Digital financial services (DFS) and financial technologies (fintechs) have immense potential to drive financial inclusion in Uganda because most Ugandans are unbanked by the formal banking institutions due to limited bank branch coverage in the country and inadequate infrastructure which makes it difficult for banks to set up physical (brick and mortar) branches. Therefore, digital financial solutions and technologies provide a massive opportunity to leapfrog these challenges and on-board more customers into the ecosystem.
Fintechs currently range from payment platforms to application developers, providing and developing a broad range of innovative financial solutions and services such as information security, micro-pension, core banking solutions, business applications, consultancy services, finFinancials, software development, e-banking solutions, forex, payments and settlement clearing, money lending platforms, reporting and analytics, IT & support. There are a number of “over-the-top” players in the fintech space. Part of the industry initiatives include the Fintech Association of Uganda.
Mobile money is a form of mobile enabled e-money service that enables mobile phone owners to send, receive, and store money in their mobile wallets. Presently, mobile financial services are offered by mobile network operators (MNOs), as well as other mobile money service providers, who operate mobile money services using the MNOs’ networks in partnership with licensed financial institutions, mainly banks. The Bank of Uganda (BoU), which is Uganda’s Central Bank enacted Mobile Money Guidelines (the Guidelines) in 2013 which require the following;
- Any entity providing or intending to provide mobile money services must be a registered limited liability company.
- If the entity intending to provide the mobile money services is not a BoU licensed institution, the entity must partner with a licensed institution, which must apply to BoU seeking approval for the provision of mobile money services in partnership with the mobile money service provider.
- The entity must provide proof of its financial position, a business plan and a risk management proposal.
- Lastly, the applicant entity must have in place appropriate and tested technology systems.
When reviewing the application, BoU considers the agreement between the licensed institution and the mobile money service provider. The agreement must provide for the establishment of an escrow account in the licensed institution. The funds in the escrow account do not belong to the mobile money service provider, but to the holders of the e-money in the mobile money platform. The licensed institution must define procedures for conducting transactions in the escrow account that satisfy the licensed institution’s fiduciary responsibility.
Most importantly, the escrow account agreement must ensure the licensed institution’s authority to distribute the funds in the escrow account to mobile money account holders in the event of the mobile money service provider’s insolvency.
The key role players at present are;
- The regulators (BoU and the Uganda Communications Commission “UCC”). The UCC is responsible for licensing and supervision of MNOs.
- Mobile Money Service Providers/MNOs. These manage the mobile money platform. They also select and manage mobile money agents. At present, the dominant players in the market are MTN Uganda and Airtel. Others are Africell and UTL.
- Partnering licensed institutions conduct proper due diligence (KYC) on the mobile money service providers and are custodians of the escrow account. They must ensure that the partnering mobile money service provider has adequate AML/CFT measures in place.
- Mobile money agents are the main interface between the clients and the mobile money service provider. They handle the cash-in and cash-out process and earn a commission. Master agents such as Simba Telecom control specific territory on behalf of the MNOs and are responsible for licensing mobile agents in those territories.
- Payment aggregators facilitate payments into customer mobile wallets across multiple MNOs and sometimes convert to multiple payment instruments such as mobile wallets for some customers and bank account for others, thus allowing customers to choose how they want to receive payments. Examples of aggregators are Ezee Money, Yo! Uganda, and Pegasus.
Some legal/regulatory issues
- Consumer protection
- Interoperability and APIs
- Shadow banking
Factors necessary for success of mobile money/opportunity
- Convenience and flexibility
- Need for financial inclusion
- Security (cashless process)
- Easy accounting/transparency
- Introduction of agent banking
- Enabling regulatory framework
- High cost
- Agent liquidity management especially in rural areas
- Regulatory uncertainty
- Financial risk and crime
- Weak supervision and enforcement
There are also money remittance services targeting Ugandans living and working abroad. For example, Useremit.com which provides a cheaper and more mobile-oriented means of enabling Ugandans in the diaspora to send money home as an alternative to Western Union and Moneygram. Others are Jpesa, Pesapal, 3G-DirectPay, JamboPay, Epay, iPay and KopoKopo among other East Africa mobile money payment gateway service providers which operate a Visa-like online payment system for merchants similar to the e-commerce platforms like Amazon and eBay.
All banks have implemented online banking services which enable customers to conduct a number of financial transactions through the financial institutions’ websites and mobile applications. The online banking system then links to the core banking system operated by the banks and transactions are effected. This service supports viewing and downloading electronic bank statements, funds transfers, utilities payments, etc.
Some of the salient features of the fintechs and e-payments legal regime in Uganda
- The Electronic Transactions Act of 2012 (ETA) recognizes electronic transactions. These are defined as exchange of information or data, the sale or purchase of goods and services conducted over computer-mediated networks. The law also recognizes electronic agents, internet service providers (ISPs), automated transactions, intermediaries, originators, data messages and e-Government services.
- The Electronic Signatures Act of 2012 (ESA) recognizes electronic signatures as data in electronic form affixed to or logically associated with a data message, which may be used to identify the signatory in relation to the data message and indicate the signatory's approval of the information contained in the data message. It includes advance electronic signatures. This Act also provides for digital signatures as a means of transformation of a message using an asymmetric cryptosystem such that a person having the initial message and the signer’s public key can accurately determine whether the transformation was created using the private key that corresponds to the signer’s public key and whether the message has been altered since the transformation was made. Asymmetric cryptosystem means an algorithm or series of algorithms which provide a secure key pair. Certificate service providers, electronic signature products, private keys, public keys, repositories, security procedures, time-stamps, transactional certificates, and verification procedures are also provided for.
- Interoperability is a mandatory requirement. Under the Mobile Money Guidelines, mobile money service providers are obligated to utilize systems capable of becoming interoperable with other payment systems in Uganda and internationally.
- Concerning authenticity, in any civil proceedings involving a secure electronic record, there is a presumption unless the contrary is proved, that the secure or advanced electronic record has not been altered since the specific point in time to which the secure status relates. However, in the absence of a secure or advanced electronic signature, this provision does not create any presumption relating to the authenticity and integrity of the electronic record or an electronic signature.
- Admissibility of electronic evidence is safeguarded by the ESA which is to the effect that in all legal proceedings, the evidential rules must not be applied so as to deny the admissibility of a data message or an electronic record merely on the ground that it is constituted by a data message or an electronic record; or if electronic evidence is the best evidence that the person adducing such evidence could reasonably be expected to obtain. Electronic evidence is also not to be excluded merely on the ground that it is not in its original form. Therefore, this makes electronic payment records admissible in evidence.
- Regarding authentication, the ESA recognizes any symbol executed or adapted or any methodology or procedure employed or adapted, by a person with the intention of authenticating a record, including an electronic or digital method. In the payments space, double authentication procedures ar9e commonly used. Some operators require Identity Cards (IDs) and secret Personal Identification Numbers (PINs). The National Identification and Registration Authority (NIRA) is in charge of the National biometric ID database. Electronic verification of personal data details held by NIRA is now done through an open application programming interface (API). However, there are concerns on data risk because Uganda has not yet enacted a substantive data protection and privacy law.
- The BoU Financial Consumer Protection Guidelines of 2011 were enacted to provide general requirements premised on fairness, reliability and transparency. Financial services providers must have in place and operate appropriate and effective procedures for receiving, considering and responding to complaints. Under the ETA, consumer protection is safeguarded by provisions relating to information that must be provided by electronic services providers, procedures for cancellation of electronic transactions after receipt of services, unsolicited services or communications, guidelines for performance of electronic transactions and invalidity of provisions excluding consumer rights.
- The Computer Misuse Act of 2011 criminalizes offences such as access or interception of any program or data without authority or permission, access with intent to commit or facilitate the commission of further offences, unauthorized modification of computer programs, unauthorised use or interception of computer services, unauthorised obstruction of use of computer, unauthorised disclosures of access codes and information, electronic fraud, child pornography, cyber harassment, offensive communications, and cyber stalking . It also lays down elaborate procedures for preservation and production orders, searches and seizures, and compensation as a form of redress.
- Competition/anti-trust requirements are loosely defined. The Mobile Money Guidelines require mobile money service providers and entities partnering in provision of mobile money services not to engage in anti-competitive practices, contracts, arrangements or understandings that would be to substantially inhibit market competition. In 2015, MTN Uganda was fined UGX 800 million and further UGX 1.5 billion in punitive damages for agent exclusivity agreements that were adjudged to contravene the Communications Act of 2013 in a suit filed by Ezee Money Uganda Limited. This matter is on appeal.
- Regulatory collaboration is structured in a memorandum of understanding between BoU and the UCC. Other government agencies such as NIRA, the Uganda Revenue Authority (URA), the National Information Technology Authority (NITA), and the line ministries such as Ministry of ICT and the Ministry of Finance, Planning and Economic Development are also involved in the decision-making process by way of policies. The Financial Intelligence Authority (FIA) is mandated with AML investigation, monitoring and prevention under the Anti-Money Laundering Act of 2013.
Cryptocurrencies and digital tokens
Cryptocurrencies, digital coins and tokens are currently not recognized as currencies and thus are not enforceable as securities. The BoU issued a public warning in February 2017 to the effect that whoever invests in cryptocurrencies is taking a risk in a financial space whether there is neither investor protection nor regulatory purview. Consequently, there has not been any regulatory guidance from the Capital Markets Authority (CMA) on Initial Coin Offerings (ICOs) and Security Token Offerings (STOs). However, there are a few operational crypto trading platforms in the market since BoU did not expressly ban crypto trading and investment. Utility tokens, payment tokens, equity tokens, token generation events (TGEs), token distribution events (TDEs), and security tokens are all not regulated at the moment.
Automated Teller Machines/ATMs
All the banks have ATMs in major locations. However, there are access challenges in rural areas. Credit cards are accepted at the major ATMs. Visa and MasterCard are the most readily acceptable, but Maestro, Discover Cards and American Express may also be used in a few spots. Surcharges may apply due to the banking/transactional fees incurred by merchants in Uganda to process payments on foreign cards. Some cases of ATM fraud have been reported.
Forex and travellers cheques
Foreign exchange is accessible from banks and forex bureaux. However, travellers cheques (whether physical or electronic) are very cumbersome to cash out. There are a number of fintech forex exchanges, however, these are currently outside the realm of regulatory oversight because the forex regulations mainly focus on traditional “brick and mortar” forex bureaux. Most forex bureaux do not accept travellers’ cheques. The official forex rate can be obtained from BoU’s website (bou.or.ug).
There are currently no regulations or guidelines governing online/digital crowdfunding in Uganda. Crowdfunding and crowdsourcing are increasingly becoming common aspects of alternative finance. Internet-mediated registries are also not regulated. Kickstarter, Indiegogo, Crowd Funder, and GoFundMe are some of the most common crowdfunding sites used.
Online gaming and gambling
Online gambling is growing at a fast pace in Uganda as gambling operators increasingly cultivate their digital presence. This is heavily powered by a very vibrant sports gambling industry mainly targeting soccer leagues such as the English Premier League, the Spanish La Liga, the Italian Serie A, the UEFA Champions League, etc. Cashless gambling is a common feature of the industry since mobile money and automated payments are acceptable by all betting shops. The increasing number of Digital TV subscribers and online betting companies such as BetPawa, BetWay, Sports Betting Africa, abaBET, World Star Betting, and 256Bet will continue to attract users. The regulator, the National Gaming Board has issued licensing requirements for online betting. Betting houses and casinos are also accountable persons under the Anti-Money Laundering Act of 2013.
Online/Digital Money Lending
Traditional money lending businesses are migrating to digital/online platforms to increase their customer reach and catchment opportunities. One of the common examples is MoKash, a service is offered by a Telcom company, MTN Uganda in partnership with a bank, Commercial Bank of Africa which enables people to save and borrow money using their mobile phones.
In the money lending context, this function is regulated and supervised by the Uganda Microfinance Regulatory Authority (UMRA), which is created under the Tier 4 Microfinance Institutions and Money Lenders Act of 2016. Only registered companies can engage in money lending business. Companies carrying on banking or insurance business and cooperative societies registered under the Cooperative Societies Act are excluded from the definition of money lenders.
Emerging trends and opportunities
- Blockchain may pave way for cryptobanking
- Proposals for taxation of fintechs and OTTs will create more tax disputes.
- Increased data requirements will drive need for cloud banking
- Proposals for regulatory sandbox
- Proposals for enactment of a National Payments law
- Proposal for ICO guidelines by the CMA
- Cheque truncation/digital cheque settlements have been cleared by BoU
- Inter-bank agent banking shared platform will drive agency banking
- E-banking/ internet banking risks are emerging
- Cyber stress-testing and cyber-attack disclosures may become mandatory
- Open banking & open API systems will raise legal and regulatory issues
- Fintechs as a driver of value in the ecosystem (insurtech, regtech, agtech, legal tech, e-commerce, e-health, e-transport, etc integration)
- Formation of Association bodies e.g Blockchain Association, Fintech Association, Bitcoin Network, etc will drive market awareness
- Increasing competition/Anti-trust awareness
- Increasing consumer protection advocacy and awareness
- Adoption of biometric technology will drive advanced biometrics such as HD fingerprint recognition, figure-knuckle print, facial/ iris recognition technology, matching and fusion algorithms, etc.
For further information, contact:
Silver Kayondo, Partner
Compiled by Ortus LLP
Inspiring New Frontiers