African economies are at a pivotal juncture. The narrative of Fintech in Africa has been mainly spun around the story of the unbanked, poverty alleviation, and economic development. But its success lies in balancing emergent benefits and risks, as with every tide of change.
While traditional banks still have a lot of ground to cover on how to solve the problem of financial inclusion, Africa is increasingly relying on digital and mobile services.
At the latest Monetary Policy Committee (MPC) retreat held in Lagos, Godwin Emefiele, the governor of the Central Bank of Nigeria emphasized the need to rethink financial system regulation, supervision and monetary policy implementation in the country.
He added that while post-COVID growth recovery in Nigeria can be adjudged to be moderate and stable, “we have seen a major change in the key sectoral drivers of that stable growth phenomenon, including the services sector, modernized agriculture, and manufacturing, suggesting that technology and innovation are playing a major role in output growth and economic development in Nigeria”.
This is important because it reiterates the regulator’s position on the importance of the regulation of the fintech sector, especially emerging frontiers like digital assets and cryptocurrencies.
In 2017, the CBN had earlier warned that cryptocurrencies were not legal tender and that investors were unprotected. In a circular dated February 5, 2021 (the “CBN letter”), the CBN had directed all regulated operators to desist from transacting in and with entities dealing in cryptocurrency.
In October of the same year, The Central Bank then went on to launch a digital currency with officials of the apex bank saying it would allow for financial inclusion and fiscal benefits to boost the economy.
The eNaira was therefore launched as part of the CBN’s cashless policy to improve cross-border trade, expand access to financial services, increase remittances from a large diaspora base and ultimately boost the country’s economy.
With emerging new asset classes such as Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi) built on Blockchain technology, it is clear that digital currencies are the next evolution of the financial technology ecosystem.
How can this impact the evolution of fintech in Nigeria? What are the benefits of building a structured and regulated ecosystem that’s open for innovation and collaboration between traditional institutions and new operators?
Regulatory Frameworks Will Ensure Certainty and Consistency In Policy Development
The Nigerian payment system has evolved significantly over the last decade, leapfrogging many of its counterparts in emerging, frontier and developing economies propelled by some key reforms by the different regulatory bodies.
The regulatory developments for the Nigerian fintech market have contributed to the ecosystem’s growth as they have demonstrated a commitment to creating an enabling environment that will support innovation in financial services, without compromising stability within the overall financial system.
Nigeria is also spearheading the adoption of CBDCs in Africa with the launch of the eNaira while the Securities and Exchange Commission also issued new digital asset regulations in May 2022.
In April, The Nigerian Communications Commission held a workshop in collaboration with the Bureau of Public Service Reforms (BPSR) and stakeholders, where it was concluded that Blockchain could be a bedrock of economic innovation and growth through effective implementation of policies and regulations.
Although we can still expect some policy harmonization as to how regulated entities will engage, it is clear that Nigeria is taking advantage of digital economy frameworks and regulatory initiatives that enables emerging technologies in the country. This is important because a regulatory environment clear about its goals will ensure that policymakers are always in alignment.
Driving Inclusion By Encouraging Innovation
The advent of blockchain technology has enabled digital records to be stored in a form that is even more permanent than physical records.
Blockchain technology stores numerous copies of the same records across multiple computer systems in a manner that is completely tamper-proof. This makes records on the blockchain less likely to be destroyed than physical ones.
This has created a situation where digital records are increasingly being more trusted and reliable than physical equivalents.
As the evolution of the financial system continues, the topic of decentralization will go hand in hand with it. It is inevitable because the conversation about how to ensure built-in transparency & accountability in the relationship between companies and citizens isn’t stopping anytime soon. Blockchain technologies are the future and will play a role in strengthening both the public and private sectors.
The application of blockchain technology in the Nigerian financial services industry is gradually gaining traction as industry players are now utilizing it in their service delivery.
Notably, in 2021, Appzone, a Nigerian fintech software company, announced the launch of Zone, Africa’s first blockchain platform for payment processing that facilitates local and intra-African payments in fiat and digital currencies (we understand that a number of commercial banks in Nigeria are currently utilizing the company’s Zone product in processing the transactions of their customers).
HouseAfrica is another example of the revolutionary way through which blockchain technology is being applied to solve important challenges.
The company aims to develop intelligent and affordable homes while giving its investors maximum security of funds through the blockchain. In 2020, the company signed a partnership agreement with Nigeria Mortgage Refinance Company (NMRC) to deploy a digital/land property title authentication and verification system.
The system will make it possible for individuals and organizations – including financial institutions – to authenticate, validate or confirm the value of any property or land across Nigeria and ultimately improve the amount of mortgage financing transactions in Nigeria.
While blockchain technology is still generally unregulated in the Nigerian financial services industry, the adoption of blockchain technology via crypto-assets is now being regulated in certain respects. Pursuant to the 2020 SEC Statement on Crypto-Assets, crypto-assets are, by default, classified as securities unless proven otherwise. Consequently, the SEC also regulates crypto-token or crypto-coin investments when it is qualified as securities transactions. Well-defined regulatory policies like this will be key to further driving expansion and global adoption of digital assets while encouraging innovation in Africa.
Cross-Continental Economic Impact
Despite the rise of operators and stakeholders pushing for inclusive finance, the digital payment ecosystem across the continent – and indeed within most countries and regions – “is highly fragmented, without an overarching regulatory framework that can tie all the payment solutions together”.
Cross-border payments are often both costly and slow. This is due to a combination of conflicted regulatory coordination in many regions, and private sector actors in the instant payments landscape constantly pursuing short-term profits and market share over longer-term regional growth and inclusion agendas.
Coordination of regulation will mean greater interoperability of instant payments systems and would help promote peer-to-peer (P2P) interactions, small-scale trade, and cross-border e-commerce between African countries.
While no one can predict the future of fintech in Africa, what we do know is it requires a nontraditional regulatory approach—one as invested in the importance of experimentation and entrepreneurship as the practices it oversees.