Introduction 

Digitalization is reshaping the financial sector with new opportunities and challenges. But the regulatory framework is lagging behind the rapid changes, exposing users and providers to fraud and cybercrime risks. To make digital finance successful and sustainable in Africa, legal innovation and building competent regulatory bodies is as important as technological innovation. This article will show how the regulatory framework can keep up with digital finance in Africa and what are the benefits and best practices for doing so.

How does the regulating framework of digital finance in Africa face difficulties?

Digital finance is transforming the financial sector by providing greater access, convenience, and innovation. Developments such as mobile money and fintech start-ups are driving this shift. In 2020, African fintechs generated revenues of approximately $4-6 billion and are projected to reach $65 billion by 2030. However, digital finance also presents challenges such as inconsistent legal frameworks and the need for regulatory collaboration. These challenges require a balance between flexibility and proportionality in regulation to ensure that digital finance can continue to grow and benefit consumers while also protecting their interests.

With the growth of digital finance, digital fraud is a growing challenge in Africa. According to INTERPOL, the top five cyberthreats in Africa are online scams, digital extortion, business email compromise, ransomware, and botnets. To combat this challenge, it is crucial to put a robust cybersecurity framework into place, promulgate progressive legal frameworks and require for countries to collaborate and coordinate their efforts.

How to unlock digital finance potential in Africa while navigating legal and regulatory challenges? 

Different countries and regions in Africa have adopted various approaches to address the legal and regulatory challenges of digital finance. One approach is the use of regulatory sandboxes, innovation hubs, or test-and-learn frameworks, which allow fintech innovators and regulators to experiment and learn in a controlled environment. Another approach is the adoption of principles-based or risk-based regulation, which provides flexibility and proportionality for different types of digital finance activities and actors. These approaches aim to foster innovation while ensuring consumer protection and mitigating risks.

Interoperable and inclusive digital identification systems: These enable verification, authentication, and KYC compliance for digital finance users and providers. For example, Benin, Côte d’Ivoire, Ghana, Guinea-Bissau, Mali, Niger, Senegal, and Togo have a regional digital identification system called WURI. Another initiative is Regional or continental initiatives or platforms: These aim to harmonize and integrate digital finance policies, standards, and systems across Africa. For example, the AU has launched the AfCFTA and endorsed the PAPSS.

Conclusion

To improve digital finance in Africa, policy makers, regulators, and practitioners should review and update legal frameworks, collaborate with stakeholders, use regional resources, and raise public awareness on digital finance rights. Building strong network security is crucial to protect against cyber threats and ensure transaction safety. This can mitigate risks and foster trust in digital finance systems.