The Central Bank is ushering in a new era for digital financial providers, compelling existing and emerging companies to conform to heightened standards, under reforms endorsed by Governor Mamo Mehiretu.

The National Bank of Ethiopia’s (NBE) guidelines emphasise a focused approach to entrench stability in the nascent digital financial market, presenting requisites for payment instrument issuers to comply with newly defined regulatory standards within a six-month adjustment window. Facing increasing interest from domestic and international institutions, the Central Bank’s move seeks to position Ethiopia at the forefront of the digital revolution, according to officials of NBE.

A more stringent capital requirement is in place where prospective issuers are nudged to register a minimum of 50 million Br in paid-up capital. There is also an uptick in daily electronic account balances, now set at 75,000 Br, from a previous 30,000 Br. Transaction ceiling on mobile money platforms is capped at 150,000 Br, except for bulk payments.

The Central Bank is introducing tracking protocols for issuers. Trust accounts will not only be mandated to maintain an equivalent value of electronic money issued. They must also ensure that 10pc of the assets are backed with cash, with mandatory daily reporting to the Central Bank regulators. According to a senior official at the Payment & Settlement Systems Directorate of NBE, this measure ensures alignment with traditional monetary policies, as Ethiopia’s economy struggles with runaway inflation. Governor Mamo revealed in August that the federal government would follow tight fiscal and monetary policies in the year to curb inflation.

“Ensuring inflation remains in check is a priority,” the senior official told Fortune.

The directive signed by Governor Mamo not only mandates compliance with the International Financial Reporting Standards (IFRS); it also emphasises the requirement of granting the Central Bank remote oversight.

While the push for a digital-first financial ecosystem gains momentum, Ethiopia currently houses only four licensed payment instrument issuers: Telebirr, M-Pesa, Kacha, and Yaya Wallet, with Telebirr leading the pack, boasting over 34 million subscribers.

Biruk Adane, chief mobile money officer of Telebirr, expressed optimism about the regulatory shift.

“While strategic adjustments are underway, the overarching direction is positive,” he told Fortune.

However, senior managers at the country’s pioneer private fintech company, Kacha Digital Financial Services S.C., remain cautious.

Yigermal Meshsesha, marketing and business development manager, finds the transactions capping a notable change, considering the company’s recent foray into international remittance and an increased focus on digital micro-loans.

“With digital finance, traceability trumps traditional banking,” he said.

He is hopeful that a grace period for adjustment to the new directive will be given to the company as it is in its formative stage.

Kacha signed agreements for interoperability with four of the largest finance institutions in the country, including the state-owned Commercial Bank of Ethiopia (CBE) and Telebirr. While Yigermal recognises the long-term benefits of having channels to capital markets, he finds the nascent sector too formative to be excited about the current state.

“It’s too early to worry about competition,” he told Fortune. “We’re focused on expanding financial inclusion.”

Yigermal believes raising the daily wallet amount from 30,000 has little significance as long as the daily transactions are capped to the company, which has obtained access to more than 5,100 outlets. Although the latest directive allows financial institutions to establish subsidiaries primarily engaged in mobile money issuances, telco operators will likely continue their hold on the market, according to industry insiders.

Dahlak Yigezu, vice president of Digital Banking at CBE, noted in the new directive a requirement for authorisation of international remittance.

“Most operators worked with banks to enable the service anyway,” he said, indicating that a thorough review of the new directive would be required to formulate strategies in the future.

However, he finds the general regulatory environment of digital finance enabling. CBE has signed interoperability with all four issuers.

The central bank has also instructed the telecom operators (Safaricom and Ethiotelecom) to allow for interoperability to non-financial entities in the digital finance landscape to foster a level-playing field.

A 2022 report by the four-decade-old market research company, Euromonitor International, indicates that banks in sub-Saharan Africa have failed to adapt to the socio-economic fabric of societies where cash transactions dominate for a largely informal economy. Citing the experience of Ethiopia, which had a branch-to-population ratio of one to around 11,500 people during the period, the report pointed to the growth of Kenya’s M-Pesa service as an antidote to financial exclusion as it currently boasts more than 51 million customers in seven countries.

To the five million users served under its network, M-Pesa, Safaricom’s mobile money platform, went live in Ethiopia a few months ago. It has a long way to go before reaching its 30 million monthly users in neighbouring Kenya. M-Pesa seeks to replicate its success in other markets despite dealing with regulatory differences marked by transaction limits, aggregation caps across identities and the number of years required before line ownership is automatically changed.

Sources in the company reveal that interoperability agreements have been signed with over 10 commercial banks.

The telecom sector, particularly giants like Safaricom and Ethio telecom, is predicted to maintain its dominance despite the reforms paving the way for financial institutions to carve out mobile money subsidiaries, according to experts such as Endeshaw Tesfaye.

“Allowing non-financial institutions was a turning point,” he told Fortune.

An experienced digital financial services consultant, he believes that while the telco couple dominate the market, collaboration will be the key to longevity.

Says Endeshaw: “Financial players will need to form partnerships if they’re to challenge telecom behemoths like Telebirr.”

He believes that financial institutions cannot keep up with telecom operators who are issuers like Telebirr due to their large distribution networks, which offer airtime and penetrating access to a large market base. He also argued that no better set of policies can be prescribed for developing the digital financial landscape.

“Policies need to be born out of unique national circumstances,” he told Fortune.

PUBLISHED ON Oct 14,2023 [ VOL 24 , NO 1224]

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