Why is regulating technology important?

Are regulations and the regulatory

environment likely to stifle innovation in Africa? What regulations are appropriate and
even helpful for innovation? How can governments balance out regulations and
entrepreneurship? Is there tension between the regulators and innovators in Africa? So
far, nothing can elaborate on these questions better than the development, success,
and spread of digital financial services (DFS) in Africa. In particular, Kenya’s M-Pesa
(as well as similar products in Kenya and Tanzania), a mobile phone-based banking
product and later a technological platform, has pushed the frontier of innovation and
financial inclusion without compromising financial stability. Kenya’s combination of a
supporting policy environment with a sound regulatory and supervisory framework
allowed space for innovators and entrepreneurs to introduce financial innovations and a
diversification of products into the market. Regulators agreed with the innovators on
prudent risk management, and the policy environment ensured a stable macroeconomic
environment. These combined factors ensured Kenya’s success. These are major
outcomes that form a strong base for lessons for 2017 in the African continent as well
as for Kenya to sustain the frontier and move to the next level. Indeed, countries that
have embraced DFS and created a regulatory yet innovation-friendly environment have
provided the guidelines Regulatory environment and technological innovation in Africa:
Any tension? ISSUE BRIEF FROM THE AUTHOR NJUGUNA NDUNG’U Former
Governor, Central Bank of Kenya On Leave of Absence from the University of Nairobi
49 Indeed, countries that have embraced digital financial inclusion and created a
regulatory yet innovation-friendly environment have provided the guidelines to
proactively shape market outcomes. to proactively shape market outcomes. This lesson
has allowed innovators to successfully introduce new products into the market with
new delivery channels and methods. Those countries have raised their financial
inclusion profiles and created vibrancy in the financial market and the totality of their
economies. Thus, different countries in Africa that have provided better regulatory
environments even at extremes—such as the Kenyan case of “test-and-learn” approach
—have found great success. The case is different for those countries that have not
embraced the digital financial revolution; often their constraints can be traced to their
prevailing regulatory environment, but not their prevailing legal frameworks. The M-
Pesa revolution and resulting technological platform developed in four innovative and
virtuous stages, spurred by a conducive regulatory environment. First, the mobile
phone platform was used for money transfer between users and later for payments and
settlement—these uses were made easier and a rollout more possible in 2006 when the
Kenyan government amended the communication law to recognize electronic units of
money. The practicality of transforming cash into electronic units of cash, storing it on
a SIM card, and simultaneously loading it into a bank account led to the development of
a transactions platform in the absence of a national payments and settlement law.
Second, encouraged by regulators, virtual savings accounts were developed using the
same M-Pesa technological platform—impacting the banking intermediation process.
Third, the development and application of information capital (credit scores) for
participants in this technological platform arose as companies started using the M-Pesa
payment data including travel and communication patterns to determine the risk profile
of customers and offer them loans at affordable rates, eliminating information
asymmetry inhibiting the development of credit markets in Africa. This development
was supported by already-existing credit information bureaus and amendments on
information sharing to the Banking Act. Finally, cross-border payments and
international remittances based on the M-Pesa technological platform have become
possible aided by the National Payments Act, which allowed for standalone payments
and settlement units including foreign exchange remittances. Now, the M-Pesa
technological platform has revolutionized financial inclusion in Kenya to reach over 75
percent of the population and increase financial access touch points: 76.7 percent of
the population are within five kilometers of a touch point, and there are 161.9 financial
access touch points per 100,000 Kenyans compared to 63.1 in Uganda, 48.9 in
Tanzania, and 11.4 in Nigeria. 50 INTERNET AND MOBILE PHONE ACCESS IN
AFRICA DIFFER GREATLY Mobile phone access in sub-Saharan Africa has grown by
leaps and bounds in the past decade: Almost 82 percent of all Africans had a cell phone
in 2015. The internet, however, has not seen that sort of uptake, largely because of the
infrastructure needed to provide it. Indeed, the world has an average of 209 internet
servers per person and OECD members average 1087 servers per person, but the
region averages only 10. Unsurprisingly, then, access to the internet remains low:
Overall, only 15 in 100 Africans have access. 18 12 MEN WOMEN 23 10 URBAN
RURAL 20 8 AGE 15-24 AGE 45+ AVERAGE (INDIVIDUALS) FOR AFRICAN
COUNTRIES 15 0 20 40 60 80 100 1990 2000 2005 2010 2015 Mobile cellular
subscriptions Internet users Mobile cellular subscriptions and internet users in sub-
Saharan Africa (per 100 people) Source: World Bank. 2016. World Development Report
2016: Digital Dividends. Washington, DC: World Bank. Based on data from Research
ICT Africa (various years), ITU, and Eurostat (EC, various years). Data available at
[Link] Digital divide: Who has access to the internet in sub-
Saharan Africa? (percent) Source: World Bank World Development Indicators (2015).
50 FIGURE 3.1. 51 INTERNET PRICES CAN CONSTRAIN ACCESS Internet prices in
sub-Saharan Africa vary wildly, from $3037 per megabits per second (Mbit/s) in Chad
to $8 in Ghana, though the region’s average is $366 Mbit/s overall. A major trend,
though, is how geography affects these prices, as landlocked countries pay an average
$365 more than coastal countries per Mbit/s. Given that much of Africa recieves its
internet via (albeit expensive) undersea cables, coastal countries have much easier
access. New initiatives to provide internet via low-orbit satellites and high-altitude
balloons offer the hope of more accessible, cheaper internet for all, though still have a
long way to go when it comes to cost and reach. Note: Price per Mbit/s in US$ PPP a
month in 2014 Q4/2015 Q1 for fixed, residential broadband service. Mbit/s = megabits
per second; PPP = purchasing power parity. Source: World Bank. 2016. World
Development Report 2016: Digital Dividends. Washington, DC: World Bank.
doi:10.1596/978-1-4648-0671-1. License: Creative Commons Attribution CC BY 3.0 IGO.
Available at:
[Link]
[Link]. Data URL: [Link] 51 100
200 300 400 500 600 1000 2000 3000 Dollars per megabits per second No data 3000
Ghana Malawi Mauritius Gabon South Africa Zimbabwe Sudan Mozambique Kenya
Mauritania Somalia Côte d’Ivoire Senegal Zambia Botswana Nigeria Ethiopia Djibouti
Angola Namibia Madagascar Tanzania Togo Comoros Benin Burkina Faso Guinea-
Bissau Lesotho Niger Mali Cameroon Chad 0 Landlocked (average: $617.23 PPP)
Coastal (average: $251.98 PPP) FIGURE 3.2. 52 TECH HUBS IN AFRICA Source:
Firestone, R. and Kelly, T. The Importance of Mapping Tech Hubs in Africa, and
beyond. 24 August 2016. World Bank Information and Communications for
Development Blog. Available at: [Link]
tech-hubs-africa-and-beyond. Civil society led Government led Hybrid led Egypt Tunisia
Morocco Burkina Faso Mali Côte d’Ivoire Uganda Ethiopia Rwanda Gambia, The
Senegal Liberia Cameroon Nigeria Congo, Rep. DRC Zambia Angola Botswana
Zimbabwe Benin Namibia Mozambique Mauritius Tanzania Kenya Madagascar Ghana
South Africa 18 4 1 1 1 3 2 2 2 2 2 5 6 5 5 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 1 3 2 3 4 3 3 1
Academic institution led 2 5 1 4 1 52 Tech hubs, defined by the World Bank as “spaces
mainly focused on developing a digital entrepreneurship ecosystem, or a network of
engagement between digital entrepreneurs, designers, and potential investors,” are
popping up in Africa in different forms. These hubs enable the digital vanguard to gain
skills and network through brainstorming sessions, workshops, and business- and
technology-related trainings, among others. Notably, the great majority of these hubs—
74 in fact—are civil society led. In sub-Saharan Africa, South Africa, Kenya and Ghana
all boast a great number of tech hubs, but there are also many scattered across the
continent. 1 1 1 1 FIGURE 3.3. 53 Going forward, what can regulators in Africa do to
encourage the innovation revolution? Products like M-Pesa cannot thrive if the
regulators on both sides do not understand the potential of the innovations taking place
to the totality of the economy as well as the risks, and provide risk mitigation processes
upfront—thus avoiding stifling emerging innovative products. Other countries in Africa
that have followed similar paths even with different legal frameworks have been
successful. Rules and guidelines should encourage prudent behavior by both the
financial institutions and market participants. Regulators should manage the orderly
entry and exit of financial institutions in the market, minimizing the potential for major
disruptions in the financial system. This did not change when other regulators, like
telecommunication (telco) regulators in Kenya, came to the scene; in that example, it
strengthened the case for DFS and provided credibility with regulators working as a
team. So far, this pattern has worked well, but DFS platforms have brought other
actors that are regulated differently into the marketplace, such as the fintechs and the
telecommunication companies partnering with banks to provide access to financial
services. What happens now, when such partnerships require different regulators and
regulatory technology? In this case, regulatory technology must develop further, cope,
and align with these new product designs and market actors. In the Kenyan case, M-
Pesa is like a joint product between commercial banks and a telco (Safaricom), and
other similar products have been developed and rolled out to the market in a similar
way. These types of products sit in a commercial bank as a transactions platform and
the telcos provide the technological transmissions of transactions to this platform. The
regulators of banks and telcos then concentrate their efforts and guidelines along these
shared responsibilities. For further progress and faster financial inclusion in Africa in
2017— as well as increased uptake of other transformative innovations—what is
required is further improvement in the regulatory environment, regulatory reforms as
well as leveraging on successful cases to make the financial market more accessible,
efficient, safe, and reliable to boost confidence and endogenously move financial
inclusion to the next level. It is emerging in this way for example in East Africa. The
lessons are clear that a poor regulatory environment can be a major obstacle to
innovations in the market and will constrain the speed of financial inclusion. In this
regard, we can scheme out the role of regulations and what we may regard as a good
regulatory environment. First, regulatory changes are needed to enable successful
adoption and adaptation of innovations. In successful cases of DFS, regulators in
telecos, central banks, and even competition encouraged adoption and use by steering
a favorable environment for new products and enhancing their credibility. Second, the
regulatory For further progress and increased uptake of transformative innovations in
2017 what is required is further improvement in the regulatory environment. Products
like M-Pesa cannot thrive if the regulators on both sides do not understand the
potential of the innovations taking place to the totality of the economy as well as the
risks. 54 environment as well as frontier regulatory technology being adapted in the
financial sector improved financial inclusion. The success of financial inclusion and
accessibility to the financial market is compatible with the developmental role of
regulators in Africa. Finally, related policies must open and even encourage and
incentivize the consumer base to take up the new technology. In the Kenyan case, by
bringing the financially excluded into the banking system, it has enhanced consumer
protection and has created a better environment for monitoring anti-money laundering
(AML) and combating the financing of terrorism (CFT). More importantly, it has created
a better environment for monetary policy. From this example, we can also provide a
more global picture of the urgency of such innovations and their potential for
transforming the lives of millions. A McKinsey Global Institute Report (2016), Digital
Finance for All: Powering Inclusive Growth in Emerging Economies,1 recently
recounted some of the achievements of this new technology: • Digital finance has the
potential to provide access to financial services for 1.6 billion people—more than half of
whom are women-—in emerging and developing economies. 1 Manyika, J., Lund, S.,
Singer, M., White, O. and Berry, C. 2016. Digital Finance for All: Powering Inclusive
Growth in Emerging Economies. McKinsey Global Institute. Available at:
[Link]
could-boost-growth-in-emerging-economies. At the recommendation of the U.N.
Secretary-General’s Independent Expert and Advisory Group on Data Revolution for
Sustainable Development, Statistics South Africa will host the first U.N. World Data
Forum (WDF) in Cape Town, South Africa in early 2017. The forum aims to coordinate
the efforts of experts in statistics, measurement, data science, and information systems,
with those of data users—including policymakers, academic communities, businesses,
and civil society—in order to build capacities for leveraging data to make
evidencebased policy decisions related to the 2030 Agenda for Sustainable
Development. Topics for discussion will include innovative data sources and
technologies, data governance and privacy issues, financing data collection and
analysis, and data communication and visualization. JANUARY 15-17, 2017 United
Nations World Data Forum EVENT TO WATCH 54 55 2 “Rebuilding the Financial
Architecture,” Finance & Development, Volume 46, Number 3, September 2009.
Available at: [Link] pubs/ft/fandd/2009/09/pdf/[Link]. But
whatever the underlying causes [of the global financial crisis], public opinion rightly
expects the regulatory environment to be reformed to prevent a repetition of the
economic and human costs of the crisis. There is a natural desire in such circumstances
for “more regulation.” What is needed, however, is “better regulation,” a regime that
can more readily identify emerging vulnerabilities, that can properly price risks, and
that strengthens incentives for prudent behavior. In some cases, this will require
additional regulation; in others, a better-targeted use of powers that regulators already
have.2 • It can increase the volumes of loans extended to individuals and businesses by
$2.1 trillion and allow governments to save $110 billion per year by reducing leakage in
spending and tax revenues. • Financial service providers can benefit by serving $400
billion annually in direct costs while sustainably increasing their balance sheets by as
much as $4.2 trillion. • The overall boost to GDP in these economies can be $2.7 trillion
by 2025, a 6 percent increase. The contribution would come from raised productivity of
financial and non-financial businesses and governments with DFS. However, the fears
of regulatory arbitrage, risks, and misunderstanding of how innovations are taking
place continues to prevent so many African regulators from embracing DFS as well as
creating an environment for other innovations in the market to thrive. The tension of
regulation and innovation perhaps reigns even into 2017. What should be done? Going
forward, how is the balance to be achieved? Nothing seems to explain this better than
the words of the late Sir Andrew Crockett after the global financial crisis: Institutions
define the rules of the game, generating a set of dynamic principles to guide the market
of dynamic innovators and entrepreneurs. What results can we look for or showcase
where the balance of regulation and innovation has been seen to work? Do we assume
that in 2017 the regulators, especially in Africa, will acquire and adapt the frontier
regulatory technology that will balance out and encourage innovation, innovative
products, and entrepreneurship? The Kenyan case demonstrates that entrepreneurs
and innovations will thrive with a supporting policy and regulatory environment. Its
successes would not have been possible without the strong regulatory institutions as
institutions have two important functions: First, they define the rules 56 AN EXAMPLE
OF TECHNOLOGY IMPROVING SERVICE DELIVERY: NAIROBI’S WATER UTILITY
USING DIGITAL CUSTOMER FEEDBACK June 2013 June 2014 October 2013 October
2014 February 2014 Source: World Bank. 2016. World Development Report 2016:
Digital Dividends. Washington, DC: World Bank. doi:10.1596/978-1-4648-0671- 1.
License: Creative Commons Attribution CC BY 3.0 IGO. Available at:
[Link] pdf/102725-PUB-
[Link]. Total complaints received Total complaints closed Average
resolution time (days) Service delivery within urban areas goes beyond availability of
goods; rather, efficiency and customer response is additionally central to a productive,
well-functioning system. New forms of communication, such as digital customer
feedback at a Nairobi water utility, corresponded with a marked increase in improved
service delivery through the resolution of complaints. In this case, the mobile
application MajiVoice provides customers the opportunity to register complaints via
text message or internet. Not long after its introduction-—June 2013-—citizens were
empowered to register complaints and those issues were resolved faster. 6000 5000
4000 3000 2000 1000 0 140 120 100 80 60 40 20 0 Number of complaints Days 56
FIGURE 3.4. 57 of the game, generating a set of dynamic principles to guide the
market of dynamic innovators and entrepreneurs. Second, they define the appropriate
incentives (as well as penalties). A combination of rules, dynamic guidelines, and
appropriate incentives will encourage prudent behavior in the market and will support
market development. In this regard, innovators and entrepreneurs will find it easy and
rewarding to operate and thrive in such a market and a regulatory environment. This
synergy is what will support innovation in the market and attract new entrepreneurs.
But there are two important caveats to watch for in 2017. Financial stability—like so
many other important drivers of growth—cannot be sustained by regulations alone.
Other internal and external factors, such as an unstable macroeconomic environment
and threats of recession, can threaten success. Economic recession robs the economy
of the supply of investment opportunities and the financial sector thrives on this
dynamism to allocate financial resources to affect the investments. In addition, capping
interest rates destroys the instrument that is used worldwide to price risk. In this case,
domestic de-risking is bad for financial stability as well as encouraging innovation and
entrepreneurs in the market. A regulatory approach and a regulatory environment that
will encourage innovation and entrepreneurship is what African economies should
strive to achieve in 2017 but also work on the pitfalls that can disrupt the process that
will kill innovativeness and broad-based growth across sectors. 58 Digital jobs and
smart urbanization VIEWPOINT FIGURE 3.5. PROBABILISTIC POPULATION
PROJECTIONS BASED ON THE WORLD POPULATION PROSPECTS Africa’s population
will continue to boom at least for the next 100 years, far above much of the world,
creating demand for new types of jobs. Source: U.N. Medium-Variant Projection, 2015.
0 2 6 4 2020 2030 2040 2050 2060 2070 2080 2090 2100 Total population (both sexes
combined) by country or area, 2020-2100 (billions) Asia Africa Latin America and the
Caribbean Europe North America Oceania Given Africa’s demographic boom and
Africa’s drive to play a more competitive role in the global economy, the question is not
if digital jobs will play a role in Africa’s future job market, but whether or not these jobs
can be successfully used to catalyze growth, support innovation, and foster sustainable
and resilient communities. The worldwide model of digital jobs has been configured
largely to utilize low-cost, but tech-savvy, labor in developing countries to augment the
staff of international ICT businesses rather than to supply a steady stream of jobs for its
burgeoning population. While this trend can help foster the emergence and growth of a
middle class in these countries, it also creates an inherent instability as other
developing nations vie for (and can ultimately take away) those commoditybased digital
jobs. With all indications that urbanization trends will continue for decades in Africa,
national governments 58 59 Adam Brown Director of Infrastructure East Africa, Tetra
Tech, Inc. Patrick Adolwa Director of Infrastructure, Konza Technopolis Development
Authority should strive to create policy frameworks that help ensure endogenous and
sustainable growth of digital jobs that are not solely outsourced to Africa from without.
Further, policymakers should include digital jobs in an economic system that promotes
productivity across the analog-digital spectrum. For example, technological innovations
in agriculture can increase farming outputs, which affects jobs along the entire supply
chain. Similarly, technological innovations in medicine can help ensure a healthy and
therefore productive population. The overall effect is one where the preponderant
application of technology at both the local and national economic levels significantly
impacts the number of digital jobs generated from within the African economy. One
way to support digital jobs, especially in the wake of Habitat III resolutions in Quito, is
through urban centers: In Africa, a higher proportion of the 59 FIGURE 3.6.
PERCENTAGE OF COUNTRY’S POPULATION UNDER 20 YEARS OLD IN 2015 Not
only will Africa’s population boom, but the number of youth on the continent is already
high, creating demand for strong, modern economies and new technologies to adapt
the region to the changing world. >60% 50 - 59% 40 - 49% 30 - 39% <30% Source:
United Nations, Department of Economic and Social Affairs, Population Division (2015).
World Population Prospects: The 2015 Revision, DVD Edition. 60 youth population will
reside in urban centers by the year 2040. When these centers serve as hubs for
technology and innovation, all sectors of the economy, as well as all segments of the
community, can benefit in a more meaningful way. Urban centers in Africa should strive
to attract international technology businesses, which will contribute to an overall
system that promotes science, technology, engineering, and mathematics (STEM)
education, entrepreneurship, inclusion and accessibility, and ultimately more jobs for
all sectors of the economy. Given its position as the youngest and fastestgrowing
population in the world, Africa no doubt needs more digital jobs to support its
population. But that those digital jobs should shore up an Africanbased technology
economy is much more significant. Africa is in a unique position, and significantly so, to
prepare its youth for more STEM-based jobs (including digital jobs) while building both
urban and rural communities that promote productivity and innovation. This will not
happen by wishful thinking. It will happen through the deliberate and systematic
strategies of progressive African governments with a long-term vision and the
wherewithal to implement appropriate policies in technology and to provide and
facilitate the necessary funding to create resilient, sustainable, innovative, and
productive (let’s just call it “smart”) urban communities as well as efficient agricultural
systems. As the concept of smart cities emerges in the world, Africa has a unique
opportunity to take a new look at what the word “smart city” really means in the
context of African urbanization in the digital age. Africa needs successful urbanization
models that incorporate technology into the community fabric in a way that provides
greater access to and benefits from technology across the socio-economic spectrum.
Kenya is looking to do just that with its new smart city. Konza Technology City and
other smart cities in the developing world Konza Technology City (KTC) of Kenya1 is a
new smart city being planned, designed, and built from the ground up. It is striving to
be a model for combining urban master planning, technology, policy, and the rule of
law to create a place that takes the word “smart” in its truest sense. While KTC is
currently going through the steps of building a city—and all of the concrete, steel, and
human resources that this entails—it is also asking, and endeavoring to answer, hard
questions about how to make smart choices about the nexus of technology, jobs,
creation, and urban planning. Smart cities like Konza, and those in other parts of the
world such as the Smart Cities Mission in India, must strive to play a major role in
ensuring that technology and digital jobs help to bring people out of poverty and
increase their physical and digital mobility. This is especially important in Africa where
urbanization trends have not been contributing to the goal of transitioning people out
of poverty to the degree that can and should be expected. When cities like KTC serve as
innovation hubs— where people live, work, and play—the community extends well
beyond the physical borders of the city. When smart cities create digital jobs by way of
innovative technology, especially in life sciences and agriculture, it creates jobs across
all sectors of the economy, which ensures that digital jobs are part of the solution—not
the solution itself. 60 1 Konza Technology City (KTC) of Kenya, available at:
[Link]

Notes

Kenya’s M-Pesa, a mobile phone-based banking product and later a technological

platform, has pushed the frontier of innovation and financial inclusion without
compromising financial stability.