This is an excerpt from the
Future of Embedded Finance in Africa 2025 report.
Embedded finance has the potential to provide more Africans with financing which meets their specific needs, in a more direct fashion. However, it is imperative that this is done in a way which is safe and beneficial to all consumers.
At the core of all financing options should be the financial health of the consumer. This is why regulating embedded financing is important for consumer protection. However, a balance should be struck between protecting consumers and encouraging innovation.
To explore this, we looked at some areas of regulation which are impacting embedded finance in Africa, and given this is limited, how regulators might approach regulation to encourage innovation.
Existing embedded finance regulations in Africa
There are not many regulations which directly targeted at embedded finance, but there are some surrounding the technology and some common financing options, such as buy now pay later (BNPL).
Rajesh Savji Parmar, founder and CEO, Indelible Inc. said: “In Kenya for example, the KCB - Kenya Central Bank has recently clamped down on micro finance apps due to many unlicensed players and predatory practises of harassing those that have taken loans
but unable to pay back on time.”
Relating to this, earlier this year the Kenyan government instructed the KCB to tighten laws around BNPL. Kuria Kimani, MP, Kenyan National Assembly said: “We strongly feel that there is a gap or a legal lacuna preventing a complete oversight of the BNPL
firms by the CBK. The products they offer are not licensed as DCPs [digital credit providers].”
Yet, Parmar emphasised that many of these regulations are “more about keeping the bad players out and compliance should be the cornerstone of healthy innovation.”
There has been increasing demand for BNPL throughout Africa, and is expected to continue to grow throughout the MENA region as seen in the diagram below.
It is likely that as the African BNPL market continues to mature, the regulatory framework is likely to evolve and have a knock-on effect on embedded finance.
From a different perspective, Hannes Wessels, country head of Binance South Africa, commented: “While existing regulations in Africa, such as stringent KYC/AML requirements and limited frameworks for fintech, can pose challenges for the growth of embedded
finance, they also present an opportunity for innovation and collaboration in the sector.”
Despite these limitations, Parmar insisted that “the continent is open to innovation”. However, he made clear that “each central bank is different”.
How regulators can support embedded finance
There are several suggestions which commentators made for how African regulators can create legislation which is supportive of innovation, which still being cautious to protect consumers.
Parmar commented that “Central Banks are fairly innovative and open to new solutions in fintech.”
He stated that many central banks are using sandboxes. An example of this can be seen in Zimbabwe, where the Reserve Bank of Zimbabwe set up a fintech regulatory sandbox for fintechs and other innovative startups to conduct experiments in a controlled environment.
Wessels stated that “Binance believes that working with regulators is crucial, as a well-regulated market ensures greater protections for users and fosters innovation.”
He argued that for regulators to encourage the benefits of embedded finance while maintaining the safety of users, they should “develop adaptive, technology-neutral guidelines”.
Wessels further added: “Binance’s advanced compliance protocols and transparent blockchain technology offer a model for balancing innovation with robust consumer protection, and we are committed to collaborating with regulators to achieve these goals.”
Yet, Parmar argued that “the regulations are less the challenge than the incumbents.” He continued: “If you are not partnering a telco like MTN, Vodafone, Airtel-Tigo, Econet, Safaricom then you are struggling to access market.”
From his perspective the challenges for start-ups in Africa are less to do with regulatory constraints and more to do with the time it takes to bring products to market and a lack of capital: “Lead times also for startups are challenging, minimum capital
requirements can be problem as well as many fintech startups may not be well capitalised.”
Parmar stated that in addition to the benefits of sandboxes, public private partnerships and competitions should be used to encourage innovation in embedded finance. Yet, he said: “What Africa needs is more investment. Areas like equity based crowdfunding
to drive overseas investment into fintech innovation for Africa is one way! ”
The future of embedded finance regulation in Africa
As thing stand, there is not a strong direction of how embedded finance will be legislated in Africa, this will be something which will remain to be seen.
However, in forming future legislation, African regulators should be looking to the aims of those who are within the industry, taking into consideration the need for growth as well as protecting consumers.
While doing so, they should also look to some of those suggestions which can be used to encourage further innovation as well as greater investment in African fintech.