Fintech Regulation in Sub-Saharan Africa

Alexander Apostolides (CCAF), Sarah Ombija (CCAF), Patrick Conteh (CCAF), Philip Rowan (CCAF), Aleem Mubarak Tejani (CCAF), Thomas Ward (Independent), Herman Smit (CCAF), Bryan Zhang (CCAF), Tania Ziegler (CCAF), Zain Umer (CCAF), Valeria Gallo (Independent) and Gabrielle Inzirillo (Independent).

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The first in a series of regional reports, this landscaping study examines how SSA jurisdictions have responded to both the opportunities and challenges associated with fintech and wider digital financial services (DFS) through regulatory efforts and processes. The study is focused on the regulatory framework for payments, e-money (including mobile money), international remittances, peer to peer lending, and equity crowdfunding. It also identifies existing frameworks for important cross-sectoral themes that impact fintech in terms of data protection, cybersecurity, open banking, financial consumer protection, anti-money laundering and electronic Know-Your-Customer. It draws on data from the Global COVID-19 FinTech Regulatory Rapid Assessment Study (CCAF and World Bank, 2020), Regulating Alternative Finance (CCAF and World Bank, 2019) and combines it with data gathered from a primary review of regulatory frameworks (laws, regulations, directives, guidelines and other regulatory information).

Highlights from the report

Observed impact

  • The COVID-19 pandemic has accelerated the adoption of fintech and 70% of surveyed regulators in SSA reported an increase in the priority of this sector in their work. Regulators highlighted the supportive role of fintech in achieving regulator objectives related to financial inclusion (76% considered it supportive), market development (52%) and the adoption of digital financial services (52%), among others.
  • Forty per cent of SSA regulators who responded to the COVID-19 survey perceived an increase in consumer protection risk related to fintech during the pandemic. This was in addition to a perceived increase in market integrity and financial stability risk (reported by 24% and 16% of surveyed regulators respectively). It is notable that in SSA, the perceived harmful impact of fintech h on consumer protection in light of COVID-19 (40%) was far higher than the global average (13%). The regulators surveyed in SSA considered that COVID-19 increased risks related to cybersecurity (69%), operational risks (35%) and consumer protection (23%).

Regulatory frameworks

Fintech verticals

  • Thirty-five per cent of sampled jurisdictions in SSA have a framework that regulates P2P lending and a further 15% of jurisdictions are planning to introduce a framework. The coverage of regulatory frameworks for P2P lending is relatively low in SSA in comparison to MENA (58%) or APAC (72%) regions. Although four SSA sampled jurisdictions regulate P2P under an existing framework, only two jurisdictions have bespoke frameworks for P2P lending in place, compared to six in MENA and nine in APAC.
  • There is an Equity Crowdfunding (ECF) regulatory framework in 34% of sampled SSA jurisdictions. The coverage of regulatory frameworks for ECF is relatively low in SSA in comparison to MENA (77%) or APAC (78%) regions. Despite the low coverage, there has been notable growth in regulatory frameworks from 12% in 2019 (CCAF and World Bank, 2019) to 34% in 2021. A further 33% of jurisdictions in our sample are planning to introduce a framework. In those jurisdictions where there is a framework, there are minimum capital requirements and often a limit on the amount of a retail investor’s portfolio that can be invested through ECF.

Cross-sectoral frameworks

  • Eighty-five per cent of sampled jurisdictions in SSA have a general regulatory framework for cybersecurity in place. It is also notable that 55% of the sampled jurisdictions have introduced additional measures on cybersecurity since the start of the COVID-19 pandemic, mainly focusing on raising awareness of ongoing cybersecurity threats among market participants. In addition, 55% of sampled jurisdictions have implemented financial services sector specific cybersecurity by at least one of the financial regulators in the jurisdiction.
  • Concerns regarding fraud and cyber risk have led to increased activity by regulators to ensure financial sector data protection and cybersecurity frameworks are in place. Relevantly, 65% of sampled SSA jurisdictions have a general data protection framework in place, with a further 20% planning to introduce one. In addition, 85% of sampled jurisdictions have implemented a financial services sector specific data protection framework by at least one of the financial regulators in the jurisdiction.
  • Financial consumer protection frameworks are in place in 82% of sampled jurisdictions. Financial consumer protection is an area of concern elevated by the COVID-19 pandemic, with 45% of surveyed jurisdictions introducing additional financial consumer protection measures. Such measures focused on ensuring fees on transactions were transparent and charges for e-Money transactions were kept low or eliminated during the peak of the pandemic.
  • In terms of Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT), all sampled jurisdictions have a framework. There is a greater propensity in the SSA sample to have the central bank (55%) as the main regulator of AML/CFT issues than in the MENA or APAC regions.
  • Two jurisdictions in the SSA sample have regulatory frameworks in place for open banking and a further five are planning to introduce such a policy. While this could be a positive development, promoting greater adoption of DFS, the SSA region still lags MENA and APAC in establishing open banking regulatory frameworks.
  • Market firms in SSA noted that regulatory support for eKYC and remote onboarding are key demands of market participants in SSA from regulators. While only 10% of sampled jurisdictions expressly forbid eKYC, only 55% of jurisdictions have a framework in how to accommodate eKYC. In the majority of cases in the sample where eKYC is permitted (55%), there is no use of a centralised digital identity system to provide validation.

Regulatory innovation initiatives

  • A review of all SSA jurisdictions for regulatory innovation initiatives reveals a significant increase in activity in the last two years. The study identified nine innovation offices, up from zero in 2019. There are also ten regulatory sandboxes in place, with a further six being planned. These initiatives may help to facilitate increased engagement between regulators and FinTech firms, while helping to create an environment that is more conducive to the growth of the FinTech sector. They may also be useful in streamlining authorisation processes and reducing the time it takes for firms to get to market. This is reflected in the high demand for regulatory innovation initiatives, with 63% of FinTech firms surveyed in SSA suggesting they ‘urgently need’ faster authorisation and/or licensing processes for new activities, and over half the respondents saying they urgently need streamlined product/service approval.

Hurdles faced

  • SSA regulators that responded to a CCAF survey reported a number of hurdles in the establishment of regulatory frameworks and innovation initiatives. The obstacles in forming regulatory frameworks include limited technical skills (reported by 75% of surveyed regulators), lack of clear mandates, and limited resources (reported by 65% and 50% of regulators respectively). For regulatory innovation initiatives specifically, the identified challenges included co-ordination with other agencies (55%), reprioritisation of resources (41%) and difficulty with external communications (41%).
  • The COVID-19 pandemic has introduced new and exacerbated pre-existing challenges faced by SSA regulators in regulating FinTech. Of the surveyed regulators, 38% responded that it was more challenging to perform core functions during COVID-19. They also indicated that COVID-19 made it more challenging to coordinate other domestic agencies (34%) and to access accurate and/or timely data for regulation or supervision (34%). It is also notable that surveyed SSA regulators stated they were less likely to have had a high level of preparedness for the COVID-19 pandemic relative to our global sample (46% relative to 54% globally), while 25% stated there was a low adequacy of resources to respond to the COVID-19 pandemic.