Financial inclusion indicates the extent to which individuals and businesses in a society can easily access and use appropriate, affordable, high quality, and timely financial services including banking, loan, equity, and insurance products. Incidentally, one of the global problems being tackled by the UN as part of the Sustainable Development Goals (SDGs) is financial inclusion. The linkage between financial inclusion and the SDGs is most apparent in the first SDG – eradication of poverty. One of the identified goal targets of this SDG is to ensure that all men and women, in particular the poor and the vulnerable, have access to financial services by 2030. The UN recognizes that people are better able to climb out of poverty – by investing in business and/or education – when they are included within the financial system.
According to the World Bank, about 1.4 billion adults globally are financially excluded for various reasons. These financially excluded people include about half the entire population in Africa because of certain socio-economic factors such as illiteracy, poverty, and lack of any acceptable identification document which limits access to basic financial services. The reference to Africa in this article relates to countries on the African continent that have low financial inclusion rates. Each of these African countries has unique conditions applicable to them, however, the factors driving low financial inclusion in most of these countries are very similar.
Financial technology (fintech) – technology innovations used to deliver financial services – has the potential to address financial inclusion in Africa. Fintech provides an opportunity to bypass some of the physical, infrastructure, and geographic barriers to accessing financial services. For instance, Africans have now been able to conduct financial transactions using their mobile phone through mobile money services. This is a service that was pioneered through M-Pesa, enabling unbanked individuals to perform various financial transactions using a mobile wallet maintained through their mobile phones. There are several other unique fintech products utilized to tackle financial inclusion in African countries including alternative credit scoring technology, non-internet-based financial products, and digital currencies. For instance, the use of customer ratings as credit scoring measurement allows poor drivers to acquire their own vehicles rather than continue to work for others who retain a significant portion of their earnings.
Yet, significant challenges to effective regulation of fintech in African countries continue to undermine financial inclusion efforts. In our recent paper, we examine the factors responsible for financial inclusion challenges in African countries, the unique fintech products being deployed in Africa to improve financial inclusion, the challenges to fintech regulation in African countries as well as possible options to transform the legal and regulatory landscape in Africa to aid financial inclusion.
Benefiting from the path dependency theory, we argue in the paper that African countries struggle with regulations that will encourage the use of fintech to address financial inclusion due to the history and evolution of their financial systems. With nearly all African countries having been colonized by European countries, the development of the financial system in these countries was founded on legal rules originating from their colonial masters. The lack of home-grown legal systems that are attuned to their culture or socio-economic circumstances affects the ability of African regulators to accommodate the requirements of fintech products driven by financial inclusion. An overhaul of certain aspects of the legal systems in most African countries may be required to achieve effective fintech regulation. For example, current land-title registration systems do not recognize traditional land ownership regimes and thereby preclude traditional land owners from using their property as security to access credit.
The path dependency challenges in African countries are exacerbated by the limited efforts by regulators in African countries to lead initiatives for the development of regulations that will promote fintech products that can drive financial inclusion. Developed countries have a high level of financial inclusion and the regulators in these countries do not have the incentive to deploy extensive resources on products that only have value in driving financial inclusion, especially if such products can create risks for market integrity of financial stability. When African regulators rely on developed economies to lead initiatives around fintech regulation, products that facilitate financial inclusion do not get the appropriate attention.
The ubiquitous nature of some fintech products, like cryptocurrency, also defies the common approach in some African countries where fintech regulations are focused on a narrow span of expertise or authority of a particular regulator. Even though different regulatory agencies have mandates to pursue a specific set of policy priorities such as the stability of the banking system (banking regulator) or efficiency of securities markets and investor protection (securities markets regulator), features of some fintech products transcend the scope of a single regulatory authority. For instance, cryptocurrency is both a means of exchange and tradeable security, bringing it within the purview of both the banking regulator and the capital securities market regulator. There is a need for different regulatory agencies to collaborate in the design of fintech regulations to achieve the policy objectives.
The negative interactions between fintech-specific laws and some general and/or cross-cutting laws are also a challenge for fintech regulation in Africa. For example, due to the inability to generate appropriate levels of revenue from taxation, African countries have been focusing on taxes chargeable on digital financial services. However, such tax policies serve to further distance financially excluded communities by making it even more expensive for them to use such products. There must be an alignment between the tax policies and regulations aimed at encouraging the adoption of fintech products in African countries.
Finally, there is a lack of alignment among African financial regulatory bodies on policy issues relating to fintech. This has created a fragmented and conflicting regulatory environment across the continent and so fintech companies must comply with different requirements in different African countries before they can operate. This makes it difficult for some African countries to take advantage of fintech products available in neighboring countries that could help with improving financial inclusion.
Concerted efforts among African countries towards addressing the identified challenges to effective fintech regulation and implementation of identified suggestions will be useful towards improving financial inclusion on the continent and achieving the SDGs.
Zehra G Kavame Eroglu is the Director of the Master of Professional Accounting and Law & Lecturer of Corporate Law and Finance Law at Deakin Law School.
Isa Alade is a PhD candidate at Deakin Law School.
This post is adapted from their article, “Disruptive Innovations or Enhancing Financial Inclusion: What Does Fintech Mean for Africa?” forthcoming in the Vanderbilt Journal of Transnational Law and available on SSRN.