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, 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% 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% 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.The RI program is designed to meet the requirements of new business models and processes. Also, the program seeks to assist the development of effective regulation towards fintech innovation without jeopardising market integrity or sacrificing investor protection. Many people applauded the move, believing that if such a program had been implemented earlier, investment technology fintech platforms like Bamboo, Trove, Risevest, and others may not have been suspended.
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. There is no specific regulation that has declared cryptocurrency trading illegal in Nigeria. However, banks and other financial institutions are prohibited from dealing in cryptocurrencies, prompting one of Nigeria’s leading crypto startups, Patricia, to relocate to Estonia. The ban has compelled players to implement a peer-to-peer (P2P) trading mechanism that eliminates the need for local exchanges. Interestingly, the CBN just unveiled its version of its digital currency known as “e-Naira”, and procedures for the release of the government-backed virtual currency are anticipated to reach the market soon.Also, the suspension of the Bank Verification Number (BVN)validation service, which was one of the most comprehensive means of identity verification in Nigeria,is another regulatory move by the CBN that is seen as stifling innovation for fintechs.
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. Furthermore, the CBK and SARB’s National Payment System Vision Strategy 2021-2025 proposes a more tailored legal and regulatory framework in the hope of accelerating growth and promoting innovation in Kenya and South Africa’s payment sector respectively.
The European Commission created a fintech task force (TFFT) in 2016 to restructure its capacity to respond to emerging financial technologies. Similarly, 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 jointly sent this piece from Lagos.
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