In this article we will focus and discuss the regulatory issues that need to be considered by authorities in the emerging markets in Africa with regard to the fintech industry. According to the Global Fintech Index of 2020, four African cities, Johannesburg, Lagos, Capetown and Nairobi were listed among the top 100 fintech markets globally. In assessing regulatory considerations, we will use the South African and Nigerian regulatory framework in fintech as a model for what regulations could be adapted to other emerging economies in the African market. The approach to regulation is not complicated, states in Africa should be not regulate specific technology but the activities that are hosted by the firms that manage and own the technology. This means that the fintech community should be subject to the same rules and requirements as any other regulated firm carrying out the same activities. We have identified the following examples of fintech activities that should be regulated: 

• Alternative finance. 
• Cryptoassets.
• Insurtech.
• Lending.
• Financial services infrastructure. 
• Payment platforms.

This article will conclude with some commentary on how the regulatory environment will drive fintech activities in the future.

Regulatory settings 

This article will by way of example, focus on the regulatory initiatives that have been developed in South Africa and Nigeria. African economies can benefit from establishing working groups of their own within their respective economies to construct a common understanding among regulators and policy makers of the fintech developments. 

In Nigeria, the Central Bank of Nigeria (CBN) has been appointed as the authority to regulate certain categories of fintech businesses. In Nigeria, regulated institutions are restricted from selling, buying or managing cryptocurrencies or enabling payments for cryptocurrency exchanges.  Nigerian residents can still deal in cryptocurrency as there is no outright ban of cryptocurrency. 

Nigeria fintech regulatory environment 

Lagos, is ranked third among African fintech hubs and 71st globally, presenting as it does one of the region’s biggest opportunities for fintech with nearly 40% of the population unbanked and close to two-thirds under 25. 

Nigeria has because of this proliferation taken significant steps towards building a supportive regulatory framework. Any fintech institution that wishes to facilitate lending may do so by registering as a bank with the CBN or other financial institution. The CBN, in 2015 released guidelines on operations of electronic payment channels predominately for payments made from mobile devices. To set up a business that has infrastructure for payments made via mobile devices an entity my be licensed by the CBN. The CBN three years later released options for entities to be authorised to set up banking facilities that allow deposits, payment provisions and the issuance of electronic wallets. These operations are known as PSBs. The Regulation of banking services via mobile phones is through the Nigerian Communications Commission. Any entity that seeks to offer banking services through the use of mobile phones would have to be licensed to do so. For example, some entities are allowing the use of airtime for the repayment of loans to its own mobile lending facilities. Nigeria has also sought to regulate asset management and crowd funding fintech businesses in which any entity wanting to operate within that space. A Fintech Roadmap Committee was established in the last quarter of 2018. The Committee has produced recommendations for the regulation of financial assets and virtual asset exchanges and the classification of cryptocurrencies as commodities, securities or currency. 

Lastly, Nigeria has not ignored the need to regulate the collection, use or transmission of personal data, particularly where financial services are being rendered through mobile phone devices. Nigeria now has laws around Data Protection which fintech companies must comply with when implementing there fintech related businesses. There are severe financial and criminal penalties for any fintech business that breach the data protection laws in Nigeria. 

South Africa fintech regulatory environment 

From around 2016, members from the South African Reserve Bank, the South African Revenue Services and the Financial Services Commission Authority were selected to form the Intergovernmental Fintech Working Group (IFWG). The purpose of the IFWG is to develop a unified set of regulations for the fintech Industry that are somewhat governed by each financial department of the South African government. In a refreshing approach to discussions on regulation, the overall objective of the IFGW is to foster fintech innovation by supporting the creation of an enabling regulatory environment and reviewing both the risks and the benefits of emerging innovations. And, establishing a balanced and responsible approach to regulating such innovations. Two years after IFWG was formed the Crypto Assets Regulatory Working Group (CARWG) was established in April 2020, CARWG, under the auspices of the IFWG published the Position Paper on Crypto Assets  which sought to provide proposals for the improvement of a regulatory framework for cryptoassets. The Position Paper is a brilliant skeleton for steps towards regulating a growing market that cannot remain unregulated. In the Position Paper, CARWG identified the following uses of crypto assets:

• Payments – more and more people are paying for services and goods with crypto assets;
• Purchasing, buying and/or selling;
• Capital raising through Initial Coin Offerings;
• Crypto asset funds and derivatives; and derivatives; and
• Market support. 

The need for regulatory provisions around crypto assets is that they pose a big risk to the financial market. The two biggest risks are:

• Consumer protection: The risk related to crypto assets that are of immediate concern include the lack of consumer protection. The possible misuse of crypto assets is related to money laundering, circumvention of exchange controls and tax evasion. 
• Monetary System: The risk pose by crypto assets to the monetary policy transmission mechanism is that a significant increase in the demand for crypto assets would lead to the creation of a parallel and ultimately fragmented monetary system. 

By way of summary, the Position Paper provides the following recommendations on regulatory considerations:

• Entities providing crypto asset services be regarded as CASPSs. Entities that fall within this classification are those that provide: crypto asset trading platforms, crypto asset vending machines, crypto asset token issuance, crypto Asset digital wallet provider and crypto asset safe custody service provider. 
• Adding CASPs to accountable institutions described in relevant financial legislation and requiring CASPs to register their business with an authority that regulates financial conduct. This would suggest that once registered those entities would have to adhere to ML provisions, keep records, conduct appropriate and adequate customer due diligence, and report any suspicious and unusual transactions. To add to this the Position Paper recommends that such entities adhere to risk management protocols.
• An authority that supervises and ensures CASPS are in compliance with powers to impose administrative penalties where there is non-compliance. The relevant authority will have duties to monitoring crypto assets.
• Unsurprisingly, it was recommended that crypto assets are not to be classified as legal tender and also not recognised as electronic money.
• An appropriate tax regime for crypto asset transactions.
• Further considerations for the ability for consumers to make payments using crypto assets at the users’ own risk.
• Recommendations for crypto assets to be accommodated as the underlying asset in the development of specific investment fund and derivative products within a regulatory regime.

When it comes to credit and lending activities the NCR has adopted a broad approach to regulation. According to the NCA any form of lending regardless of the underlying platform used will be regulated by the NCA. Cryptocurrency lending, however, falls out of the NCA regulatory regime, predominately because no crypto asset has received legal tender status.

In South Africa the SARB, regulates the payment system industry and the Payment Association of South Africa oversees the participation of the banks and non-bank players in the payment system industry. Any entity that wishes to participate within this space has to be authorised by the PASA. 

Fintech in the retail investment market does not have specific regulation. However, regardless of the technology any entity that offers investment advisory or management assistance to clients for entering into transactions involving securities will be regulated. Under South African legislation:
a person/company is regarded as conducting "the business of an exchange" and is required to register as an exchange, if that person constitutes, maintains, and provides an infrastructure (technology):

• For bringing together buyers and sellers of securities.
• For matching bids and offers for securities of multiple buyers and sellers.
• Whereby a matched bid and offer for securities constitutes a transaction (a contract of purchase and sale of securities).  

Lastly, the main regulatory compliance issues a fintech company can expect to face are cybersecurity, anti-money laundering, financial crime, and consumer protection.

It is not uncommon for regulated entities providing traditional financial services entering arrangements with fintech companies. For example, a bank and a non-bank entity may enter into a Fintech Arrangement under a joint agreement. In South Africa, this activity is regulated by SARB (PA) who require such arrangements to be approved first before operating within South Africa. 

Conclusions and future of fintech regulation across Africa

A key protection that sovereigns in Africa should offer innovators in the fintech market are more comprehensive intellectual property laws. As reflected by the working paper in South Africa on crypto assets, in the future the fintech industry might see tighter controls around crypto assets. This is particularly expected to mitigate risks in the circumstances in which the use of crypto assets grows to a point were it affects the stability of the traditional monetary system. 

COVID-19 compelled economies to adapt quickly to embracing e-commerce and digital banking at a faster pace than regulators could imagine. According to the Mauritius Fintech Hub , developments in Mauritius demonstrate the innovate approaches that can be taken to support the African market. For example, Mauritius introduced a new framework for digital banking and Central Bank Digital Currency. 

The Africa Fintech Network has grown since 2018 with now over 29 members participating in establishing task forces to prepare for the future of fintech in the areas of digital payments, digital banking and crypto assets. With economies like Mauritius taking steps to a cashless society, the dream of the rest of the continent becoming cashless in the not-too-distant future will become a reality. From the perspective of governments in Africa the wealth of data created from fintech activity will create more reliable economic predictions, allowing for more effective policy setting. It is, therefore, imperative for governments across Africa to take a carefully considered approach to building a regulatory framework for the fintech sector. And, in doing so aim to not stifle the growth and/or the emergence of fintech activity within their respective economies.