Digital Financial Services (DFS) contribute a great deal to increase financial inclusion through the development of digital savings and credit services.
With the growing use of mobile money transfers in Tanzania, the country is witnessing an ever-increasing number of digital financial trading that simply cannot go unregulated.
In Tanzania, as elsewhere, mobile technology is central to digital financial transformation and as such, the African Financial Inclusion Policy Initiative (AfPI) has worked on a policy framework to help members address the challenges of regulating digital credit markets in Africa.
With the development of new digital technologies every waking day, the financial services ecosystem is constantly evolving.
In the past decade alone, there has been a proliferation of new means of digital payment that to a great extent has brought about financial inclusion in a way that traditional platforms like banks and money lenders couldn’t.
It is the introduction of these new non-bank financial services providers generally referred to as FinTechs that has conjured the need for digital financial services regulations. Towering above FinTechs are Mobile Network Operators (MNOs), commanders of the Digital Financial Services market.
MNOs were lucky enough to find a ready and defined market to usurp. MNOs already had an existing client base and an enormous network of agents that were using their mobile telecom services for texting and calling.
These millions of users became the customers of what is now referred to as First-Generation of Digital Financial Services (DFS) which is the sending, receiving, withdrawing and depositing of money via mobile platforms.
After that came the second generation of DFS in which MNOs and banks came together to offer new financial products like electronic money (e-money) and from there, the delivery of small loans and savings accounts.
Eye on The Money: Regulating Digital Financial Services
In Tanzania, DFS processes occur under the supervision of the Central Bank of Tanzania. The Microfinance Regulations (2019) covers Non-Deposit Taking Microfinance Service Providers. It defines a digital microfinance lender as “a microfinance service provider carrying out lending activities, from the loan application, approval, disbursement and repayment through digital channels.”
Customers are able to transfer money between their various e-wallet accounts held with different e-money providers and other financial systems. With growing cooperation in the DFS arena, customers can easily move money from bank to mobile accounts and visa vasa as well as pay various government fees, fines and charges.
Tanzania, a country of over 60 million people, is now enjoying tremendous growth in DFS and related financial inclusion. According to the Bank of Tanzania’s (BOT) Mobile Transactions Data 2019, almost half of the 60 million (43 per cent) of the Tanzanian population actively used mobile services in 2019.
Thanks to this explosion of DFS, financial inclusion in Tanzania is recorded to have increased to 65 per cent as of 2017. With this recognition, the country’s second Five Year Development Plan (FYDP II) places great emphasis on digital technologies and that includes DFS.
Only recently the government moved to places charges on all mobile money transfers as well as other digital payment platforms. Now, for every mobile money transaction, the government charges a certain percentage of taxes as it does for the purchase of digital services like the payment of electricity services.
As for mobile money transfer taxes, the amount was originally set to be 10 to 10,000 Tanzanian shillings (0.4ȼ US to $4.31) per transaction, but following an outcry from the public, the tax was cut by 30% to 7 to 7,000 shillings, depending on the amount of money transferred.
When introducing the mobile money transfer taxes last year, Tanzania set a target of gathering $2.1 billion over the next five years. Short of exact figures, but generally speaking, the government is well on its way to achieving the target as mobile money transfers increase exponentially along with other services like savings and lending.
Just to give you a picture of how significant the mobile money transfer taxes are, Tanzania has an average annual budget of $15.82 billion so at $2.1 billion, the mobile money tax is a significant contributor to the country’s internal revenue collection.
Summary of Tanzania DFS Regulatory Scheme
The Bank of Tanzania (BoT) has adopted a progressive regulatory approach and also kept open cooperation with the private sector. As described in the Digital Credit Regulation study case prepared by the Alliance For Financial Inclusion (AFI) in collaboration with the BoT itself, the BoT works closely with banks and non-banks under a supervision strategy described as a “test and learn” approach.
Learning from the market as innovations are introduced by the private sector, the BoT then moves to draft national payments system laws in collaboration with the private sector. This approach has so far built confidence in investors in the DFS ecosystem.
The Tanzanian legal system is based on English common law. The major steps towards digital transformation in regulation have been marked by: The Bank of Tanzania Act 2006, stipulates in Section 6 that BOT will “conduct oversight functions on the payment, clearing and settlement systems in any bank, financial institution or infrastructure service provider or company”.
As for mobile money providers, the BoT through the 2007 Electronic Payment Systems Guideline created new rules for electronic payment schemes. It allowed non-bank financial institutions to offer electronic payment schemes and money transfers.
Although it did not accommodate mobile money, it opened the doors for Mobile Network Operators (MNOs) to offer money transfer and payment services. Since the law did not address licensing of MNOs, operators were required by the Bank of Tanzania to apply for “Letters of No Objection” in conjunction with a bank in order to conduct payment services legally.
Then there is the National Payment Systems Act 2015, the Payment Systems Licensing and Approval Regulations and the Electronic Money Regulations of Tanzania. This law provides for a non-bank based electronic money regulatory model allowing banks and non-banks to operate while giving BOT formal oversight of mobile money services.
In 2017, BoT issued Guidelines on Agent Banking for Banks and Financial Institutions. The guidelines apply to agent banking as a delivery channel for offering cost-effective banking services.
In 2018, BoT issued regulations for various categories of microfinance service providers identified under the Microfinance Act, which also covers DFS products. In order to limit the risks, the Financial Consumer Protection Regulations articulate the provisions to be followed by every financial services provider.
Of course, there are great concerns as to mobile money transfers being used for money laundering and to fund illegal activities and so the BoT has instituted the country’s Anti-Money Laundering Regulations to further define the applicable rules for electronic funds transfer and cash transactions reporting.
Similarly, across the border in Kenya, only last year the President sign the Central Bank (Amendment) Bill 2021 into law (7 December 2021). The Act provides for the regulation of digital lenders in Kenya and requires any person carrying on digital credit business and who is not licensed under any other law to now obtain a license from the Central Bank of Kenya (CBK).
The Act also provides that the CBK will make regulations necessary to give effect to the Act. Some of the provisions to be covered under the regulations are registration, management and reporting requirements, credit information sharing, data protection and consumer protection.