How regulators can help to boost African tech

African firms flocked to this year’s GITEX tech conference in Dubai in a bid to attract new investors, but many still complain that regulations at home are hobbling their potential.

Image : Lagos Techie

At this year’s GITEX in Dubai, a giant tech show which aims to increase the UAE’s influence in the sector, African startups occupied a more important place than ever.

Inside the enormous Dubai World Trade Centre, the Nigerian delegation had a one-floor green exhibition stand while Moroccan startups presented their products inside a shining white circular structure. The event saw the biggest ever gathering of African startups under one roof, according to the organisers.

Visitors attend the GITEX Global technology show at the Dubai World Trade Centre (DWTC) in the Gulf emirate, on October 12, 2022. (Photo by Karim SAHIB / AFP)

The excitement and confidence were palpable. Six years ago, Africa did not have a single “unicorn” – a startup worth over $1bn. Today, it has seven.

However, the excitement needs to be put in context. Many of the firms showcased in Dubai are still trying to figure out their business, profit and sustainability models. Most of all, firms are wrestling with challenging regulations that differ from country to country.

When asked about the challenges they face, entrepreneurs – particularly those in the financial technology space – respond with one word: licences. Operating as a fintech requires a licence, or several if the company is engaged in multiple activities. These are usually granted by regulators such as central banks.

“The regulation is still trying to catch up and understand how to govern these new products and services. There is a gap in the regulation that is affecting fintech across the continent,” says Pardon Mujakachi, vice-president of partnerships and strategy at Chipper Cash, an Africa-focused, San Francisco-based fintech valued at $2bn.

While more sophisticated frameworks exist for digital payments or e-money services in some African countries, other financial activities in which emerging fintechs are keen to engage, such as equity crowdfunding and peer-to peer lending, are often not covered by existing regulations.

Challenge of obtaining a licence

The story of Rwandan brothers Crepin and Kevin Kayisire starkly illustrates the problem. Their fintech, Kayko, was born out of a need to help their mother get a loan for her catering business.

“The restaurant was doing well, and she wanted to scale up by opening others in Kigali,” says Kevin. “We went to the bank, but they would not lend us money because we did not have proper financial statements proving our good results.”

The two brothers built a mobile app that would allow SMEs to digitalise their expenses and revenues. “The idea was to make it simple for small companies to keep track of their accounting, so when they ask banks for micro-loans to grow their businesses, they can provide a clear financial profile,” says Crepin.

Registering their business with Rwanda’s chamber of commerce was fairly easy. But getting a licence to operate as a fintech, which would give them the right to charge transaction fees and access data, has been challenging.  

“It’s very expensive, around $100,000. We found a way to get around it by partnering with bigger companies,” explains Crepin. Major telcos, which operate under e-money licences granted by central banks, are willing to partner with startups to offer features they cannot access. But that is not a miracle cure.

“The problem with partnering with these big players is that all the transaction fees and data go to them. It’s just helping their businesses,” the brothers complain. They also fear that ruthless firms could steal their ideas.

A 2021 study by the Cambridge Centre for Alternative Finance (CCAF) found that 63% of fintech firms in sub-Saharan Africa said they urgently needed faster authorisation and/or licensing processes for new activities and over half said they needed streamlined product and service approval.

“I do think it’s one our biggest challenges,” says Janade Du Plessis, fund manager of Launch Africa Ventures and Five35 Ventures, who concluded two deals at GITEX.

Limited technical skills, lack of clear mandates, and limited resources are the key obstacles to the introduction of effective regulation, according to the CCAF survey.

But Du Plessis believes that startup acts – defined by the Investment Climate Reform Facility as “legal instruments aimed at fostering the creation and development of startups” – offer a positive way forward (see box). “They go from creating various tax incentives for entrepreneurs to facilitating the access to data via data pools,” he says.

However, they still fail to solve the licencing problem, says Du Plessis. “Usually, those acts sit in departments of economics or growth within governments, while licences are all issued by central banks, which work independently.”

Startup acts offer a way forward

Of the continent’s four tech giants – Nigeria, Kenya, South Africa, and Egypt – Nigeria passed its startup act on 19 October, Kenya and South Africa have legislation in the pipeline and Egypt is in an early development phase. Mali, Tunisia and Senegal have also passed acts.

Nigerian regulators were inspired by a trip in September 2021 to Tunisia , where the tech scene grew considerably after the passing of the country’s act. In four years, 700 Tunisian companies have benefited from grants, funding, and other incentives permitted by the law.

Olatubosun Alake, a member of the Lagos State Science Research and Innovation Council, says that Nigerian states are also making progress. “The bill is taken at a federal level, but in Lagos, we are localising the bill and making sure it helps startups in our state. It should help them in terms of registrations, labelling, access to capital and finance, access to loans and permits, and make sure they have the right designations.”

Towards a thriving tech scene

To get out of the gridlock, some fintechs are applying to foreign central banks to obtain their licences.

Knabu, a crypto clearing bank founded by Gabrielle Patrick, tried to operate with the permission of African central banks, but has had more luck with the UK’s Bank of England. Du Plessis says that it “gave them a sandbox of data, and if they meet the extremely high KPI [key performance indicator], they would be given a licence to do international money transfers”.

That approach has precedence in Africa. In 2007, the Central Bank of Kenya, together with Kenya’s Communication Authority, issued a “letter of no objection” to the mobile network operator Safaricom to develop the M-Pesa mobile money service. Fifteen years later, M-Pesa has cemented its position as Africa’s largest fintech platform with over 50m monthly active customers.

Despite a clear excitement for the thriving African tech scene, regulators, central banks, and startup founders are in search of clearer channels of communication.

“These ecosystems take time to emerge,” says Du Plessis. “I have a view that by 2050, considering that Africa gets younger as the years pass, all regulatory processes will be in place.”

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