The fintech industry in Africa is experiencing rapid growth, as startups enable services in what is a highly fragmented banking and financial ecosystem. Over the past few years, the sector has been one of the most funded among startups in the continent.
The continent presents such a great opportunity for the fintech industry to grow, especially with millions of people remaining unbanked or lacking access to traditional financial services.
Despite this growth and the making of huge technological advances, however, scaling the ecosystem is rare.
A recent study by the Wheeler Institute for Business and Development which studied 716 fintech companies operating in Africa found that only 5% have scaled.
The figure reflects the young nature of the continent’s fintech industry, and it perhaps seems low, given the excitement and the recent trends in investment within the industry. That notwithstanding, the biggest challenge to its growth is associated with the extent to which fintech legislation and regulations have been adopted across these countries.
That Africa is forward-thinking in terms of fintech regulatory progress is so much true, but there is no uniformity in regulations.
Take for instance Kenya, significant growth has been realized in the lending industry and it was only until the August of 2021 that a bill was passed to regulate digital lending.
The country is also trying to support innovation across the sector, with some innovations having already been approved for commercialization in the current market.
Some insurance regulators are also setting up their regulatory sandboxes, and there have been collaborations between local and foreign regulators in support of fintech and digital infrastructure.
Kenya’s parliamentary approval for CBK to manage digital lenders presents the sad state of affairs regarding the future of fintech in East Africa and the continent in general.
Uganda, in retrospect, is somewhat inactive in the fintech market. Laws are largely governed by licenses. The country’s regulatory sandbox regime is mostly restricted to money payments. Issuance of payment instruments for payment cards and electronic devices, for instance, requires a license.
The law, however, exempts financial institutions who are licensed by central banks from needing a license, unless they wish to offer an electronic money service, in which case a money issuance license is required. In short, Uganda is “pro-innovation”, but it is a long way from being entirely efficient.
Another case in point is Tanzania. Part of the reason why the country said no to cryptocurrency was that the virtual currencies were being traded on unregulated exchanges. But even though the restrictions may be lifted, Tanzania has not seen any policies or laws in relation to virtual currencies.
Advancements in tax collection methods in Kenya, Uganda, and Tanzania are evident. But it is worth noting that there are no specific tax incentives relating to fintech.
Kenya’s introduction of digital services taxes mainly targeted digital marketplaces. In 2021, the scope of services expanded to include the income accruing from businesses providing online services.
The same tax was introduced in Uganda, in full recognition of the potential revenue that can be collected by the sector. But so far, there have been no proper rules on tax in the digital sector.
Tanzania, on the other hand, also doesn’t have a specific digital services tax. Thus, there are no specific or special rules for digital or fintech services. In July 2021, however, the government introduced levies including for mobile money transactions, although this is yet to be applied.
Despite these regulatory challenges, trading and investing in fintech continues to advance. The financial sector regulation is changing too. Sandboxes that enable regulators to work with, and understand financial technology are becoming increasingly common in different parts of Africa. Regulators are working on regulating digital credit, and alternative finance (crowdfunding); though regulatory approaches vary.
All things considered, the future of fintech in Africa remains dependent on a huge number of unknown (and perhaps even unknowable) circumstances and events that will change its evolutionary path. But it undoubtedly is the best bet for fintech’s new home.
With favourable demographics, a shrinking reliance on natural resources, and rapidly expanding infrastructure, the continent is concocting the perfect mix for an innovative explosion.