"The Big Regulation Debate" - A presentation by Victor Malu: Head Future Financial Systems FSD Kenya

1. Financial Inclusion Summit
Regulation 2.0 – Gazing into the crystal ball
Victor Malu
Head Future Financial Systems

2. Outline
1.How regulation evolved over the years
2.How regulation shapes innovation
3.Key pillars for regulation 2.0

3. 1.How regulation
evolved over the years

4. Preamble
1. Kenya’s pro-innovation outlook
2. Supportive entrepreneurial base
3. Good skills, tech systems, mobile penetration
4. But… regulation is hard business…:
“It is pointless to suggest that the solution is to appoint regulators
with the foresight of Nostradamus, the detective skills of Sherlock
Holmes and the political insight of Machiavelli, as well as the
patience of Job and the hide of a rhinoceros”
John Kay, FT columnist, British economist and author

5. 2006 – 2012: Foundation setting
2006:
• Enactment of
microfinance
law; affirming
alternative
models of
intermediation
• Central Bank
takes on
regulation of
deposit-taking
MFIs
2007-10:
• After prior
testing, M-Pesa
is launched,
followed by
Celtel’s Sokotele
(now Airtel
Money)
• Agency banking
introduced,
permitting more
outreach
2011-12:
• National Payments
Systems Act
enacted
• Law for deposit-
taking SACCOs
enacted
• Competition
Authority created
• Positive credit
information
sharing introduced

6. 2013 – 2017: Scaling up
2013:
• Banks permitted
to carry out
incidental
business
(financial
supermarkets e.g.
bancasurrance)
• Gov’t announces
major plans to
digitize
government
payments.
2014-15:
• Government
Payments
Gateway (eCitizen)
launched for P2G
and B2G
• Payments
regulation enacted
• Work on
interoperability
begins
2016 to date:
• Payments
Association of
Kenya
• PesaLink, M-Akiba
launched
• Many other
products linked to
current
infrastructure

7. End result… a crowded field

8. 2. Regulation shaping
innovation:
M-Akiba & PesaLink

9. Example 1: M-Akiba – Gov’t driven

10. M-Akiba, continued
About:
• World’s first
sovereign bond on
mobile phone
• Minimum purchase
amount of KShs.3000
($30) viz KShs.50,000
($485) on traditional
gov’t securities
• Consecutive trades
from KShs.500 ($5)
• 10% fixed coupon
Legal/policy changes:
• Traded as a infra
bond to get tax
exempt status
• Procedural changes
to opening of
securities account
on mobile / KYC
• Major commitment
by Gov’t / National
Treasury
Performance to date:
• Purchasing the
bond is instant viz 2
days on traditional
securities
• Limited KShs150m
offer in 2wks;
purchases range
from KShs3000 to
KShs1m
• Full issue but has
not been as vibrant

11. Example 2: PesaLink – industry driven
About:
• Bank to bank switch,
offering 24/7, real
time and low cost
money transfer
• From KShs10 to
KShs999,999 via
mobile (USSD, App),
ATM, internet, branch
and agents
• Provides more choice
for both retail and
business clients
Legal/policy changes:
• National Payments
Act and Regulations
permitted this
innovation
• Institutional
mechanism and
structures authorised
by CBK delegation.
Performance to date:
• 30 banks have
received Central Bank
approval, live on
PesaLink
• 2.5m+ customers
registered
• KShs8bn moved in the
5 months to start of
August
• Plans to add more
functionality like P2B,
onboarding other
players

12. 3. Regulation 2.0
Innovation influence on
regulatory design

13. 1. Robust, best practice
law and policy
• Financial services
becoming more co-
mingled, need
comprehensive legal
approaches
• As a leader, Kenya has
to benchmark
internationally
• Law and policy driven
by evidence and
strong analytics
3. Encourage right
technology, solutions
• Innovation not the
same as automation
• Innovation not
equal to just
another App
• Regulation can
inhibit tech or
innovation if its
made expensive, or
law takes long to
change; tech is
dynamic
2. Support
institutional/design
• As an example, none
of the examples were
a solo job
• Collaboration is the
way of the future
• Products and
solutions need
different players
• Regulation can
catalyse collaboration,
design (e.g. sandbox)
Key pillars for Regulation 2.0

14. 1. The idea / concept
• UK Financial Conduct
Authority defines it as
“safe space” for
innovation to be
tested prior to
approval and go to
market
• Regulators closely
observing fintechs and
innovation
• Evidence behind it is
strong
3. Application to
Kenya
• Cross-sector
sandbox; fintechs
are not siloed
• Anchor on explicit
policy goals –
Access, efficiency,
stability
• Build on existing
‘test and learn’
approaches
2. Benefits/evidence
• 2005 FSA
paper:*Reduced time
to market - normal
regulation can extend
time to market by
30%, costing up to 8%
of product life time
revenueAccess to
finance - Regulatory
uncertainties make
valuations fall by
15%Customer-centric
innovation
*https://www.fca.org.uk/publication/researc
h/regulatory-sandbox.pdf
Case in point: Regulatory sandbox

15. FSD Kenya | Building inclusive financial markets
3rd floor, 9-Riverside, Riverside drive
@FSDKe
FSD Kenya