• Nihmal Marrie, Managing Director and Partner, Kitso Lemo, Associate Director at Boston Consulting Group, Johannesburg


• 18.11.2024 12:00 pm
#GovernmentRole #AfricanFintech

In recent years, the African fintech ecosystem has emerged as a dynamic and transformative force, significantly advancing financial inclusion across the continent. Much of this growth has been fuelled by innovative private sector financial technology solutions, addressing the challenges faced by traditional financial services. However, to fully unlock the potential of fintech and ensure its sustainability, government intervention in developing a comprehensive regulatory framework is essential.

The Rise of Fintech in Africa

Africa's fintech revolution can be traced back to Kenya's M-PESA, launched in 2007. M-PESA provided a mobile-based solution to the country's inefficient banking system, quickly gaining popularity and spreading to other African nations. Today, Africa accounts for nearly half of the world's mobile money accounts, with countries like Nigeria, South Africa, and Egypt leading the charge in fintech innovation.

There have been several African success stories. These fintechs are primarily in payments, enabling more efficient, reliable transaction amongst consumers and businesses including digital native fintechs such as Yoco, Opay, Flutterwave and Moniepoint, and telco backed fintechs including MTN MoMo, M-PESA, Airtel Money and Orange Money.

Other leading segments are banking and remittances where players including South Africa’s Tyme Bank have made significant market share gains and are exploring international expansion.

Highlighting the attractiveness of the sector to global investors, a landmark transaction in 2024 saw global payment leader Mastercard invest $200m in MTN Group Fintech, following a $100m investment in Airtel Money as it seeks to expand access to digital payments in Africa.

Despite these successes, significant challenges remain. Many African countries still struggle with financial exclusion, particularly in rural areas. Fintech solutions, such as mobile money, micro-lending, and digital payment platforms, have shown great promise in bridging this gap.

If one considers that South Africa is the most advanced of the banking systems on the continent, the population remains under-banked with less than 5% of small businesses able to access working capital.

For the sector to achieve greater market penetration, it needs to be able to attract capital and ultimately see more businesses raise capital to expand operations or reach Initial Public Offering (IPO) stage.    

The Importance of a Regulatory Framework

While innovation can be driven by the private sector, it is imperative that frameworks for the following are in place:

1. Consumer Protection: Regulatory oversight ensures that fintech companies operate transparently and ethically, protecting consumers from fraud and ensuring the security of their financial data.
    
2. Market Stability: Regulations help maintain stability in the financial market, preventing the kind of volatility that could undermine trust in fintech solutions.
    
3. Encouraging Innovation: Clear guidelines and supportive policies can foster innovation by providing a predictable environment for fintech companies to develop and deploy new solutions.
    
4. Attracting Investment: A well-regulated fintech ecosystem is more attractive to investors, both local and international, who seek a secure and stable environment for their investments.

Learning from Global Successes

African governments can draw valuable lessons from the successes of fintech ecosystems in South America and Asia.

Brazil's fintech sector has flourished due to proactive regulatory measures. The Brazilian Central Bank's Pix Open Payments System has fostered competition and innovation, enabling fintech companies to offer diverse financial services. The Pix offering has now exceeded over 150 million users annually – greater than credit usage in the region. This has resulted in increased financial inclusion and improved access to credit for underserved populations.

In Asia, countries like Singapore and India have created supportive regulatory environments that encourage fintech growth. Singapore's Monetary Authority has implemented a regulatory sandbox, allowing fintech companies to test new products under relaxed regulatory requirements. India's Unified Payments Interface (UPI) has revolutionised digital payments, thanks to a collaborative effort between the government and private sector.

The Path Forward for Africa

To replicate these successes, African governments must take a proactive approach in developing and implementing regulatory frameworks tailored to their unique contexts.

To this end, we’re encouraged by the work done by the Central Bank of West African States who are driving frameworks for inter-operability for the fintech ecosystem. Ghana is another example of a country taking positive steps here.

Here are key steps that can be taken:

1. Stakeholder Collaboration: Governments should collaborate with fintech companies, financial institutions, and other stakeholders to understand the needs and challenges of the ecosystem. Public-private partnerships can drive effective regulatory measures that support innovation while ensuring consumer protection.
    
2. Regulatory Sandboxes: Establishing regulatory sandboxes can provide a controlled environment for fintech companies to experiment with new products and services. This approach allows regulators to closely monitor innovations and adapt regulations accordingly.
    
3. Capacity Building: Governments should invest in building the capacity of regulatory bodies to effectively oversee the fintech sector. This includes training personnel, upgrading technological infrastructure, and fostering a culture of continuous learning.
    
4. Regional Cooperation: We need to recognise that fintech businesses want to cross borders and enable consumers and businesses to send money across the continent, but the different geographies and regulatory environments make this difficult. African countries can benefit from regional cooperation in fintech regulation. Harmonizing regulations across borders can facilitate cross-border fintech operations and enhance the overall competitiveness of the African fintech ecosystem.
    
5. Capacity building of skills: As the fintech ecosystem is maturing, there will be increased competition from skills across various sectors including insurance, banking and telecommunications. This will include developing not only skills around product capabilities, legal and compliance but also technology roles such as system architects, developers, cyber-security specialists and data scientists. Investing in these talent pipelines at scale will be key to unlocking value.