Finance Bill a huge boost for fintech start-ups next year


The government, through the Finance Bill 2023, has made a landmark proposition to incentivize startups and transform the fintech space. FILE PHOTO | POOL

In a pioneering move that aligns Kenya with global best practices, the government, through the Finance Bill 2023, has made a landmark proposition to incentivize startups and transform the fintech space.

This trailblazing approach, which defers taxation on share ownership schemes offered by eligible startups, sends a clear message: Kenya is ready and eager to become a leading hub for venture capital entrepreneurs in Africa.

The proposed bill creates an environment conducive for startups, particularly in the fintech sector.

By defining an "eligible startup" as a Kenya-incorporated business with a turnover of less than KES 100 million and less than five years of existence, the government is demonstrating its commitment to fostering a vibrant ecosystem for early-stage companies.

The proposed tax deferment on share ownership benefits is an innovative approach aimed at attracting and retaining talent in startups.

Employees who receive company shares instead of cash payments will only be taxed within thirty days of certain triggers, such as the expiry of five years from the year the shares were awarded, disposal of the shares, or cessation of employment.

The tax value will be based on the shares' fair market value at the triggering event's date.

In this rapidly evolving digital age, we must take cues from global leaders in fintech, such as Singapore and the United Kingdom.

Singapore's fintech ecosystem is hailed as one of the most robust and innovative, largely attributable to its regulatory sandbox approach.

This approach provides a safe space for fintech startups to test their innovative products and services in a controlled environment, without the fear of regulatory backlash.

It's a strategy that has fuelled an environment of creativity, attracting both local and international fintech companies.

The UK, on the other hand, has made significant strides through government initiatives like the establishment of the Fintech Sector Strategy.

This strategy includes measures such as creating a 'fintech bridge' with international markets, ensuring access to global talent, and nurturing the next generation of fintech entrepreneurs.

These actions have positioned the UK as a thriving hub for fintech innovation and investment.

Drawing from these examples, I propose the following suggestions to our President for enhancing our fintech sector:

Establish a Fintech Regulatory Sandbox: This will allow our startups to test their innovative solutions in a controlled environment, thereby fostering creativity and increasing our competitiveness.

Develop a National Fintech Strategy: Similar to the UK's approach, a coherent national strategy will streamline our efforts, ensuring we're driving towards a common vision.

Foster International Collaboration: Building 'fintech bridges' with other markets can facilitate access to global markets for our fintech startups and draw international investments to our shores.

Enhance Education and Training: We need to equip our young people with the skills needed to drive innovation in this sector.

This can be achieved by integrating fintech into our education system and providing continuous training opportunities.

While the fintech industry has ushered in a wave of innovation, it is not without its risks and failures, even in more advanced markets.

For instance, the collapse of the UK's P2P lender, Lendy, raised concerns over the robustness of regulatory oversight.

Similarly, the high-profile failure of Germany's Wirecard underscored the threats posed by operational risk, fraud, and inadequate internal controls.

These cases highlight the primary risks associated with the fintech sector: regulatory risks, operational risks, cyber threats, and market risks. If not well managed, these risks can undermine consumer trust and market integrity, hindering the industry's growth.

As we navigate these challenges in Kenya, our regulatory approach must be based on promoting innovation while safeguarding the integrity of our financial system.

Here are some recommendations:

Risk-Based Approach: Not all fintech present the same level of risk. Therefore, a one-size-fits-all regulatory approach may not be effective.

Instead, regulators should adopt a risk-based approach, where the level of regulatory oversight is commensurate with the risk profile of the fintech firm.

Regulatory Sandboxes: As previously mentioned, regulatory sandboxes provide a controlled environment for fintech firms to test their innovations without fear of regulatory penalties.

This allows regulators to understand the risks associated with new products or services better and devise appropriate regulations.

Collaboration and Information Sharing: Regulators should foster collaboration with fintech firms and other stakeholders to promote information sharing. This can facilitate a better understanding of emerging risks and how to mitigate them.

Cybersecurity Regulations: Given the digital nature of fintech, cyber threats are a significant risk. Regulators should establish robust cybersecurity regulations to protect against these threats.

Consumer Education: Regulators should also focus on enhancing consumer awareness about the risks associated with fintech products and services. An informed consumer base can act as a first line of defense against potential market abuses.

International Cooperation: Given the cross-border nature of fintech, international cooperation is crucial. Kenyan regulators can learn from the experiences of other jurisdictions and adopt best practices.

Regulating the fintech sector is a delicate balancing act. On the one hand, we need to promote innovation and competition. On the other hand, we must ensure the safety and soundness of our financial system. With a thoughtful and proactive regulatory approach, we can navigate these challenges and harness the transformative power of fintech for the benefit of all Kenyans.

As the newly elected Chairperson of FINTAK, I am committed to working closely with all stakeholders to implement these suggestions. Our mission is to make Kenya the voice of fintech in Africa, and I am confident that we will achieve this vision.

Thank you, Mr. President, for leading the way in recognizing the transformative power of fintech. Together, we can revolutionize our economy, foster financial inclusion, and secure a prosperous future for our great nation.

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