OPINION: Why simple, unified regulation for fintech is important

The rapid growth of financial technology (fintech) in Tanzania is having a deep and profound impact on how Tanzanians go about their lives.

Fintech solutions such as Airtel Money, AkiliPay, BitPesa, Ezy-Pesa, G-Mobile, Get-Pesa, Halo-Pesa, HaloYako, M-Pesa, M-Pawa, Mama Money, Pesapal, Tigo-Pesa, Safari Wallet, Selcom, TerraPay and many others have arrived on the economic horizon of Tanzania to transform a cash-heavy payments industry by offering simple, fast, convenient, transparent and intuitive interactions with financial services.

Fintech is progressing more quickly due to the fast development of and access to mobile technologies, the advent of the internet and its penetration into households, and the mass-market penetration of smartphones which has enabled internet access for millions of Tanzanians.

Can banks ignore the growth of fintech?

Data from the 2017 Finscope survey indicates that 16.7 per cent of the population in Tanzania has a bank account or uses bank services, which is equivalent to 9.1 million people out of 54.2 million. However, 60 per cent of the population has a mobile phone and uses mobile money services, which equals 32.5 million people.

Central to opportunities for investors in Tanzania’s fintech sector is the ubiquity of mobile phones and other mobile devices in a country where the majority of people do not have a bank account.

Indeed, Disrupt Africa recently released a report – ‘Finnovating for Africa: Exploring the African Fintech Startup Ecosystem’ – that forecasts the amount of private investments coming into the African fintech space to rise exponentially, after reaching $92 million as at end of May 2017.

Institutions such as the Financial Sector Deepening Trust (FSDT), the Human Development Innovation Fund (HDIF) and the Gates Foundation are also supporting fintech startups in Tanzania by offering invaluable hands-on advice and money to develop various alternatives to traditional banking.

Yet, some bankers see fintech solutions as posing a big competitive threat because these solutions have targeted banks’ profitable retail payment business. For example, M-Pawa is helping Tanzanians to save and borrow money while earning them interest on the money saved. Other fintech solutions are helping Tanzanians streamline payments and integrate billings.

Thus, banks cannot ignore the fintech revolution if they are to stay relevant in the near future in financial services.

A brighter future lies in collaboration

In its report, “Unleashing the Potential of Fintech in Banking,” EY highlights that collaborating instead of competing with fintech startups could bring mutual benefits of symbiosis.

Banks can increase their return on equity (ROE) by working together with fintech companies as this has the joint benefit of cutting down costs and accelerating innovation without being hampered by legacy infrastructure systems and entrenched culture.

Moreover, by collaborating with banks, fintech companies can gain access to broader payment markets, regulatory experiences in the payments domain, and funds for future growth.

Lessons from China’s fintech scene

When it comes to fintech, Tanzania and the rest of the world can learn from the successful experience of China. Four of the world’s top 10 fintech companies are Chinese: Alibaba Group’s spin-off Ant Financial; Qudian; Lufax and ZhongAn.

The key success factors for China’s fintech sector are large population of over 1 billion people, low access to banking services, high internet and mobile penetration, and relaxed regulations. The above factors are in fact quite akin to the prevailing conditions in Tanzania, where, as highlighted hereinabove, only 16.7 per cent of people in a population of 54.2 million have a bank account or use bank services.

In addition, Tanzania’s penetration of mobile phones is relatively high with 60 per cent having a mobile phone and using mobile financial services.

These, combined with the strong macroeconomic performance of Tanzania, offer huge opportunities for fintech. Little wonder, then, that numerous local and foreign investors are setting up fintech companies in Tanzania.

Legal and regulatory considerations

Tanzania has the most conducive conditions for increasing financial inclusion, according to a study by the Economist’s Intelligence Unit. The Bank of Tanzania (BoT) and the central government are very proactive in supporting and nurturing the growth of the fintech sector in Tanzania.

The 7,400km of optic fibre cable constructed by the central government under the National ICT Broadband Backbone serves as a telecommunications backbone for both voice and data communications, which is essential for the fintech sector.

Also, the BoT has issued its Second National Inclusion Framework (NFIF 2018–2022) targeting to raise formal financial inclusion to 75 per cent from the current 65 per cent in 2017.

In this connection, the commitment of the BoT and the central government to financial inclusion and fintech is firm.

There is, however, no single unified regulation governing the fintech sector in Tanzania. Issues such as data privacy, KYC, consumer protection, e-contracts, etc are pertinent to fintech but they are haphazardly regulated – and this could lead to regulatory conflict or overlap thereby creating uncertain and bringing serious risks for fintech companies.

The government needs to draft a simple, practical and unified fintech policy and regulation as soon as possible to provide clear direction on how the Tanzanian fintech sector should be shaped.

All fintech activities essentially rest on the enforceability of e-contracts; fortunately, the Written Laws (Miscellaneous Amendment) Act, 2007 and the Electronic Transactions Act, 2015 provide for the validity and enforceability of e-contracts. The courts are called to recognize and enforce e-contracts provided they comply with Tanzania’s laws and principles of contract.

Tanzania’s fintech sector is definitely promising, boosted by the country’s demographic growth, strong macroeconomic performance and the government’s firm commitment to financial inclusion.

Mr Kibuuka is the managing partner of Isidora & Company Advocates.