Regulating African Fintech space: Promoting innovation or stifling growth

By Ayomide Ayileka and Oluromade Fagbolade

Over the past decade, technology innovation in finance “fintech” fueled by investments has been on the rise. Google recently announced that its Africa Investment Fund would invest up to $50 million in African growth-stage companies. Fintech has become a significant driving force in the African economy, with $180 billion projected to contribute to the continent’s GDP by 2025.

The fintech innovations enabling African countries to transition from physical retail banking to online payments, remittances and other services pose new challenges for regulators. On one hand, while innovators are moving at the speed of light to develop new customer propositions; regulators are on the other hand are moving at a slow pace to issue guidelines to govern the space. When they do, the attitude is more similar to maintaining financial stability and encouraging entrepreneurship without stifling growth.

Fintech has enormous economic potential for Nigeria, with the usage of digital money expected to boost the country’s yearly GDP by $3.7 trillion by 2025. While the fintech industry in Nigeria is still nascent, industry analysts believe the continent’s most populous nation has reached a peak where regulatory bodies need to implement best practices to drive the industry to its full potential. The Central Bank of Nigeria (CBN) and other major regulators have in recent times issued guidelines governing the fintech sector, particularly the payment and remittance subsector, the most active in the Nigerian Fintech industry which has long piqued the attention of investors and regulators alike. The rationale for this is not improbable as this subsector accounts for 43 per cent of the entire fintech sector.

There is no specific fintech regulation in Nigeria, as such, the Bank and Other Financial Institutions Act 2020, classifies other financial institutions as Payment Service Providers “PSP” and International Money Transfer Activities, regardless of whether their activities are conducted digitally.

Despite Nigeria’s financial inclusion target, 36 per cent of Nigerian adults remain unbanked and unable to join the formal financial sector. Fintech companies targeting the unbanked are providing a solution to this challenge, a position which has seemingly received CBN’s support. The revised Payment Service Bank (PSB) guidelines for example are aimed at capturing the unbanked into the financial space. Contrary to the previous CBN guidelines for PSBs, the revised guidelines provide that PSBs are permitted to carry out payments and remittances, including inbound cross-border personal remittances services through channels within Nigeria. Consequently, the guidelines have paved the way for the participation of more fintech companies

The Securities and Exchange Commission (SEC), which is primarily responsible for capital market regulation, announced its Regulatory Incubation Program (the RI Program), which is the SEC’s version of the CBN’s regulatory sandbox for fintechs offering services and products in the Nigerian Capital Market space.

Although, while the SEC has been lauded for launching the RI Program, many have however expressed worry about the CBN’s restrictions on cryptocurrency exchanges, citing the CBN’s unwillingness to view digital currencies as a vehicle for economic development.

Looking at Kenya’s fintech revolution, which contributed to the country’s near-total financial inclusion rate of 82.9 per cent, making it the highest in Africa. As one of the leading economies of Africa, Kenya’s financial inclusion has been at its forecast level for well over a decade, increasing by a projected six per cent in the African Development Bank (AfDB) statistics 2020.

Similar to Nigeria, the Central Bank of Kenya (CBK) does not recognize cryptocurrency as a legal tender and has repeatedly cautioned the public from dealing with virtual currencies. However, in contrast to Nigeria’s regulatory environment, Kenya’s government has provided new startups with financing and lenient rules, resulting in increased fintech adoption throughout the nation.

In 2020, the Global Fintech Index City ranked South Africa as the first African country and 37th on the world’s fintech startup ecosystem map alongside Kenya, Nigeria, Ghana, Egypt, and Uganda. It is also recognised as a fintech game changer in sub-Saharan Africa.

The increase in fintech innovations in South Africa has improved the efficiency of the financial sector, and strengthened the financial integration of all South Africans by addressing their daily needs and helping them to achieve financial targets.

For an integrated AfCFTA, fintech could benefit if existing regulations were harmonized amongst member states. It may make it easier for fintech and tech entrepreneurs to do business amongst other member states, particularly in the expansion and foreign direct investment (FDI) stage. Solving cross-border payments within the continent could exponentially increase intra-Africa trade. While payment in Africa is a $400bn+ industry, Africa’s fintech payment system is undoubtedly large and untapped, thus successfully uniting all the banks under one payment system offers enormous potential for the industry in terms of economic development and fostering trade &investment among countries signed to the trade agreement.

Regulators in various jurisdictions have many ways of approaching innovation. They include sandboxes, innovation hubs, incubators, accelerators, and so on, but their aim remains the same, which is to actively promote innovation.

With this, regulators are not only acquainted with emerging innovations attracting investment, but they also get to introduce initiatives aimed at enabling fintech innovations whilst managing risk. 

Regulators play a crucial role in the implementation of sector-specific legislation and policies aimed at resolving industry problems. The government may consider forming a joint advisory council of ecosystem stakeholders to regularly propose the passage of legislation and progressive policies to foster an enabling environment and maximize the promise of our digital economy.

Creating specific regulations will help regulators avoid regulatory overlap. For instance, the CBN and SEC in 2020 had a different standing on the recognition of crypto assets as securities. Regulators in Africa can study and learn from the launch of Mexico’s first fintech license. With the introduction of the Nigeria Startup bill, which is hoped to be enacted soon, the Nigerian government is at the forefront of this proposal. Furthermore, a more tailored legal and regulatory framework proposed by the CBK in its National Payment System Vision Strategy 2021 -2025 will help to accelerate growth and promote innovation in the Kenyan’s payment sector. African fintech regulators can establish a joint fintech task force charged with developing policy recommendations aimed at resolving issues related to information sharing, transparency, cloud services, cyber security, control standards, data outsourcing and off shoring, as well as barriers to fintech growth.

Given the dynamic nature of innovation in the fintech sector, Africa remains a fertile ground for the growth of fintech and all stakeholders must be reminded that they all have a role to play in making the ecosystem more prosperous. Fintech companies are urged to help regulators stay up to date on the latest fintech trends. In the absence of specific fintech regulations, regulators may issue guidelines governing the sector or amend existing guidelines to keep up with the rapidly evolving financial landscape. One thing seems to be certain: regulators should not wait until all of the answers are known before taking action. Regulators are instead encouraged to start thinking about the future regulatory framework. They must do it in a manner that is sensitive to the rapid pace of change and aware of the potential of new opportunities.

Ayileka and Fagbolade wrote from Lagos