After Nigerian fintech Korapay’s account in Kenya was frozen in July on suspicion of money laundering, investigators found only a single transaction, and that was for funds needed to apply for a local license.
(Bloomberg) — After Nigerian fintech Korapay’s account in Kenya was frozen in July on suspicion of money laundering, investigators found only a single transaction, and that was for funds needed to apply for a local license.
It took three months to unblock the account, and Korapay is still waiting for a license to operate in the country, according to Chief Executive Officer Dickson Nsofor.
Korapay is one of a number of fintechs, including Flutterwave Inc. and Chipper Cash, facing regulatory hurdles as they try to enter the Kenyan market. The layers of bureaucracy drive up transaction costs for remittances, which are a key source of income for many locals, making the fees among the highest in the world.
“We want to be highly regulated,” Nsofor said. “But licensing and regulation is the key that the gatekeepers use to push new players out.”
Remittances — international transfers back to a worker’s home country — are vital to Kenya’s economy, accounting for more than 3% of the gross domestic product last year. Yet, even as the population embraces fintech, with nearly twice as many people using mobile money than holding traditional bank accounts, technology’s promise of lowering the cost of sending funds has remained elusive.
Bureaucratic hurdles can be difficult to navigate in Kenya. The local regulator in July ordered two of Africa’s most successful startups, Flutterwave and Chipper Cash, to stop offering remittances and payments in the country because they weren’t licensed.
Kenya has welcomed some new players. Zepz Group, which operates services Wave Mobile Money Inc. and WorldRemit, is among the fintech firms operating in the market.
The regulations are in place to prevent money laundering and financing terrorism, according to Central Bank of Kenya Governor Patrick Njoroge.
“Particular remittance providers think that this is the Wild West,” Njoroge said in an interview in September. “Maybe in other jurisdictions they’ve done it but, in our jurisdiction, we are very particular about regulation.”
Kenya has made strides in financial inclusion, giving more people access to financial products and services. Last year, 81% of the population used mobile money, according to a survey by Kenya’s FSD, the central bank and the national statistics agency, as smartphones made transactions easier.
Yet with more than a quarter of Kenyans living below the World Bank’s extreme poverty line of $2.15 per person a day, the high fees are taking money from those who can’t afford it, according to Korapay’s Nsofor.
A central bank survey last year found the average cost of sending funds to Kenya was between 4% and 5%, a heavy burden for economically vulnerable people.
“The cost of remittances remains high especially sending to Africa, as well as intra-Africa,” said Shem Ochuodho, global chairman of Kenya Diaspora Alliance, a lobby group for Kenyans living abroad. “I would encourage the central bank to move a little faster to create an enabling environment for fintechs.”
The problem of delays in giving fintechs permission to operate extends across Africa, according to Saema Somalya, General Counsel for money transfer app Remitly Global Inc.
“Many African countries only allow banks to participate in local payment schemes,” Somalya said, calling the delays a “key source of friction” between the industry and regulators.
A lack of uniformity in licensing requirements across countries is an obstacle to developing competition and more affordable services, according to Oluwabankole Falade, Flutterwave’s top government affairs officer.
The authorities should balance the need to adequately regulate the services with the need to provide “sound, predictable, non-discriminatory and proportionate legal and regulatory frameworks” for users, World Bank Senior Financial Sector Specialist Oya Pinar Ardic Alper said.
“Remittances present an opportunity for bringing financially excluded people into the regulated financial sector,” Alper said. “If not delivered in a safe and efficient way, remittances also become a difficult and discouraging financial service to use.”
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