatory Sandbox for the Fintech space. This sandbox which was only set up in 2019, has the purpose of fostering collaboration in a controlled environment, for actors and ventures focussed on the promotion of relatively new systems and technologies (e.g. Cryptocurrency).
The success of this venture is still unclear but it should be noted that like in many other African states there is a degree of fragmentation when it comes to the corresponding regulatory fintech body. One such explanation for this fragmentation is that Fintech is still a relatively new sector, and because of this it has an innate ability to transcend sectors static regulation attempts.
How does this Sandbox work?
Once admitted to the Sandbox, the company gets a 12-month period to run tests on the product or service, sending interim reports on the progress to the CMA. After the 12-month period, the company may either be granted permission to operate fully in the market or be denied permission based on the findings from their testing period. Before applying for the sandbox, the companies will need to have developed the idea to the level of operational testing according to the former CMA Chief Executive, Mr. Paul Muthaura. The CMA is currently accepting applications to the regulatory sandbox. Most recently at least 4 fintech companies were admitted into the regulatory sandbox of Kenya.
What does the future hold?
Kenya’s fintech sector development hasn't always been an easy ride. Currently, 40% of its GDP is transacted through the M-Pesa platform which has only been in existence for around 6 years. Indeed, the expanding role of Mpesa has been resisted by large Kenyan banks, including Equity Bank, which in 2014, complained to the regulator that M-Pesa’s model was in violation of the 2014 Banking Act, starting a battle that was dubbed the “Mobile Wars”. Their claim was that “M-Pesa, offered by Safaricom, would cause a financial crisis in the country.”
Ultimately, with support from regulatory authorities as well as technocratic ministers such as Bitange Demo, M-Pesa has emerged as a major pillar in the objective of extending financial inclusion across Kenya.
As of 2020, the Kenyan parliament is currently mediating the introduction of The Startup Bill, which if passed would see the creation of Kenyan National Innovation Authority. This standing body would oversee the creation of partnerships among local and international business incubators, as well as encourage the creation of an online directory of start-ups. This could prove critical in the quest to create a Fintech ecosystem that appeals to investors from outside of the region too. Importantly, the body would also regulate and overlook the registration and certification of ‘start-ups’. Furthermore, under the bill, various county governments will also be able to establish their own incubation programs. A major development on the limited role that the Kenyan state plays in supporting startup incubators like NAILAB and would greatly benefit the fintech sector.
Nigeria 🇳🇬
Another giant in Africa’s fintech landscape in Nigeria. The West African nation which is home to Fintech powerhouses Flutterwave and Paystack offers an entirely different context to Kenya. Comparatively, Nigeria has a very large, youthful population, a less stable political system, and a diaspora that is highly involved in innovation across sectors. This has given way to a Fintech experience that has been largely driven by a technologically adept consumer class. Such a situation has created a vacuum between governance and innovation, posing multiple challenges in deciding how best to regulate and manage such activity in the long term.
Indeed, regulators across the region suffer from a dilemma with policy implementation, and the various models adopted can either foster or hinder the progress of innovation within the economy. Typically, Nigerian regulatory bodies have taken a more cautious approach to fintech and have often prevented entry to or withdrawn products from the market until legislation has been passed which directly addresses such use cases. Specifically, these measures include the following:
(1) Imposition of heavy and overbearing licensing fees and taxes.
(2) Tariffs imposed on remittance payment solutions.
The bottom line is that the implications of restrictive measures, coupled with the tricky legislative process runs the risk of stifling innovation and undermining the sector which has immense potential given Nigeria’s rapidly growing population. Ultimately the combination of an active entrepreneurial class that regularly introduces new fintech products ranging from remittances to digital wallets and a governing body that has not developed a clear vision for financial innovation has given way to concerns that fintech could face an unstable future if not properly regulated.
This difference in adoption of regulatory practices goes far in explaining how, despite its size, Lagos lags behind Nairobi as a fintech hub in 3rd place in Africa and 71st globally and despite its huge potential.
Nigeria’s bullish Regulation
To further compound issues for Nigerian fintech there is no exact authority on the surface that regulates fintech in Nigeria but the Central Bank of Nigeria has taken the lead in passing regulation that cuts across fintech affecting mobile payments, international money transfers, and further innovation by attempting to mitigate risks. These acts can be found here.
From this list, we can see that regulation is exhaustive, fragmented and was heavily implemented in the 5 year period after 2014. As mentioned, often these regulations result in heavy licenses and stringent requirements. The MMRS (Mobile Money Remittance Service) requirements are as follows:
A licence in its home country to carry on money transfer services, a net worth of US$1 billion.
A valid Mobile Money Operator's licence.
A presence in at least twenty countries with at least 10 years of experience in the money transfer business.
In addition, there are often controls on how much foreign currency can be obtained and Naira sold, these capital controls are frustrating for many investors given the instability of Naira’s value. This is particularly significant given that Nigeria’s FinTech Industry is maturing and increasingly attracting funding from foreign investors.
Moreover, the absence of a substantive legal framework regarding intellectual property rights in Nigeria presents a serious risk for investors and entrepreneurs alike - an area that will need to be addressed in the near future.
Other concerns with regulation are posited around lack of clarity around data protection and sharing. However, the introduction of the Nigeria Data Protection Regulation of 2019 has seen new regulations introduced regarding the sharing of consumer’s personal data. As the open-banking model in Nigeria is not as pronounced as in other African countries like South Africa, there is concern that data providers might attempt to monopolize their assets which could prevent start-ups from benefiting from an increasingly large financial database.
Lastly, capital requirements for fintech start-ups tend to be high forcing many to partner or acquire sponsorship from licensed companies, to acquire funding from microfinance institutions and banks or to utilize state lending licenses. Unfortunately for these firms, these long bureaucratic processes can cause considerable financial and administrative strains on start-ups attempting to penetrate the market. These capital requirements are common across Africa from Rwanda to South Africa and Nigeria is by no means an exception to the rule.
Yet, there have been some recent positive developments within Nigeria’s fintech landscape
In January of 2021, the CBN also established a regulatory sandbox focusing on the telecommunications and fintech sector accepting applications on a cohort by cohort basis hoping to foster further development. There are also strong indicators that the CBN is beginning to change its tune on blockchain and crypto-currencies. The CBN has often been overly cautious about crypto-currencies with crackdowns being launched and confusion as to whether they had been banned in Nigeria out of concerns of consumer protection, these regulations have had little effect on stemming the growth of cryptos within Nigeria which has become a leader in cryptocurrency business. The CBN is set to launch on its crypto-currency within the decade which will almost certainly involve the adoption of blockchain in a similar manner to South Africa’s Project Khokha. Moreover, the CBN has been sending out positive signals regarding open banking and its desire to develop such practices within Nigeria.
Credit obtention in Nigeria is relatively easy in comparison to other African countries helping smaller to medium firms to scale. Funding and capital acquisition is often characterized by stringent regulation and in view of this Nigeria has a clear advantage. Moreover, improvements are being made in the macro-business environment, according to a report released by UK Aid, with the ease of starting a business and the ease of trading across borders both improving.
Perhaps the strongest statement of intent that Nigeria is devoted to foster technological innovation as a whole is the Smart City Project in Lagos. Similar to other smart city projects in Africa, like Kigali and Konza Technology Hub, the $250m project aims to transform Lagos into a tech hub that will focus on fields such as AI, robotics, biomedical informatics, and sustainable energy and will be administered by the State Science, Research and Innovation Council.
Nigeria does, however, have some trends that are similar to Kenya’s. The National Data Protection Regulation 2019 was introduced to help protect the privacy and regulate data based abuses of Nigerian consumers. Also, Nigerian officials in the Ministry of Communications and Digital Economy have been calling for the adoption of greater data collaboration practices between public and private firms in a similar manner to Kenya, whilst digital practices have been adopted into a national developmental strategy known as the National Digital Economy Policy and Strategy (NDEPS). The NDPES has a stated goal of combating poverty through innovation and financial inclusion by fast-tracking the development of a digital economy that will further serve to diversify the Nigerian economy. However, fintech and innovation in the financial sector is not as pronounced as in the Kenyan Digital Blueprint.
What does the future hold?
Nigeria has huge potential given its vast population, the majority being young and tech savvy, which is expected to grow to 401,000,000 yet over-baring regulation by a fragmented regulatory system inhibits the sector. Despite positive indications from the CBN that they are willing to adopt new innovative models in finance like open banking, data-sharing and crypto-currency, there is still a lot of progress to be made. An increase in regulatory clarity and fintech specific regulations would help Nigeria unlock its potential but to a certain degree this is going to be constrained by the social, economic and political realities at play in Nigeria.
Ghana 🇬🇭
Ghana, despite lagging behind in fintech funding is developing a strong set of progressive digitalisation policies. These policies and its adoption of mobile money has made Ghana one of the fastest-growing fintech and digital eco-systems in Africa.
Ghana entered the fintech market at the same time as other players and introduced its first piece of fintech legislation in 2008, the Electronic Transactions Act. Since then the Ghanian Central Bank and government have begun rolling out more legislation to support the increased adoption of financial services. The Payment Systems and Service Act 2019, amended and consolidated laws considering payment services and systems providing a framework for businesses utilizing mobile payment services. Subsequently this turned Ghana into the fasted growing mobile payments market in the West African region, recording a transactional growth of 317% between 2018-19 and a 267% growth in values of transactions over the same time period. In addition, Ghana became the first country in Africa to implement a universal QR response code payment service whose success was attributed to a successful government marketing campaign.
The regulatory sandbox program was launched by the Bank of Ghana in collaboration with Emtech Service LLC in 2020. Similar to many other sandboxes across the continent it created regulated testing grounds for products and is currently geared towards financial service providers with a preference given towards blockchain, electronic KYC (know your customer), remittance, and crowdfunding, which was recently given the status of fintech. The sandbox has also stated that it is committed to addressing financial inclusion and the unbanked in Ghana interlinking it into wider developmental practices.
Ghana currently has no open bank systems which would enable fintech firms to collaborate with data sharing practices through APIs, though the Ghanaian Government has an intention to move towards it with the Digital Financial Services (DFS) Policy (2020). This policy introduced regulations that facilitated limited data sharing between data controllers such as banks, Mobile Network Operators, and regulated stakeholders, such as licensed fintech. Ghana has also launched the Ghana Open Data Initiative that aims to create an open-source data platform offering datasets on a variety of sectors including finance, agriculture and local government.
There has also been incorporation of digitalization into a developmental policy with the Ghana Beyond Aid, an ambitious developmental strategy launched in 2018 that aims to transform Ghana into a developmental state by unleashing its resource and human capital. As part of the program Ghana aims to transform the country into a financial hub for the region within 5 years, fintech and technology playing a major role in this goal. Moreover, as part of the plan, the state is to push for a supportive private sector environment to foster both domestic and foreign investment in Ghanaian fintech and finances as a whole and to implement “more aggressive” investment efforts and strong support for SMEs.
Ghana’s developmental authorities, in tandem with the private sector, has been planning the construction of a $10bn tech hub, known as Home, Office, People, and Environment (HOPE Hub). The project, if ever completed, is expected to cost $10bn, would cover 1,2m square meters, host over 50,000 workers, and would be home to Africa’s tallest building. However, construction is yet to begin and is unlikely to do so soon.
Covid-19’s effect on Ghanaian fintech policy
Obviously, the Covid-19 pandemic and its subsequent economic fallout have had an effect on financial markets globally and Ghana has proven to be no exception, but, interestingly Ghana did pass the world’s Digital Finance Policy amid the pandemic. The cash-based nature of the economy has proved for obvious reasons problematic during the pandemic and Ghana’s new blueprint is an attempt to tackle this. In the short term, the government-supported FinTech by removing fees for low-value remittances, relaxed transaction and wallet size limits for mobile money, made know-your-customer (KYC) transferable from SIM registrations to allow for remote mobile money account openings, and zero-rated all interoperable transactions made through the interbank switch. Over the next 4 years, the Ghana government has identified 6 key areas for progress, which if implemented will undoubtedly aid the growing fintech sector:
Improving governance of the DFS ecosystem
Supporting fintech
Creating an enabling regulatory framework
Actively building the capacity of authorities to supervise the space
Supporting the development of market infrastructure for DFS
Driving the expansion of digital payment use cases
Whilst Ghana is making strides at creating a regulatory framework that fosters growth, The Bank of Ghana being far less restrictive in digital financial services than its Nigerian counterparts, issues within the regulatory framework still exist. There are protective regulations in place that state that in some cases 30% of stakeholders must be local and given the growing intra-african nature of financial service might prove to be problematic. FinTech firms are also subject to taxes like any other firm and there is no separate fiscal legislation for fintech firms. Often when a government is attempting to foster growth within a specific sector, the cashless economy in this case, a separate tax system is advisable.
In addition, concerns have been raised about mobile data costs with accusations of cartelling levelled against telecommunications firms, this places the Ghanaian government in an awkward dilemma. Its push towards a cashless, digitalised economy could result in a regulation and price controls of the mobile data markets potentially undermining investor confidence in addition to legal challenges, though the creation of a commission to monitor and discourage unfair competition practices would not go unnoticed.
However, despite such limitations Ghana’s fintech sector is likely to grow in the near future with the relative small size of Ghana being negated by its political stability and regulatory environment.
Rwanda 🇷🇼
The most notable fintech development in Francophone Africa has happened in Rwanda. Over the last 20 years, Rwanda has enacted a wave of ambitious developmental policies with the aim of transforming a country of 12,000,000 into a middle-income economy with strong manufacturing, agricultural and knowledge-based industries.
Vision 2020
At the turn of the Millenium the Rwandan government launched a 20-year developmental program called “Vision 2020” a comprehensive agenda that consisted of 6 key ‘good governance’ pillars that would develop, diversify and strengthen the Rwandan economy and reduce poverty in the process:
In accordance, with the overarching developmental policies of “Vision 2020” an array of financial policies have been rolled out by both government and the National Bank of Rwanda (BNR) to boost mid-term sectoral growth:
National Strategy for Transformation 2017–2024, which aims to further the acceleration of innovation and the growth of digital solutions.
National Financial Inclusion Strategy 2019–2024, the main objective is to leverage the potential of the fintech sector to expand digital financial services.
Payment Services Providers Regulation No. 05/2018, expanded BNR oversight over the activities of payment initiation providers (PIPS) enabling wider access to the national payment system.
Rwanda Payment System Strategy 2018–2024, was launched with the objective of fostering an enabling environment for innovation in the payment system through collaboration between the public and private sectors.
SMART Rwanda Master Plan 2015–2020, which aims to increases access to financial services through fostering ICT innovation and the development of financial infrastructure
Vision 2050, the successor to Vision 2020, will place an even stronger emphasis on the development of a digital, knowledge-based economy.
The strategic objectives of the developmental program, which range from agricultural wealth development to competitiveness and integration, will interact with financial services and the wider innovation economy one way another. In order to achieve these goals, there will need to be a development of both human and financial capital to achieve its goals.
In order to accommodate the development of this capital, the Rwandan government has constructed the Kigali Innovation City, a $420 innovation park in Kigali which it hopes will transform Rwanda into the regional tech and business hub. The flagship program has been designed in order to foster the creation of a hi-tech and globally exposed ecosystem that will develop the talent, innovation, and capital that Rwanda requires to reach middle-income status.
There has been a push at the product level for digitalization. The Mara Phone, Africa’s only locally produced smartphone, was designed and is manufactured in the country. Rwanda’s push for telecommunications infrastructure has also been highly successful with 95% of the country is covered by 4G in 2018 alone. Moreover, Kigali has introduced the Tap & Go system, a similar service top up and tap up to an Oyster Card. Given this push from the government toward digital practices and making them readily available to the wider population, it is easy to see why fintech in Rwanda is growing rapidly.
Is the hub just a white elephant?
If the correct regulatory system from central banks is not in place then-emerging fintech firms will struggle to gain traction regardless of how many tech hubs are built. Rwanda is acutely aware of this and the BNR has embarked on a variety of regulatory enablers.
On a macro-level, the BNR has signed a memorandum of understanding with the Rwanda Utilities Regulatory Authority (RURA) to ensure oversight and to strengthen payment and services and market infrastructures. An agreement has also been reached to share responsibilities on financial monitoring to prevent an exacerbation in financial crime and to protect consumer data.
This relationship between the BNR and RURA is not limited just to memorandums of understanding but also through networking and assessment events. FinTech Fridays are a bi-monthly event held by BNR and RURA which acts as a forum for networking, peer-learning, and information sharing.
However, limitations persist
The regulatory sandbox was launched in 2018 by the BNR and RURA and attempts to balance a flexible yet clear regulatory environment where start-ups can test their products.
Unfortunately, the momentum behind the drive towards a digital economy has not been applied to its sandbox. The sandbox suffers from chronic underuse with many fintech firms simply not viewing the point in taking part with the bureaucratically intensive procedure being another issue raised by many. In fact, in 2019 only one firm, Riha Payment Service enrolled.
The expense of launching a start-up in Rwanda is also a major limitation for those attempting to scale. This is further compounded by the high-risk proportionate capital requirements needed to obtain various sector-dependent government licenses and telecom integration fees.
Similar to many African fintech markets, acquiring funding remains a serious challenge. There are however six active Rwandan-based investment actors, including BeneFactors, Business Development Fund, Business Partners International, GroFin, Ignite, and Kountable, which provide seed and early-stage funding to all business sectors, though so far this has not been sufficient to negate the lack of readily available credit.
Similar to Kenya, despite the active role of BNR, there is no specific authority or legislation dedicated to the FinTech sector.
Rwanda’s open banking and data regulation
Currently, Rwanda has no data protection law that protects consumer data like South Africa with the Rwanda Data Protection Law 2020 yet to be passed. This hasn't, however, prohibited data sharing practices and a drive towards an open banking model.
Regulation on open banking is relatively relaxed and covers individual consumers and SMEs with an objective to encourage innovation, efficiency, new products, and new players. As Rwandan FinTech is heavily driven by telecommunications which results in the possession of a large amount of consumer data, the open-banking sector is likely to grow in the following years. However, despite the lack of overarching data law, consumer consent for participation is still required.
There has been a concerted push by the government for firms, and in particular fintech firms, to take advantage of data sharing opportunities. In 2021, for example, Rwanda alongside Cenfir and the Mastercard Foundation signed a memorandum of understanding on a Three-Year Digital Program that would harness big data to improve government service delivery. Moreover, the BNR has created a “data warehouse” that is serving as a starting point for financial records with free and open access to the public. Strangely, despite data-driven processes being a central tenant to Vision 2050, fintech firms cannot access data stored on the National Identification Agency databases.
South Africa 🇿🇦
South Africa is one of the continent’s lead fintech hubs with Johannesburg being the largest hub, not surprisingly as it is home to a developed financial sector hosting some of Africa’s leading banks. Currently, Johannesburg is the continent’s largest FinTech hub with a global ranking of 62 whilst Cape Town is in fourth place in Africa and 87th place globally.
The success of South African fintech hubs has been attributed to the country being an early mover in the market and is currently home to over 220 operation fintech companies which primarily consist of payment, B2B tech support, and lending platforms. The South African regulatory authority, the South African Reserve Bank, has taken a less cautious stance than the Central Bank of Nigeria and has allowed innovation to flourish at arm's length.
Another success is the development of South Africa’s fintech hubs is the well-established financial system which ranks 18th out of 140 markets in its efficiency, confidence, and trustworthiness. The robust South African banking sector has a strong regulatory and legal framework, establishes institutions, and is globally competitive. Subsequently, this has opened key credit lines for emerging fintech firms, giving them a succinct advantage over other regional hubs.
There has also been a substantial push from the government to foster innovation with the Department of Science and Technology (DST) managing the government’s R&D spend and incentives. These programs have focused on supporting technology innovation with the Government accounting for 44.6% of gross expenditure on research and development in 2015. The government boldly stated that it wished to increase spending per GDP on R&D to 1.5% from 0.77% by 2020, prior to the Covid-19 pandemic, with a majority of this funding coming from tax breaks.
In addition to R&D development, there has been a push from other government departments to aid the growth of fintech developments in South Africa, giving it a notable advantage over regional rivals. The Small Enterprise Development Agency (SEDA) offers various degrees of support to small enterprises which include funding to business incubators that are technology-specific. The Department of Trade and Industry has programs that are tailored to help boost the economy and provide funding and grants to promote entrepreneurs and support innovation initiatives, which includes the financial sector. Lastly, the 12J Venture Capital Tax Incentive which is administered by the South African Revenue Service (SARS) offers to write off full investments made in any one year from taxable income if the investors qualify as venture capital companies.
The South African Reserve Bank that regulates the fintech sector has its own dedicated fintech unit that was set up in 2017 which has 3 specific focus areas:
Consider the policy and regulatory implications of financial services
Gain deeper understanding of and practical insight into the fintech landscape through collection and analysis of data
Deliver innovation and collaboration initiatives such as Project Khokha & Financial Markets Innovation, Crypto Assets & Stablecoins, and Open Banking
Fintech Unit has contributed to a variety of projects and papers within the SARB ranging in topic from crypto assets to digital currencies. Furthermore, it played a key role in developing the SARB’s positions on regulatory guidance and sandboxes, as well as contributing greatly to the Global Fintech Hackcelerator, Project Khokha, and the launch of the Innovation hub. Projects that have contributed to the development of South Africa’s fintech sector and made a statement of intent regarding its future role in the South African economy.
The Global Fintech Hackcelerator, is a fintech acceleration program that offers a visible platform for the various fintech firms to demonstrate their solutions to the highly complex financial challenges faced by South Africa. a platform for fintech firms to demonstrate their innovative solutions to complex financial challenges in the Southern African region. The SARB considers fintech acceleration programs as a means to embrace fintech whilst simultaneously allowing regulators to appraise and analyze the risks and benefits in a balanced manner.
The Innovation Hub (Intergovernmental Fintech Working Group), launched by the SARB and other government regulators including the Financial Sector Conduct Authority (FSCA), Financial Intelligence Centre (FIC), the National Credit Regulator (NCR), the Competition Commission in 2020, to respond to the changes in the financial sector being driven by fintech and to promote responsible adoption of innovation in the sector.
The hub was created with the intention to support the financial sector in its adoption of innovation that supplement the roles of regulators including financial stability, consumer protection, financial inclusion and fair lending practices. Innovators from across the financial sector regardless of development stage be it as an established fintech firm or a start-up and subsequently receive 3 avenues of support following admission:
The Regulatory Guidance Units helps market innovators resolve specific questions concerning regulatory and policy requirements.
The Regulatory Sandbox provides innovators with an opportunity to test their products to the extent of regulatory boundaries under the supervision of a regulatory body.
The Innovation Accelerator provides a collaborative and exploratory environment for regulators to cooperate and learn from each other’s work within the industry.
The Innovation Hub has since gone on to play a major role in the development of the fintech landscape within South Africa including regulation advice, in particular crypto-currency, the development of Project Khokha, and accelerating the scale of emerging fintech firms like Xago. However, the hub is only a year old and given the currently precarious situation of the South African economy time will be needed before a more in-depth appraisal of its performance can be conducted.
South Africa Data & Open Banking
FinTech companies that process personal data, domestically or across borders, are obliged to comply with the Protection of Personal Information Act 2013 (POPIA). POPIA is by far the most comprehensive data protection legislation on the continent and is heavily modeled on the European Union’s GDPR. POPIA codifies existing protections as per the South African constitution and common law with the provisions of POPIA commencing on the 1st of July 2020 giving companies until the 1st of July 2021 to comply introducing a new layer of regulation for data-sharing and open banking in particular.
This regulation whilst ensuring the consumer’s data rights will have little effect on the development of data collaboration partnerships in open-banking in South Africa, in fact the push towards open banking has gathered pace since the onset of the Covid-19 pandemic. Many banks in South Africa have since opted to use APIs to share data with service providers that include fintech firms, enabling consumers to view different financial accounts, spending patterns, advice on financial requirements, and other services on a platform, and be able to compare alternatives.
We can see clearly how this fostering of open banking is bearing fruits in South Africa and how the pandemic has had an accelerating effect on it.
Nedbank and Investec have been the two most prominent South African banks that have embraced open banking with Nedbank being the first to open its API platform, API marketplace to fintech that meets technical standards. A great opportunity for fintech firms as they can continue to develop products in the knowledge they can be used by Nedbank customers providing they are admitted into the API marketplace. Similarly, Investec has joined the fray by collaborating with the fintech firm Bud who helps banks connect their data and apps to fintech firms and financial service providers. Moreover, truID a fintech firm received significant funding throughout the Covid-19 pandemic in South Africa to develop open banking tech as a means to assist financial service providers to access consumer banking data securely.
Limitations of the South African model
South Africa’s regulatory and policy framework is not without its limitations. Despite its developed banking and credit sector many smaller firms and start-ups often struggle to acquire funding. Currently, the banking industry is better to set up in assisting the needs of established firms, a fact highlighted by only 40% of funding for the MSME market comes from banks and only 2% of MSMEs are able to access bank loans. This makes scaling considerably difficult for start-up firms operating in South Africa despite the best efforts of the South African government to increase the availability of funding.
This lack of funding and capital requirement is exacerbated by regulatory funding restraints. Often fintech firms are required to have a proven business model that is scalable and capable of high expected returns. Moreover, government support and incentives for tech financing coordination could be improved as they currently exclude fintech. Moreover, the crow-funding regulation in South Africa is somewhat ambiguous limiting alternative funding channels. Obviously, there needs to be regulation in place when acquiring funding but in South Africa’s case many view the regulation in place as an impediment.
Lastly, competition from the informal sector has been highlighted as a point of concern by many fintech firms operating within the country, indicating that the regulatory reach of the government and central bank might not be as far as desired.
Concluding remarks
In order to support fintech regulatory bodies should aim to engage with fintech businesses to create a policy that includes:
An environment for them to test products and systems
Central banks promoting a regional and international cooperation
Long-term developmental visions that place fintech as a key strategic priority
Stable and clear regulation that allows fintech’s to build with confidence