How FSDMoç is addressing financial sector regulation challenges: The Regulatory Sandbox Story!

By: Kátia Agostinho, FSDMoç Analyst

Digital tools are making access to financial products and services possible around the world, and Mozambique should be able to learn from other countries that are more advanced in this journey and provide the same opportunities for the Mozambicans, while at the same time takes advantage from the great ideas being introduced by Mozambicans. This country is 2515km coast long and has a low population density with 30.1hab/km2[1] on a 799,380km2 area.

Providing financial services via the traditional “brick and mortar” branches is proven to be inefficient and exclusionist for the majority of the population – the low income. There is a perception that the “smaller” segments in income such as smalholder farmers and SMEs are not attractive enough comparing to the “largest” ones such as big companies and NGOs, but this market is getting smaller and smaller with many banks sharing the same customer base, economic opportunities empowering the unserved, at the same time startups awakening for digital solutions that will short the gap existing between financial services and low income people.

Where we started: getting the sector pulse

In the first semester of 2017 FSDMoç initiated a series of engagement with the financial sector stakeholders, mainly the software developers community and financial service providers to understand what is available in the market for digital finance services.  We also approached the regulators and the government in order to get their view about the development of the digital finance services and the role of the FinTech. From these interactions is was clear that FinTech was in the embryonal phase of development.

Our work started with a scoping research where we interviewed startups, developers, funders and the regulator. Followed by the launch of the FinTech challenge with the objective of identifying technology-derived solutions that were solving financial inclusion challenges.  The scoping research revealed that, despite the youngness of the Mozambican FinTech industry, much of the growth in FinTech is supported by development funding (World Bank, Embassy of Netherlands, DFID) national and international competitions (Seedstars, The Tony Elumelu Foundation, hackathons) and a commercial bank incubator initiative.

Findings on What the market is looking for

The ideas identified in the scoping research are mostly focused in four sectors: payments, informal savings and crowdfunding models (xitique), alternative lending and financial reporting. This trend can be perceived as an opportunity that the market is identifying because of the gap left by commercial banks offerings.

Across the population spectrum, there is demand for better, cheaper, varied and more accessible financial services. Businesses, especially micro and small enterprises who are largely excluded from traditional bank lending channels, are also looking to FinTech to provide better banking and credit facilities from institutions willing to lend to higher risk borrowers with less access to traditional collateral or identification documents.

Under the FinTech challenge, we received more than 20 proposals from 19 registered companies. The ideas were focused on payment systems, crowdfunding models (xitique), and alternative lending and SMEs simplified accounting tools, some similarities with the scoping research. Within those, a number of ideas that got stuck due to regulation constrains, mainly on the payments area.

Unfavorable regulatory system for innovation and inclusion

Until that day, a regular service provider was not allowed to offer any kind of financial services if is not a registered and licensed as a FSP. The Central Bank has taken a wait-and-see approach to regulate innovations bought by and to the market.

Along the way, particularly in recent years, we have witnessed a rapid evolution of financial technologies and the introduction of increasingly sophisticated financial services and products, a dynamic that has not always been accompanied by the adequacy of legal and regulatory requirements.

Source: Central Bank Governor Speech during regulatory sandbox inauguration, 17 May 2018.

It makes sense in such a young industry to let the market structure emerge before deciding the most effective way to regulate it. Balanced regulations are needed to enable FinTech firms to compete with incumbent service providers and provide them with a level playing field to safeguard the interests of investors and customers, and in influencing the future direction of FinTech, particularly in the context of financial inclusion.

The experience of the FinTech challenge provided evidence of the gap in the regulation level that limits the financial sector expansion per sí. This enabled us to engage with the central bank through advocacy and demonstrate the need to create this space through a process. We exposed the central bank to different FinTech events at international level and facilitated engagement with some of these FinTech firms.

After almost a year, in May 2018, the Mozambique sandbox – the 3rd regulatory sandbox in Africa after Zambia (Information and Communication Technology Authority) and Sierra Leona – was launched by the central bank Governor. It is currently incubating five startups aspiring FinTech of which two are developing local and cross border remittance services and the other three testing alternative payment systems, over a period of 6 months.

We always hoped that the FinTech challenge would invigorate the financial sector by raising awareness about what is out there. The process of supporting the central bank in creating the sandbox incubator increased both the central bank and our knowledge about the market in the most effective way.

Because FSDMoç believes in a dynamic financial sector offering quality services that enable resilience and economic empowerment. To reach this goal, The financial sector in Mozambique needs more initiatives like the FinTech challenge that can drive the creation of more opportunities for the startups and FinTech enabling a more dynamic market in the interest of the consumers

[1] Source: Preliminary results of the IV Census 2017

 

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Author
Denise Alves

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