Ideas & Debate

CMA plans fintech hub to drive financial innovation

A screen shot of the M-Akiba mobile traded bond. Fintech companies use software and digital platforms to deliver financial services. FILE PHOTO | NMG
A screen shot of the M-Akiba mobile traded bond. Fintech companies use software and digital platforms to deliver financial services. FILE PHOTO | NMG 

Over the past decade, the Kenyan financial sector has witnessed a proliferation of new innovative technologies such as M-Pesa that have driven growth in financial services uptake exponentially.

Despite Kenya’s renowned stature as a hub of innovation, the country’s capital markets have sub-optimally utilised the opportunity presented by fintech innovations to push capital market activity to the next level.

It is worth noting that the impact of fintech has been more pronounced in other sectors of financial services such as the banking industry and the insurance industry than has been seen within the capital markets.

This sub-sector is now increasingly engaging alternative fintech business models and utilising financial technology to benefit from fintech innovations.

From Kenya’s perspective, fintech innovation is in alignment with the 10-year Capital Market Master Plan’s rationale to stimulate innovation, to broaden product and service offerings, deepen market participation and liquidity, and drive transformative economic development.

Effectively it is widely anticipated that fintech will be one of the key hallmarks of competition between Kenya and other jurisdictions globally in terms of new listings, financial access and savings levels.

As markets evolve, fintech in capital markets is also evolving through increasing use of mobile phones, more automation of capital markets services through RegTech, Investments-Tech, Alt-data, Artificial Intelligence and Distributed Ledger Technology.

This is aimed at both remapping existing business models and partnering with market participants to create a more robust market system.

With the recent launch of M-Akiba, a Government of Kenya (GoK) mobile based retail bond, licensed entities are moving towards automating their operations using fintech and the rapid emergence of such startups heralds a paradigm shift. This therefore calls for an appropriate operational framework of operation and environment to understand and leverage the opportunities presented by fintech innovation the urgency of which cannot be overemphasised.

Some of the forward thinking international financial authorities that have in collaboration with respective financial institutions launched or are in the process of implementing what are known as “regulatory sandboxes” or “fintech hubs” include the Australian Securities and Investments Commission (ASIC), Financial Services Regulatory Authority of the Abu Dhabi Global Market (ADGM), Financial Conduct Authority UK (FCA), Bank Negara Malaysia, Bank of Thailand, Hong Kong Monetary Authority (HKMA), Bank of Indonesia and the Monetary Authority of Singapore.

Cognisant of the need for collaboration and benchmarking with jurisdictions that have been leading in fintech innovation and development, the CMA (Kenya) has signed Cooperation Agreements (MoUs) with the ASIC and the FSRA- ADGM aimed at information sharing and promoting innovation in the respective markets.

The International Organisation of Securities Commissions (IOSCO) has further taken a lead on the area of oversight and through its Committee on Emerging Risks (CER) collaborated with other IOSCO Committees and conducted a study among its members on the evolution of fintech and its intersection with securities markets regulation.

The study focused on the status of development of fintech in both developed and emerging markets, including the existing and prospective regulatory implications.

Given these recent dynamics and with one of its core mandates of market development in the context of the Capital Markets Master Plan in mind, the authority has prioritised efforts towards developing a “regulatory sandbox” to support the implementation of Fintech innovation in Kenya.

A “regulatory sandbox” is a safe space in which innovators can test new products and services in an insulated environment without the risk of consequences of regulation from regulatory authorities.

The sandbox is a tailored framework that allows firms deploying innovative technology in the financial technology sector (“fintech participants”) to conduct their activities in a controlled and cost-effective environment.

A regulatory sandbox has the potential to encourage and support the design and delivery of new financial products and services that benefit consumers and businesses.

The sandbox is expected to be a crucial component to assist Kenya become a leading market for fintech innovation in Africa and the wider globe in line with its leading position on mobile money.

The sandbox aims at giving limited authorisation for fintech startups to test new products and models with a small number of actual users in a simulated environment.

This gives them more time to build and test business ideas, instead of spending time navigating complex financial services regulations. Focusing on regulatory compliance in many cases eats up seed capital before an innovator can establish whether an idea could work and be scaled up.

Participants are nonetheless required to follow rules on marketing, privacy, anti-money laundering, disclosure, and management of conflicts of interest.

It should be noted however that the sandbox is intended to facilitate testing in a contained environment and not to circumvent existing laws and regulations.

It is suitable for proposed activities, ideas, products, services and innovative solutions that are not appropriately addressed under prevailing laws and regulations.

The duration a solution will function in the sandbox is dependent on various factors such as complexity of the proposal and the specific legal and regulatory requirements involved.

If activities within a sandbox environment are implemented successfully, this can foster innovation and promote product development, translating into a diversity of additional products being availed in the market, thus creating deeper capital markets.

For a firm to qualify for the sandbox it has to evidence that the proposal will lead to better outcomes for consumers through, for example, an increased range of innovative products and services, reduced costs and improved access to financial services.

Worth noting is that Vision 2030 is very categorical about the importance of technology and innovation in the economic development of the country.

The Kenyan Capital Markets is well positioned from a capital, regulatory and technological perspective to invest and partner in fintech with the objective of shaping next-generation solutions that ensure robust and transparent capital market infrastructure for the benefit of investors.

In this regard, the authority developed a consultative paper- cum- policy framework for the implementation of a regulatory sandbox to support fintech innovation in the capital markets in Kenya.

This was subjected to discussion with industry players, policy makers and other stakeholders in June, 2017 through a consultative forum.

Following further refinements based on the industry insights provided, the strategy will then be subjected to a second consultative forum for validation purposes.

Further, the authority will in parallel conduct a baseline diagnostic survey to facilitate the mapping of viable fintech companies with capital markets orientation that would be potential candidates for the regulatory sandbox.

Ultimately, and informed by outcomes from these processes the authority shall formulate a Policy Guidance Note anchored on Section 12A of the CMA Act to operationalise a regulatory sandbox for the Kenyan capital markets.

The potential for fintech to power the financial sector in Kenya and specifically the capital markets due to the presence of fewer legacy systems cannot be gainsaid.

This combined with the potential to bring about greater financial inclusion for the Kenyan populace and improve access to capital and economic growth presents an ideal avenue for the much-needed expansion of the Kenyan capital markets.

In line with the Capital Markets 10- Year- Masterplan, we are all the more certain that the initiatives will further concretise Kenya as a global fintech centre of excellence.

Viola Kilel is product Development Officer at the Capital Markets Authority.