Regulators and fintech innovators in Africa need to talk more

The African continent looks set to realize around $230 billion in financial sector revenue by 2025, despite various political and economic challenges, according to a McKinsey report on Africa’s evolving fintech industry.

The report further reveals the only factor that could prevent the continent from realizing this goal is its ability to reach the continent’s 1.4 billion-strong population, providing them with the services they so desperately need to establish and run businesses at home and across the region.

One barrier to achieving this growth is fragmented regulation. The fintech regulatory landscape in Africa is a fascinating paradox. While it grapples with fragmentation and occasionally lags the rapid pace of innovation, it uniquely positions itself ahead of many global regions while still ambitiously striving for international standards.

Cost of regulatory compliance in Africa

Regulatory compliance comes at a cost to fintechs and businesses in Africa. The financial burden is emphasized by a 2021 World Bank report, which states that this cost for businesses in Africa can be as high as 5-10% of revenue. Additionally, the World Bank’s Doing Business 2020 report highlights that sub-Saharan Africa scores the lowest globally due to complex regulatory environments. These factors not only discourage foreign direct investment (FDI) but also stifle economic growth.

The upshot is that fintech companies need to employ ingenious and, of course, legal ways of navigating the complex requirements and licensing procedures in each of the 54 African countries. This process inevitably drives up the operation costs for the fintech companies and creates barriers for expansion especially for smaller startups with limited funds.

This is not unique to Africa and we have seen how this dynamic has played out the world over. According to the Financial Times, in 2023 crypto and fintech companies were fined more for lax controls than the entire traditional financial system. These companies paid $5.8 billion in fines last year for shortcomings in customer checks and anti-money laundering controls, as well as for failing to uphold sanctions and other financial crime issues.

Certainly there is no disputing the need for stringent regulation, but more can be done in implementing them effectively. Across Africa, there is a need for simple, harmonized regulation which achieves two critical tasks: industry oversight and the encouragement of reasonable risk-taking and innovation.

Collaborate for growth and greatness

When regulation is standardized across African economies, the sky’s the limit! This is precisely what the fintech community, driving economies and livelihoods in Africa, is advocating for. There have been notable successes when regulators and fintech communities and associations collaborate.

FintechNGR, the body of fintech players in Nigeria, partnered with the National Insurance Commission (NAICOM) to develop a Fintech Adoption Roadmap Policy for the Insurance Sector. The body also achieved this in 2019 when it collaborated with Securities and Exchange Commission (SEC), Nigeria’s stock market regulator, to develop The Fintech Adoption Roadmap Policy in the Capital Market.

Similarly there has been some progress when regulators collaborate; the Pan-African Payment and Settlement System (PAPSS) is making strides in facilitating seamless cross-border transactions by reducing the need for foreign currencies in intra-African trade, thereby fostering greater financial integration across the continent.

Africa’s fintech market is among the most promising sectors, in the most exciting geography in the world. Clearly, with all its innovation, Africa deserves a market that balances innovation with protection, clear laws that define boundaries, and adaptable regulatory frameworks, a market where innovation thrives within a framework that ensures market stability, and financial inclusion.

Olugbenga Agboola is founder and CEO of Flutterwave.

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