In any economy, a strong regulatory framework is essential for financial protection, inclusion, and growth. But across a continent as diverse and complex as Africa, where many individuals remain financially underserved and underbanked, what role does financial regulation play - especially when it comes to digital credit lending? And what can be done to improve it?
Financial regulation in Africa today
As it stands, there is no pan-African regulatory body in place - instead, each country is subject to its own set of financial regulations, most of which are governed by each nation’s central bank. And, across the continent, each jurisdiction varies greatly - not just in terms of legislation, but also in terms of ability, and openness willingness, to adapt to the shifting global financial landscape.
In recent decades there has been a real drive to improve the efficacy and reach of these frameworks across the continent, due in part to the global growth of fintech. However, this also means that there is a degree of disconnect, particularly when it comes to lending.
Although the majority of central banks in Africa are willing to approve lending products, each has its own individual concerns and approach, making the process complicated and difficult to navigate Whereas some markets, such as Zambia and Ghana, are more open to testing new products and models, others are less open to innovation. Equally, some markets are more sensitive to interest rates, whereas others primarily focus on consumer and data protection.
It ultimately comes down to what each central bank believes is best for its consumers. For some, it is developing a framework that supports digital innovation, to leverage the power of fintech and accelerate progress. For others, it is keeping financial control centralised. This essentially means that across the continent, whilst some economies are rapidly evolving to accommodate newer forms of financial technology and the new opportunities that it presents, others are more focused on retaining the regulatory framework that they already have.
The issues for credit lenders
In recent years, a lack of inter-market knowledge sharing and central credit market monitoring has contributed towards several policy mistakes across the continent, whilst population growth continues to outstrip credit extension. And the current state of financial regulation across Africa presents several challenges for lenders, as well as their partners and end consumers.
Firstly is the matter of keeping lending products cost-effective. The majority of central banks in Africa expect digital lenders to comply with the same regulations as banks. However, this results in huge compliance costs, which makes it more difficult for lenders to competitively price their products. This presents a real challenge, given that access to responsible lending is vital for financial inclusion and economic growth.
In addition, the majority of regulators have interest caps which affect how much they can charge for lending products. The wider the product reach, the higher the charge, due to higher risk levels. These caps are hugely detrimental to profitability, and therefore the potential for lending products which set out to drive financial inclusion, such as Ezra’s.
Ezra ensures full regulatory compliance by partnering with regional banks, to facilitate the provision of responsible, reliable, and rapid loans, tailored to the needs of its partners. Ezra’s teams of product experts benefit from years of industry experience across different markets, and have developed an acute awareness of what regulators expect in terms of product, pricing, and risk strategy throughout Africa. They are therefore well-equipped to develop products which meet the requirements and expectations of regulators across the continent. However, this does not leave Ezra without an issue at hand. The lack of thorough, comprehensive regulation makes it difficult to determine precisely which lending products will satisfy each central bank.
Even with the benefits of long-standing banking partnerships and industry expertise, the barriers currently presented by regulators are proving counterproductive to the overall drive forwards financial inclusion in Africa. As it stands, sub-Saharan Africa is already falling behind other markets when it comes to credit to GDP ratio and, without meaningful change, this gap is likely to widen.
What can be done to improve the current situation?
There are three key factors which, if implemented, would drive cohesion and growth in financial regulation across Africa, and help more end users to access responsible lending products.
- Reframe the ‘loan’
Firstly, central banks need to rethink their approach to digital lending, and reframe how loan products are considered. Different fintechs and lendtechs serve different market segments and this needs to be accounted for, as these variables can greatly affect risk which, in turn, determines the prices that should be charged.
- More product regulation
Regulation should not be about rigidity - it should be about the responsible pursuit of opportunity.
Dinko Svetic, VP of Growth at Ezra, says: “Clearer and more innovative regulation would be beneficial to all parties - fintechs, banks, and central regulators. The flexibility to accept new business models, develop new products, and to experiment is key to driving financial inclusion”.
- Clearer channels of dialogue between fintechs and regulators
Communication is key, and more should be done to promote dialogue between regulators and fintechs. The promotion of these conversations can go a long way towards creating solutions which are optimised for each individual market, and best meet the needs of its consumers.
Appropriate and effective regulatory evolution, alongside greater communication and collaboration, can lay the foundations for better product innovation, economic growth, and more opportunities for end users. For fintech companies such as Ezra, the development of regulatory frameworks that are both robust yet flexible will propel the advantages of access to essential, responsible, and transparent credit services in emerging markets throughout Africa.
To learn more about Ezra’s lending solutions and our range of products, contact us today.