Legislation

Cross-Regional Comparison Analysis Nathalie Hemmen

Cross-Regional Comparison Analysis Nathalie Hemmen

which could accelerate financial inclusion through fintech solutions by giving new providers access to the payments system. Furthermore, both regions are lacking new tools such as digital identification via automated know-your-customer systems, which would also help drive fintech financial inclusion (Global Microscope 2018).

Another finding is that the most common concern or issue here is the timeline. Multiple experts mentioned the extended periods of time that are required in order to receive the necessary licences and certificates to operate and offer their solutions in SSA. This is perceived as an extended challenge that delays the implementation of their services and impacts the operations of giving people access to financial services. The regulations can have an impact on how easy it is for providers to enter the market and reach the unbanked population in order to financially include them with fintech innovation. MyBucks says that to get a banking license in Africa from scratch, “the average time will be like 3 years”. However, in order to get it, they are required to have the necessary capital, procedures in place, nominate board members and the like. In getting the license, he furthermore claims that the bureaucracy in Africa is a challenge, as there are various laws and providers need to be patient (Appendix B.4).

In addition to that, regulations are perceived as being too slow to adapt to the changing

environment and allow providers to offer their services. In this context, MyBucks mentions

that “legislation is not fast enough” and that in terms of their technology, “legislation is not

ready for it”. At the same time, the representative thinks that the implementation of sandboxes

in the region will help them (Appendix B.4). JamiiPay has also experienced challenges in terms

of legislation, as they operate in a market where tiered KYC has not yet been implemented,

which would differentiate between different financial services and the amount of control that

providers need to execute. Having this in place would enable the providers to offer smaller

financial services with less effort and less requirements for the customer, making it easier to

include unbanked and poor people. They also see issues in the fact that the market has not yet

opened up to agent banking, which would make it easier to reach people in rural areas through

so-called agents, as they think that this is a crucial delivery channel in the future. However,

they also mention that they are still able to execute some of their operations without needing

any regulations, which they can use during their trial phase, which positively impacts their

testing of the solution (Appendix B.6).

Cross-Regional Comparison Analysis Nathalie Hemmen

in, even though they want to work as a “virtual bank”. This is obviously a challenge for them, as it diverts funds from being invested in their digital infrastructure and their main operations, as they have to be used to open a bank branch. This type of regulation can also be seen as not being up-to-date, as it implies a lack of understanding for the benefits and business models of digital financial services (Appendix B.4).

In MENA, the issues with regulation seem to be partly more severe. As Al Majmoua claims, Lebanon for example lacks the adequate regulation for digital finance as they have a “very limited regulatory framework that would allow digital transactions to happen over phones or over mobile”. In this context, they have no regulation allowing for the creation and usage of mobile wallets, such as are rather popular in Sub-Saharan Africa. Al Majmoua also links this back to the fact that their telecommunications operators are solely managing the networks on behalf of the state, thus lacking any incentive to invest into the network or develop any additional products (Appendix B.8). FINCA Impact Finance also sees restrictions in terms of the legislation. Although they prefer to be a deposit-taking institution, as they are in other countries where they operate, this is not possible in Jordan, since they are a microfinance institution and as such, they are not allowed to take deposits (Appendix B.9). These types of gaps or hurdles in the legislation of a country limit the providers in their operations and how much they are able to do, and as such also limits the effect on financial inclusion that they can have through the deployment of fintech.

However, legislation can also have a positive effect on fintech solutions working for financial inclusions. As CARE Denmark shows, the support of the government for their solution has been positive, and they have declared their leadership in the Smart Village Africa Initiative, a pan-African initiative looking to “offer Internet access and digital infrastructure in villages during the next 10 or 15 years” (Appendix B.7). This digital strategy of the government not only sends a positive message to fintech providers about the support in the implementation process, it also impacts the overall environment for the operations as well as the reception of the solution.

The benefits of this can also be seen in MENA, with Mahfazti. The involvement of the Central

Bank of Jordan in this solution simplifies the overall operations. As the representative explains,

the Central Bank there has created their own mobile money payments switch, which aims “to

connect all the payment services providers through that switch in order to enable

interoperability and transparent transactions”. Although they as a telecommunications operator

Cross-Regional Comparison Analysis Nathalie Hemmen

were not allowed to offer mobile financial services directly, but had to create a different company for that, the involvement and leadership of the Central Bank and the resulting interoperability of accounts can have a positive impact on the adoption and implementation (Appendix B.3). In relation to the Central Bank, Koosmik in SSA also benefits from the BCEAO, the Central Bank for a number of African countries resulting in unified regulations that make a market expansion easy (Appendix B.5). Sseguku in Uganda faces a situation where there are four different categories, which have different levels of regulations. Banks are the most heavily regulated, but microfinance falls into the last category, which has the least regulations, thus proving to be a positive point for them as microfinance fintech providers.

They also fall under a different authority with that (Appendix B.1). In this context, the legislation can be an effective driver that helps fintech providers enter the market and execute their operations, but if unfavourable, it can also be a significant challenge and hurdle for providers to master.

Another element that plays into this is the characteristics of the present institutions. As relayed earlier, SSA exhibits particularly weak institutions which can hamper financial inclusion through fintech solutions. Similar to the Sub-Saharan Africa, the Middle East and North Africa is also lacking strong institutions that on one hand can lead the way for new initiatives and strategies but on the other hand are also able to supervise and check the market sphere adequately. Coupled with the strong presence of corruption in both regions as well, this might lead to additional hurdles for new players to enter the market or grow their businesses and operations in the areas and it might be discouraging for people to access the services (Nicet-Chenaf / Rougier 2016; Enterprise Surveys 2018). In this context, both regions face the same challenges and show the same weaknesses in relation to institutions and corruption, despite recent improvements and efforts for betterment.

Furthermore, the literature has established that more competition in an area leads to greater financial inclusion, as the higher number of providers increases the probability of them reaching out to the poorer and more high-risk clients (Wang / Guan 2017). However, a high amount of competition in a market can make the market entry harder for new providers such as fintech providers to establish themselves and successfully reach their customer segment.

CARE Denmark, however, explained in the context of their fintech project in SSA that due to

Cross-Regional Comparison Analysis Nathalie Hemmen

competitors has made it substantially easier for them and has been resulting in a lot of support from different sides on the ground (Appendix B.7). As for MyBucks, the development of competition actually presses the government and the Central Bank in the country to implement sandboxes and start testing out different models and create “a regulatory environment”

(Appendix B.4). For Al Majmoua in MENA, on the other hand, the additional challenge that arises for them as a microfinance institution is that due to the competition in the market and a number of different providers present, “the risk of over-indebtedness and cross lending”

increases. As customers take out loans at more than one loan provider, their risk for being unable to repay them all rises and with that the risk of becoming indebted to them as well (Appendix B.8).

All in all, the legislation driver can be supportive in driving financial inclusion via fintech

innovation. However, as a lot of countries in the developing regions do not yet have updated

legislation that relate to the fintech models and new technologies, legislation can be more of a

challenge than an effective driver. Moreover, the developing regions are characterized by

corruption, an unstable economic environment as well as weak institutions that slow down

overall progress and innovation. Despite this, providers still seem to find ways of delivering

financial services in some ways with the current regulations in place.