Economies in Sub-Saharan Africa (SSA) are developing digital financial services. In the larger markets, regulators have taken policy and regulatory measures to support financial institutions' digital transformation. While emphasising the importance of robust cybersecurity and consumer protection measures, the global pandemic has generated a strong appreciation for the digital economy. With it comes the expectation that the digital economy will bring growth. Of the emerging and new technological developments, there are a few we consider most likely to bring growth to SSA capital markets.
Central Bank Digital Currencies (CBDCs) have grabbed the attention of financial authorities worldwide, with governments weighing its feasibility and inherent risks against the potential economic value. Five of the 40 countries that the International Monetary Foundation has approved to issue digital currencies are in Africa. Notably, the South African Reserve Bank (SARB) began CBDC experimentation in 2016, and the Bank of Ghana aims to publish the findings of its work on CBDCs in 2021. African nations' progress in CBDC research and implementation lays the groundwork for successful adoption in the future. Moreover, it signals SSA’s ability to participate meaningfully in the emerging universal digital payments network.
In 2020, blockchain data analytics firm Chainanalytics published their ‘Global Cryptocurrency Adoption Index’ citing Kenya, South Africa, and Nigeria among the top 10 crypto adopting nations in the world.
These countries are also the region's leading economies. Cryptocurrency is attractive to African consumers as a mechanism for managing currency devaluation and avoiding high transaction costs.
The regulatory status of cryptocurrency is uncertain and varies from country to country in the region1. While this forces institutional portfolios to stay on the side-lines of cryptocurrency investment, it doesn’t stop local corporates from making proprietary investments in cryptocurrency. Cryptocurrency is an essential building block of the digital economy; its growing adoption and use by consumers and corporates in SSA evidences the direction of change. Also, it provides the impetus for financial service providers to add crypto capabilities to their technology infrastructure and offer crypto products and services.
1 Financial Sector Conduct Authority Notice http://www.fsca.co.za/Regulatory Frameworks/Documents for Consultation/Notice of publication - Draft Declaration of crypto assets as a financial product.zip;
Global Blockchain Business Council – 1 Global Standards Mapping Initiatives 2020 https://gbbcouncil.org/wp-content/uploads/2020/10/GSMI-Legal-Regulatory-Report.pdf
IMF CBDC Blog post. Retrieved from: https://blogs.imf.org/2021/01/14/legally-speaking-is-digital-money-really-money/
The Nigerian Securities and Exchange Commission has stated that they will recognise digital assets as securities, pledging to formulate regulations and policies that will help encourage innovation and adoption in the market.
The recognition extends to Digital Asset Token Offerings, Security Token ICOs and "other blockchain-based offers of digital assets". This position is congruent with the Financial Sector Conduct Authority's definition. The progressive development of regulation will promote growth in illiquid real-world assets' tokenisation and allow fractional ownership. Tokenisation holds specific promise in SSA, where the strength of local investors is still growing.
Accelerators, fintech venture capital firms and business incubators, have spawned many start-ups with innovative, robust, financial products and services. In step with this development, the concept of open banking has challenged large financial institutions' monopoly over customer financial data and become mainstream. Open banking in SSA is nascent; the environment continues to evolve rapidly. In December 2020, SARB published a consultation paper on an open-banking policy for the national payment system. In Nigeria the Open Technology Foundation known as Open Banking Nigeria, was formed in 2017 to coordinate open API standards for the financial services industry. Open Banking Nigeria actively petitions the Central Bank of Nigeria to extend its role in regulating open banking in Nigeria2. The Central Bank of Kenya (CBK) published its Kenya National Payments System Vision and Strategy 2021- 2025; CBK asserted defining standards for API development and regulating secure data portability in the market3. Central Banks in Ghana, Mauritius, Rwanda and Tanzania have adopted similar approaches. Xero and one of South Africa's leading banks, Nedbank, are launching the country's first fully digital direct API bank feed. The solution gives small businesses access to daily financial data for the general purpose of cash flow management. Financial institutions thinly service a large portion of the SSA population; in these circumstances, open banking promotes financial inclusion by making customer financial data accessible and affordable for fintech companies.
2Open Banking Nigeria, Annual Report to The Central Bank of Nigeria on Open Banking Progress
3CENTRAL BANK OF KENYA National Payments System Vision and Strategy 2021- 2025¬ https://www.centralbank.go.ke/wp-content/uploads/2020/12/CBK-NPS-Vision-and-Strategy.pdf
Companies are increasingly using data and analytics techniques to manage their performance, for fraud prevention, to enhance the customer experience and to secure growth in today's dynamic market. AI has become pervasive in financial services. Applications include investment tools like robo-advisory and discrete internal implementations in claims processing and robotic process automation. In this way, post-trade providers are developing the operational tools to compete and deliver service in the emerging digital economy.
IMF CBDC Blog post Retrieved from: https://blogs.imf.org/2021/01/14/legally-speaking-is-digital-money-really-money/
SEC Digital Assets Recognised as Securities Retrieved from: The Securities and Exchange Commission, Nigeria
Xero API Xero and Nedbank are set to launch South Africa’s first fully digital direct API bank feed | Xero Blog
Africa's potential is considerable. Its population has a mobile penetration rate that is higher than its internet penetration rate; banks and other financial institutions can leverage mobile apps, digital technology and fintech partnerships to reach out to more consumers and create an inclusive economy. CBDCs are the link to the global digital economy. The largest economies in Africa, are participating meaningfully in the digital evolution of the post-trade industry by enacting legislation that foster technology adoption and innovation. The steadily growing global interest in such financial technologies, will pave the way for the African continent to advance into the new age.
Open Banking in Africa, Hogan Lovells Retrieved from: https://www.hoganlovells.com/en/publications/open-banking-in-africa
Open Banking Around the World (South African Jurisdiction) Retrieved from: https://knowledgeproducts.nortonrosefulbright.com/nrf/open-banking-global-comparative-analysis
RBI 2018 Ban on Crypto Dealings Retrieved from: https://www.bloombergquint.com/law-and-policy/supreme-court-sets-aside-rbi-circular-that-barred-banks-from-being-involved-in-cryptocurrency-trading
India’s Recent Tight Crypto Regulation Retrieved from: https://economictimes.indiatimes.com/tech/tech-bytes/crypto-community-panics-on-news-of-pvt-currencys-exit/articleshow/80620693.cms
