Proposed PII Directive Holds Both Promise and Caution for MoMos

Following the amendment of the decade-old payment system proclamation, the National Bank of Ethiopia has recently revised the Payment Instrument Issuer (PII) directive governing the mobile money sector for the past two years.

This amendment comes as a result of the government’s commitment to facilitating foreign investment into Ethiopia’s digital financial services sector.

In addition, the directive’s revision was influenced by the government’s promise to allow Safaricom Ethiopia to introduce its mobile money service, M-Pesa, into the Ethiopian market within a year.

The most significant change introduced by the directive is the investment protection fee that any foreign investment must pay to operate in Ethiopia, which is 150 million dollars. As the consortium behind Safaricom Ethiopia prepares to introduce M-Pesa in the country, its licensing fee paid to the government, including the fee paid for the telecom license, will amount to one billion dollars.

Apart from facilitating the entrance of foreign investment into the sector, the revised PII directive has introduced some changes that are expected to profoundly impact on the operation and service delivery of PIIs.

The changes are primarily aimed at enhancing clarity, ensuring security, increasing the capacity of PIIs, and employing more stringent regulation.

It is noteworthy, however, that many of the conditions outlined in the current directive have yet to be tested in practice, as only one licensed PII, Telebirr, has been in operation for the past year.

Foreign Entrance

While the parliament recently ratified the revision of the National Payment System Proclamation to allow foreign investment in the fintech industry, this was done with certain caveats sketched in the draft directive and the proclamation itself.

One of them is that businesses other than financial institutions and state-owned enterprises must establish a subsidiary company or separate share company to run a PII business.

Provisions in the directive regarding foreign capital include the following:

• Foreign nationals shall have a minimum paid-up capital of 50 million birr (~900,000 USD) in foreign currency. The capital requirement is similar for both local and foreign investors.

• The requirement presented in the previous directive, stating that a share company other than a government enterprise shall have a minimum of 10 shareholders to be established as a PIIs, has been scraped off. The Ethiopian Commercial Code stipulates that a minimum of five shareholders is required to form a share company. In a prior discussion on the payment system proclamation, representatives of Safaricom Ethiopia had contested the provision citing that the numerical requirement is limiting.

• The directive also outlines requirements for companies to be established as a subsidiary. However, the subsidiary’s parent shall be a payment instrument issuer, a payment system operator, a telecom operator, or an investor who exclusively invests in a telecom company, a payment instrument issuer, or a payment system operator.

• To process licensing, the established subsidiary has to fulfill several requirements, including signed minutes of the board of directors of the parent company on the decision to establish/invest in the subsidiary.

• A foreign national applicant is required to present evidence of payment of 150 million dollars or equivalent in another foreign currency for an investment protection fee. In addition, licensing and investigation fee of three million birr has to be paid as stipulated in the recently introduced licensing and authorization fee directive.

A founder of a fintech company operating in Africa, K-flip spoke to regarding the investment protection fee, said, “I think it’s a good first start, but the entrance seems a bit hefty for smaller mobile money operators. I think they will also need to think about early-stage fintech that may want to enter the market as well because those are the companies driving innovation as opposed to the larger players.”

Operational Provisions

• If an authorized or licensed applicant fails to begin operations within six months without notifying the National Bank, the authorization or license may be revoked or suspended. The previous directive required licensed entities to begin operations within six months but did not specify the consequences for failing to do so.

• PIIs are required to have an outsourcing agreement with a financial institution to provide inward remittance services. Previously the services was categorized under those that PIIs can provide without an outsourcing agreement. Currently, Telebirr is the only PII providing remittance service, having partnered with digital and traditional MTOs. According to the latest data shared by the operator, its remittance service has facilitated 1.8 million worth of inward remittance.

The 2021 international remittance service directive recognizes PIIs are “representatives” along with banks, and the Ethiopian Postal service. Based on the directive, PIIs had been granted the same privileges as the banks and Ethio Post. The provision in the new draft adds a layer where PIIs are required to get into an outsourcing agreement with a financial institution to facilitate the services. This is along with the provision of digital- credit, insurance and pension services. Industry experts argue this will deter PIIs from issuing innovative solutions as they would have to rely on the appetite of bank officials to successfully implement products.

• Services previously referred to us, Micro-credit, micro-saving, and micro-insurance, are now changed to digital. According to officials, this is done to grant PIIs more freedom. However, the terms remain the same in the amended payment system proclamation.

• In 2021, the central bank abandoned the previous three-tiered account level categorization in favor of a new two-tiered categorization. The draft directive proposes a similar approach. The amendment also added exceptions for remittance transfers, airline ticket purchases, salary transfers, and utility payments. However, in order to benefit from these exceptions, service providers must have the technological capability to segregate these payments and implement strong internal controls.

• According to the proposed darft, level one customers can have a maximum daily balance of 10,000 birr in their electronic account, while level two accounts could keep up to 100,000 birr. An aggregate amount is set at 100,000 and 300,00 birr, respectively.  previously level one accounts were only allowed to have 5,000 while level two accounts are restricted to 30,000 birr.
• Another layer added to level categorization is that level one account holders should be introduced by another level two account holder.

• To ensure maximum protection on transactions related to electronic accounts, the directive requires all transactions to have single-factor authentication. For transactions above 5,000 birr and two-factor authentication needs to be applied, an increase from 2,000 birr.

Regional comparison of account limit

Role of Insurers

Financial institutions other than insurance companies, re-insurer or payment system operators are required to submit completed applications to the National Bank to get authorization to issue a payment instrument.

In this manner, the directive clarifies the entities that are allowed to engage in PII activities, which excludes insurance and re-insurance companies.  

This is done because, in principle, insurers, re-insurers and payment system operators are not allowed to maintain digital money and hold accounts. The insurance business proclamation of 2019, however, recognizes insurers’ role in providing digital financial services.

It states minimum condition to provide digital insurance services shall be determined by the central bank’s directive. 

Overall, the amendment aims to encourage foreign investment in the digital financial services sector and improve the clarity, security, capacity, and regulation of the operation and service delivery of PIIs. The $150 million investment protection fee for foreign investors may be viewed as excessive by smaller mobile money operators, and the requirement for PIIs to have an outsourcing agreement with a financial institution in order to provide inward remittance services may hinder their innovation.

However, the revised directive is a first step toward opening the mobile money sector in Ethiopia to foreign investment. As the revised directive has not yet been tested in practice, it may be necessary to make additional modifications to ensure the success of Mobile money services in Ethiopia.