A regulatory framework tailored to the specific characteristics of providing digital financial services is one of the key determinants of success in a given market. Two regulatory issues are particularly important in this regard: (i) the permission to use third party agents for the delivery of financial services and (ii) the permission for nonbanks such as mobile network operators (MNOs) to issue electronic money without being subject to the full range of prudential regulations applied to banks. When Uganda’s central bank, the Bank of Uganda (BOU), commissioned a diagnostic on its legal framework in 2011 in order to better understand options for regulating digital financial services, the answer to both questions was negative – banks were not permitted to use agents and nonbanks were not allowed to issue e-money without applying for a bank license.
Despite these challenges, BOU made creative use of its room to maneuver under mostly unfavorable financial sector laws and allowed mobile financial services (MFS) to emerge. The outcome is impressive - to date Uganda is among the most successful countries in Africa with regards to MFS. According to a recent Intermedia survey, 43% of Ugandan adults have access to, and 26% actively use, mobile money accounts.
The legal situation
What was the legal situation when MFS first started to emerge in 2009? Unlike neighboring countries Kenya and Tanzania, the central bank law in Uganda (the BOU Act) did not provide the regulator with the general authority to regulate the payments sector. Uganda did not, and still does not, have a payments law that can be used by the BOU to issue licenses to electronic money issuers (as Kenya now has). At the same time, only banks and other institutions regulated by the Financial Institutions Act are permitted to provide retail payment services. Regarding the use of agents, the BOU insisted that a change of this law would be required to permit agency banking – a legal interpretation that keeps banks from using agents to this date. These constraints leave little wiggle room for the emergence of digital financial services (neither for a bank-based nor nonbank-based model) without a change of law, something the BoU did not want to wait for as it can take many years.
When some of the leading MNOs approached BOU about launching MFS, the BOU permitted them to go ahead instead of stating that financial institution business is the exclusive domain of licensed financial institutions. The BOU instructed MNOs to find a bank they can partner with, and the bank to apply for a ‘letter of no objection’ to offer MFS. These letters are based on the legal agreement between MNOs and banks, which include all the details of the partnerships.
Results and outcomes
As a result of this process, between 2009 and 2011, the four largest MNOs launched MFS that essentially follow the model of other countries that permit nonbanks to offer electronic money services, only that the partner bank and not the MNO is the regulated entity.
Since the necessary legal changes for the direct licensing of MNOs as electronic money issuers were still not forthcoming in 2013, the BOU issued Mobile Money Guidelines to provide more clarity to the industry about which rules to follow, while still advocating for a special law to be introduced in the future. Although guidelines do not carry the same legal weight as official regulations, they make the relationships between MNOs and partner banks more transparent. What formerly existed only in confidential legal agreements now exists in publicly available documentation.
The outcome of the current approach in comparison to the alternative of direct licensing of the MNO is that the bank plays an enhanced role in monitoring the performance of MNOs, as it is the main supervised entity and carries the regulatory risk. One could say that BOU outsourced part of its supervisory task to the partner banks.
What lies ahead
A risk looming at the horizon is that once banks are permitted to offer agent banking (revision of the Financial Institutions Act is in progress), they will directly compete with the services offered by their partner MNOs and this will create a conflict of interest. The pending legal changes - the change of the BOU Act to provide BOU with the authority to regulate the payments sector and the introduction of a payments law - should therefore still be seen as a high priority for the healthy growth of the sector. In the interim, Uganda’s mobile financial services sector is a great example of how a country can find creative solutions to building an enabling environment for innovation without incurring unnecessary risks.