It’s been an explosive season in the financial industry. Just when some government and experts thought the industry couldn’t shift exponentially, the financial landscape keeps shifting. We are having local fintech leaders ramping up their ambition for global dominance. Yet, most innovations are around payments. Of course, payment is the first step for what’s to come that will bring about inclusive financing.
A challenge
In many African countries, regulators are creating self-sabotaging policies. Nigeria and South Africa are among the top markets for cryptocurrencies in Africa. Nigeria, amidst plunging into a recession in 2020, is the top peer-to-peer bitcoin trading nation in Africa with $99 million in trade volumes in the first quarter of 2021. The Bitcoin trading volume in Nigeria from 2020 soared to USD 400 million, and this is just 20 million behind Russia’s USD 420 million. Cross-border payments still remain a key factor. The demand for Africa’s technology talents for remote-work is rapidly growing, and this still makes cross-border payment a major problem for companies that intend to do business with Africa. The cost of cross-border payment without cryptocurrency is expensive in Nigeria, also considering the big arbitrage across Nigeria’s local currency market.
Increased inflation, unfavorable traditional exchange rates, and unreliable local currency have strongly encouraged cryptocurrency adoption. You see, these challenges trigger the demand for foreign currencies. On the other hand, the minimal access to the dollar has made people pay attention to cryptocurrencies for cross-border payment.
The regulatory climate in Africa has rather encouraged users to adopt peer-to-peer cryptocurrency trading as well as boost participation in the parallel market. The lack of proper regulation in some African countries is stifling economic growth. African governments will have to develop new policies that allow for greater financial inclusion.
What is playing out now is similar to what happened to the music industry from the 1990s to 2008. The MP3 revolution troubled the music industry. The new reality that a digital version of a song could be “transferred freely” across the internet in seconds made the industry players attack their own customers through the law instead of adapting and modeling their business around digital sales. The industry associations began to track and sue online music traders. They later soon realized they were attacking their most precious asset – the relationship with their customers. Their strategy wasn’t working. It was self-sabotage at its best, as digital downloads kept growing exponentially. Apple computers smartly responded by building iTunes around the digital rights management (DRM) software that allows the digital files to be encoded in such a way that users couldn’t play the songs on any other device. This became a big hit in sales for Apple. Yet, music lovers didn’t want the restriction that came with DRM. Over the years big corporations had to admit defeat and started selling DRM-free music online. Today, we have platforms like Spotify capitalizing on cloud computing to make music available on any device. We can see this play out in the financial industry today. Many countries are fighting their relationship with their most important asset – the citizens. So often fear causes some organizations to return to what is familiar rather than facing the challenge and adopting new models and policies. In fighting digital currencies some countries have wasted resources and goodwill that could have been directed towards a more productive economic and regulatory climate.
A path
Speaking of the productive economic climate and financial inclusion, I still find it worrisome that Futures contracts and Commodity exchanges are still hard to come by in Africa. McKinsey research reports that “More than 60% of the population of sub-Saharan Africa is smallholder farmers, and about 23% of sub-Saharan Africa’s GDP comes from agriculture.” Africa’s agricultural potential is untapped. Rather than collecting “outside-loans” and entering self-sabotaging deals, the continent can look within and allow trading African agricultural commodities with digital currencies. This will provide farmers inexpensive, fast, and easy access to capital for more efficient farming. Let’s also consider that the continent is experiencing a high demand for services, especially in the technology space. The demand for African app developers, for example, is on the high side. This is a great source of revenue for young citizens who don’t need to pass through the inefficient educational system on the continent. Cross-border payment is a challenge worth looking into.
“Africa is the most expensive region to send money to, where sending $200 costs an average 8.2% in the fourth quarter of 2020”, a world bank report on remittance cost.
While this is not an elaborate discussion on the path to better financial inclusion, the major issue remains to simplify cross-border payment and making regulation good.
Interestingly, fintech is prospering on the continent. However, the continent needs to open up to cryptocurrency and position itself as, possibly, a cryptocurrency hub powered by services and agriculture.
Africa is positioned to see a rise in international remittance, cryptocurrency adoption, and fintech innovation. The regulatory framework and innovations by entrepreneurs are drivers worth observing.
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TechAssembly is a technology development company that works on digital transformation, tech skill acquisition, and tech talent acquisition. TechAssembly specializes in communication solutions, economic tech, FinTech, business solutions, Web and Mobile development (One Stop Shop for all technology development needs).
Our clientele includes funded start-ups and SMEs, some of which are within and outside Africa.