The adoption of digital business models, along with digital payments, accelerated significantly during the COVID-19 outbreak in Q1 2020. As of January 2020, the number of active electronic money customers in Ghana was 14,130,350, with total transactions valued at GH¢30.2 billion (data source: Fintech and Innovation Unit, Bank of Ghana). By January 2023, the number of active electronic money customers had skyrocketed to 20,551,466 with transactions valued at GH¢130.05 billion, a whopping growth of 62.69 per cent (CAGR) over the 3-year period. Ahoy to financial inclusion, forward ever, backwards never. Except that there is still friction in parts of the financial market where digitisation matters most, micro-savings and micro-credit. That friction, in part, is caused by regulatory complexity. It may be fair to remark, however, that the temptation to sacrifice regulatory rigour, to satisfy the need for financial inclusion, may in itself exacerbate risks related to money laundering and terrorist financing. Further, a robust regulatory regime helps to mitigate systemic risks, something that is good for all: market actors, regulators, and policymakers. Despite this, there are concerns about some aspects of financial sector regulations regarding Digital Financial Services, which is still not clear. A simple question should help clarify this concern. Question: Is it permissible for Tier 4 NBFIs, for instance, micro-credit or Susu enterprises, to procure payment services from duly licensed PSPs, and utilise the latter’s technological platform to deliver Digital Financial Services to clients? Those who may argue NO, would cite as reference, (a) Rule11(3) of the Business Rules and Sanctions for MFIs, (b) Section 7(2) of the Payment Systems and Services Act 2019, (Act 987), and (c) public alerts issued by the Bank warning the unsuspecting public about the activities of certain errant (usually illegal) organizations. However, a critical review of the corpus of regulatory notices, directives and guidelines on the subject matter may suggest the need for further stakeholder engagement to sufficiently put to rest all doubts. This article is intended to achieve two objectives: (a) critically review and point out the tension between the letter and spirit of regulatory instruments on DFS, (b) to make recommendations on how to balance AML/CFT risks with financial inclusion, in a way that is consistent with the size, business mix, and complexity of NBFIs.
Policy Recommendations:
- Third-Party Service-Level Agreement (SLA): The relevant units within the Bank of Ghana (OFISD, and Fintech and Innovation Unit), should engage key stakeholders within the PSP and Tier 3, 4 NBFI nexus, to fashion out guidelines that will govern SLAs related to Digital Financial Services.
- Compliance Reviews by Apex Bodies: Per Paragraph 2.7.5 of the AML/CFT Guidelines 2022, Accountable Institutions relying on intermediaries or other third parties service providers must ensure enhanced due diligence is performed. Apex bodies in the NBFI sector must take the lead in this Enhanced Due Diligence process to develop a Preferred Supplier List, out of which their member institutions could source third-party services related to payments.
- Regulatory Disclosures: Implement a sunshine policy to promote market transparency. Section 42 of the Payment Systems and Services Act 2019, Act 987, empowers the Bank of Ghana to mandate prudential reporting by PSPs, in a manner and format it deems fit. As part of its risk controls toolkit, the Bank should direct all PSPs to publish the names of NBFI customers that are using its platform for Digital Financial Services. This will have a positive impact on market conduct.
- AML/CFT Policy: All NBFIs that choose to provide Digital Financial Services, must have AML/CFT policies as an integral component of their Risk Management Framework.
- Enhanced Supervision: Due to the high-risk situation posed by providers of Digital Financial Services, enhanced supervision by OFISD, though sector Apex bodies, is reasonable, and consistent with FATF recommendation 26.