Fintech brings African opportunities but requires cautious approach
By Ian Jansen van Rensburg, Senior Systems Engineer at VMware Sub Sharan Africa
Foreign direct investment (FDI) into Africa has become critical to the economic growth of the continent. Research shows that it is especially the telecoms, media, and technology (TMT) sector that has been gaining in prominence. This reflects not only the increasing digitalisation of the continent, but also how important fintech has become in unlocking economic opportunities.
But unlike other world markets where fintech mainly disrupts the status quo, in Africa it is more focused on addressing the critical needs of the masses. This is done through innovations in mobile money, online payment processing, lending and investment solutions, micro-payments, and even insurance and banking. Such is the significance of this, that in Sub-Saharan Africa, 16% of the market has embraced mobile banking solutions. So, instead of viewing fintech as an either/or scenario, companies should see it as the means to deliver additional value where traditional offerings have been unable to deliver.
A report shows that that FDI largely follows economic growth, policy reform, economic diversification, and GDP size. It cites Rwanda as an example of how economic reform and business-friendly policies can attract investor interest in a small economy while using South Africa to illustrate a high level of FDI that can be attributed to its diverse and relatively large economy.
One of the most significant advantages Africa provides is its rapidly growing youth population. It is expected to double to more than 830 million by 2050. If managed effectively, this could translate to markets that can support increased productivity and more inclusive economic growth. With 90% of Africa’s youth living in low and lower-middle income countries, the lack of formal jobs remains a concern. This is where fintech has a critical role to play in empowering the digitally-aware market segment with the tools needed to drive entrepreneurship.
And yet, an increasingly complex regulatory environment could stifle many of these opportunities. For example, new regulatory requirements by the Central Bank of Nigeria could make it difficult for some fintech companies to operate. One of the concerns is that fintech startups would require to have minimum shareholder funds ranging from $275,000 to $14 million before obtaining licences for their operations.
Another concern is that the speed and ease of access to credit provided through mobile apps are resulting in massive cases of indebtedness. In Kenya, for example, excessive repayment terms have already seen almost three million Kenyans being negatively credit-listed. So, while mobile lending has made it easier for Africans to access much-needed funds, the credit cycle becomes difficult to break especially as more fintechs emerge providing lending similar services thereby perpetuating bad debt.
Building from this is the need to drive compliance around the protection of personal data. Given how rapidly fintech solutions are spreading across the continent, more must be done to ensure these start-ups are compliant and taking the required precautions to safeguard sensitive information. Already, 17 countries on the continent have enacted comprehensive personal data legislation. Furthermore, the African Union (AU) adopted the AU Convention on Cybersecurity and Data Protection to provide a personal data protection framework which countries can transpose into their national legislation.
Therefore, to fully embrace the benefits of fintech and FDI, countries on the continent must ensure their regulatory framework adapts to the requirements of the digital age. But even though much work is still to be done, the potential is there to position Africa strongly for future growth.