How regulatory deficit inhibits Kenya's fintech space growth

BDFintech (1)

Financial technology has become a fundamental part of the global fiscal ecosystem. FILE PHOTO | SHUTTERSTOCK

Often referred to as fintech, financial technology has, in modern times, increasingly become a fundamental part of the global fiscal ecosystem, with Kenya emerging as a world leader in mobile money and home to perhaps the world’s most well-known example of fintech-based solutions – M-Pesa.

The share of the adult population in the country with an account in the dominant mobile money platform, data shows, is well above 60 percent, underscoring the remarkable feat that the Safaricom-owned business has achieved over the years.

But that’s just one success story in a sector where several other players are lamenting sluggish expansion and growth rates, partly attributable to delayed development of regulations.

Apart from mobile money transfer platforms, other emerging fintech components in the country in recent years have included digital lenders, payment service providers and cryptocurrency technology implementers.

The rapid emergence of new technologies and the growth of new fintech models have proved a hard nut to crack for regulators whose ability to respond to change in a timely fashion has often been crippled.

In their Wealth Expectancy report for this year, Standard Chartered Bank pointed to regulatory deficiency as one of the prime detriments to people investing in digital assets, with a whopping 33 percent of the study respondents who are less likely to make digital investments this year citing lack of enough regulations.

Concerns around data privacy and security, fraud, harmful manipulation of consumer behaviour, the sudden collapse of a number of fintech institutions and borrower distress resulting from irresponsible digital microcredit lending practices are some of the illustrations of system-wide risks that analysts have flagged as requiring updated supervision policy frameworks.

“The risks primarily arise from the underlying technology enabling fintech but also from new business models, product features, and provider types. This poses two questions: Do we need regulations in this nascent fintech ecosystem? How can the financial sector keep up with current fintech regulations and prepare for the future as technology evolves?” poses fintech firm Pesapal Legal and Compliance manager Barkley Odhiambo.

“Analysis of the global financial system has demonstrated time and again that government regulations aren’t just necessary — they often yield great value for consumers and businesses alike. Beyond protecting consumers, as technology changes business and fintech come into the market, regulations can help manage processes and pave the way for fair competition,” he adds.

Crypto exchange firm Yellow Card Chief Compliance Officer Mandy Naidoo says the fintech space, specifically cryptocurrencies, has not achieved a 100 per cent guarantee for safety and calls for tailored regulations to add to the industry’s protective gear.

“The original idea for crypto trade was aimed at attaining global financial freedom and inclusion. As trading and a savings scheme, crypto investments like all other ventures need to be effectively regulated to cushion the industry from unforeseeable shocks,” says Ms Naidoo.

In Kenya, myriad attempts to impose regulations in the self-styled liberal digital assets industry have been met with little progress, watering down the safety nets and presenting users with limited recourse in case funds are lost.

The country’s policy shapers are however starting to make slight progress in that regard, with the Central Bank of Kenya (CBK) last year commencing the implementation of strict consumer protection rules introduced by the Digital Credit Providers Regulations (2021).

The laws, which give CBK powers to revoke the licences of offenders, are tailored to prevent mobile loan lenders from pestering defaulters with intrusive phone calls to friends, associates and family in the name-and-shame tactics meant to recover money.

They also require the lenders to disclose the total charges for their loans, including interest rates, late payment and roll-over fees, before disbursing credit to customers.

In a sector report published by digital lender Tala last month, CBK licensing has proved to be a game changer in the trade, with customers reportedly paying substantial consideration to the certification when choosing a digital lender.

“Licensing by CBK is slowly gaining traction as a factor when consumers are choosing digital lenders,” stated the report.

With the licensing, players say the nod has been central to shaking off perceptions that had widely seen most if not all, digital lenders characterised as rogue.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.