Payment Systems Proclamation Revision to Pave New Path for DFS in Ethiopia

Earlier this week the Parliament’s standing committee for budget, plan and finance convened with central bank regulators and members of the private sector to deliberate on the amendment of the payment systems proclamation.

On Monday, November 14, 2022, Parliament’s standing committee for plan, budget, and finance convened with central bank regulators and members of the private sector to deliberate on pending legislation for payment systems.

A proposal for an amendment to the proclamation governing payment systems was tabled to lawmakers last month after getting the nod from the Council of Ministers.

What is the Amendment?

During the launch ceremony for Ethio telecom’s Telebirr mobile money platform a year and a half ago, Prime Minister Abiy Ahmed pledged that the mobile money market would be fully liberalized within a year.

Experts at the National Bank of Ethiopia (NBE)  have been preparing ever since, including the introduction of a major amendment to the proclamation that would see the total liberalization of the payment systems sector, not just mobile money.

The amendment comprises several changes, most of which are geared towards catering to potential foreign investment. 

Major Changes 

Foreign Investment and Company Structure 

The federal drive to fully liberalize the digital financial services sector opens the door for new players. Foreign investors, foreign companies, and Ethiopian companies partially or fully owned by foreigners are all eligible to enter the booming Ethiopian fintech market as an operator. 

Foreign investors can join the sector in one of two modalities. Telecom companies, payment instrument issuers and payment instrument operators operating outside of Ethiopia, which the NBE identifies as strategic investors, are able to set up a subsidiary company to participate in the financial sector through a subsidiary company.

Central bank regulators argue subsidiaries would allow the companies to maintain independence and integrity while providing them with a buffer from shocks that could take place in their country of origin. 

Directives issued to govern the licensing of PIIs and PSOs dictate that share companies must consist of at least 10 shareholders, with officials hoping to encourage diversity in the composition of equity holders.

However, the Commercial Code puts the minimum number of shareholders at five.

When participants raised the discrepancy during a Parliamentary session, representatives of the NBE indicated they are open to revising the shareholder quota.

Foreign nationals can join the sector through direct investment in existing PIIs or PSOs or by setting up a subsidiary company.

Foreign nationals and Ethiopian organizations fully owned by foreign nationals can only engage in the business if they manage to raise the entirety of their capital in foreign currency. 

Previously, foreign nationals of Ethiopian origin were allowed to invest in digital finance, provided the investment was in foreign currency while dividends were strictly to be paid out in Birr.

 Business entities that are not state owned or designated as financial institutions are compelled to set up a separate firm dedicated to provide payment systems services. The firm will be required to meet the NBE’s minimum capital requirements.

Regulators have indicated that issues pertaining to the employment of expats, and the relationship between subsidiaries with their parent companies will be addressed in an upcoming directive.

A provision that requires telcos (with the exception of Ethiopian state-owned operators) to establish a subsidiary company was hotly debated by representatives of Safaricom Ethiopia. The operator is keen to introduce its behemoth MPESA mobile money platform to Ethiopia after launching its telecom services in August.

Safaricom Ethiopia recently put out a call to recruit master agents for its pending mobile money debut. Although details surrounding licensing are still being worked out, the Ministry of Finance has publicly stated its commitment to awarding Safaricom a mobile money license.

Central bank regulators maintain that the establishment of a subsidiary is key to enabling the effective regulation of mobile money services. Telecom operators are under the purview of the Ethiopian Communication Authority (ECA). 

Regulators say they considered all possible ways of regulating including forming an agreement with the ECA, before deciding requiring formation of a subsidiary as the best solution. 

Telcos in Kenya are going through a similar restructuring after the Kenyan government decided telecom and mobile money services should be considered separate legal entities.

Airtel Kenya recently completed its restructuring and established Airtel Mobile Kenya and Airtel Networks Kenya Telecom, which are subsidiaries of Airtel Africa Plc.

Decoupling MPESA from Safaricom Kenya is hoped to present as many advantages as it could create structural and financial complications. If regulated by the Central Bank of Kenya, MPESA could offer more diversified services such as higher business and consumer loans, as well as remove transaction limits.

The case is different in the Ethiopian market, where regulations governing PIIs do not provide special advantages. 

Experts argue that Safaricom separating its mobile money wing from its telco operations would inhibit its ability to integrate the two services. It also would require MPESA to raise its own investment to accommodate a standalone company structure. The composition of investors behind the Safaricom Consortium is also expected to pose challenges for the operator.

Others raise the issue of creating a level playing field to allow local and foreign telcos to compete.

Entrance Fee

The latest version of the draft proclamation suggests foreign companies may be subject to fees in addition to the regular licensing fees that are applied to both local and foreign entities. (more about licensing fees). The payment, which is referred to as “fee for joining a protected sector” or “ investment protection” in the Amharic version, will be determined by the NBE. Earlier drafts of the amendment referred to the payment simply as “a fee.”

These fees are to be paid to the federal government for allowing investors into a previously closed off sector. The central bank is considering setting a formal definition of the proposed payments to avoid confusion. 

A recently issued NBE directive that defines licensing, authorization and oversight fees sets similar licensing fees for both local and foreign operators.

What Qualifies as a Financial Institution? 

The standing proclamation – last amended a decade ago – reserves the term “financial institution” for banks, insurers and microfinance institutions. The proposed revision seeks to extend the privilege to reinsurers, payment instrument issuers (PIIs) and payment system operators (PSOs).

Pending Details

Although it was also part of the previous proclamation, a provision granting the NBE the right to order an operator to cease commercial activities in the interest of the public was challenged by participants who argued the concept is too wide and merits specificity.

Central bank regulators maintain the concept is too broad and technical for inclusion in a proclamation. However, they indicated future deliberations with concerned parties to include the details in upcoming directives.

The previous legal framework prohibited a company from holding both PII and PSO licenses simultaneously. The rule still applies. Regulators are adamant that investors will need to set up separate companies to attain both licenses, although the proposed “Investment Protection Fee” would only need to be paid once to cover both firms. 

Despite the fact that each market has its own licensing requirements, the vastly different nature of the two businesses and variations in the level of risk involved, support the argument for distinct licenses. Regulators also hope to see the rule ward off potential monopolies. The separation is standard practice in markets such as Nigeria, although regulators in China opt to blend the two instead.

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