According to McKinsey & Co’s Fintech in Africa: The end of the beginning report, between 2020 and 2021 the number of tech start-ups in Africa tripled to around 5 200 companies. Just under half of these are fintechs, with an estimated revenue of between $4 billion and $6 billion in 2020.
Looking into the future, McKinsey projects a bumper harvest for investors exploring the fintech market in Africa. They foresee that Ghana and francophone Africa will experience the fastest growth at 15% and 13% per annum respectively, with other jurisdictions like Nigeria, Egypt, Kenya, Morocco, Senegal, South Africa, Tanzania and Uganda also experiencing growth.
More developed markets, like Nigeria and South Africa, are likely to see development in B2B liquidity and regulatory technology, such as anti-money-laundering and know-your-customer compliance. Other markets are expected to experience growth in areas such as banking-as-a-service, buy-now-pay-later services in retail and medium-sized enterprise lending, underwriting, servicing, claims and assessments in insurance.
Dr Ademola Bamgbose, a senior associate in the Litigation and Arbitration Practice at Hogan Lovells, London, says many factors contribute to the growth of fintech companies in Africa. “These include a young and fast growing population, the fact that cash remains a major medium of payment for transactions in Africa, increasing mobile penetration, a largely unbanked market, and the increasingly favourable regulatory environment in Africa.”
According to the McKinsey report, increasingly supportive regulatory frameworks, together with an influx of funding in Africa, suggest the beginning of a period of exponential growth in the industry.
“In Ghana for example, since February 2023, the Bank of Ghana has opened a regulatory sandbox,” shared Naa Amorkor Amarteifio, an associate partner in the Dispute Resolution Practice at AB & David, Ghana. “This enables its first cohort of fintech start-ups and innovators to test their newly developed financial technology with less regulation and supervision until such entities are sure of their innovations and the regulator has formulated appropriate regulatory frameworks for their operations. This initiative will support new business models not currently under any regulatory regime, new and immature digital financial service technology, and innovative and disruptive digital financial service products, with the potential of solving present financial inclusion challenges.”
As with any other region, investing in fintech in Africa is not without challenges. Bamgbose and Amarteifio say these include infrastructure challenges such as the shortage of stable and reliable mobile and internet connections, lack of a constant electricity supply, and limited payment rails.
“Other challenges are the lack of a centralised and reliable identity database, making it difficult to verify, track and connect previous records in relation to consumers, and the lack of financial literacy and capability in certain parts of the continent,” said Bamgbose. “There’s also the problem of a relatively uncertain regulatory environment across the continent. McKinsey rightly notes that fintechs in Africa have to contend with a fragmented financial regulatory framework, and different countries are evolving at different paces. Fintechs may find that they cannot adapt fast enough in some markets to keep up with regulations which, along with the degree of enforcement, can change quickly.”
Looking specifically at Ghana as a case study, Amarteifio pointed out that the Payment Systems and Services Act, 2019 (Act 987) is the main law regulating fintech in Ghana, and the principal regulator responsible for the fintech sector is the Bank of Ghana. “Without procuring the relevant permits from the Bank of Ghana and complying with all regulatory requirements, it is unlawful for any fintech company to engage in business in Ghana,” she said. “Other regulators which play complementary roles include the Data Protection Commission, Securities and Exchange Commission and Cybersecurity Authority.”
“Key areas of the regulatory framework cover licensing, data protection requirements, anti-money laundering policy, and cyber security requirements,” Bamgbose said. “It’s clear that the fintech industry in Africa offers huge returns for investors, however, like any other jurisdiction, it is not without its risks and challenges, especially as the regulatory space rapidly evolves to meet the changing face of the industry. Investors require careful and proactive project management, market intelligence and experience of the market in order to navigate the regulatory terrains, mitigate any risk and maximise return on investment in the continent.”
Dr Bamgbose | Hogan Lovells, London Naa Amorkor Amarteifio | AB & David, Ghana
Senior Associate in the Litigation and Arbitration Practice Associate Partner in the Dispute Resolution Practice
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