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Money TalksConfusion reigns over payment system reform

Confusion reigns over payment system reform

Gone are the days when a telecom operator solely survived on the business of telecom services. In the era of digitization, digital financial services and other products are becoming the core businesses of telecom operators. The announcement by Ethiopian officials that M-Pesa is going to be granted a license to operate in Ethiopia pleased Safaricom investors even more than getting the Safaricom license. Safaricom has already embarked on negotiating with the government and developing infrastructure for MPesa. However, the devil is in the details, and investors are dissatisfied with the type of license Ethiopian authorities envision for MPesa.

The National Bank of Ethiopia (NBE) has been amending the Payment System Proclamation, a decade-old legislation that needs to be amended to enable foreign fintechs such as MPesa to operate in the country. After the Council of Ministers passed the draft amendment, the House of Peoples’ Representatives (HPR) has been deliberating on it before publishing it in the Negarit Gazette.

However, a staunch opposition exists in the form of Safaricom and MPesa’s legal advisors in Ethiopia.

MPesa in Kenya and other countries has been providing digital financial services; hence, it is a fintech. It is also considered a business unit of Safaricom.

However, Ethiopian legislation bars such provisions. First, it does not allow fintech. In Ethiopia’s context, a fintech only facilitates payment systems, acting in between financial institutions and consumers. Second, it prevents MPesa from being considered a business unit within Safaricom, but rather separate licenses are needed.

The much-anticipated amendment to the Payment System Proclamation recognizes MPesa as a “payment instrument issuer” or “payment system operator.” So MPesa gets a license as a payment instrument issuer. It is the same license given to ethio telecom but for foreign licenses. The amendment does not allow digital microlending and saving.

The amendment further states that a payment instrument issuer may facilitate the provision of microcredit, including overdraft, microsavings, microinsurance, inward international remittances, or any other related services digitally in partnership with financial institutions licensed by the central bank.

This means that MPesa can only facilitate, but not directly conduct, the business of digital microlending and microsaving, which is its core business.

The amendment also has some contradictions.

It defines “financial institution” as a bank, a microfinance institution, an insurance company, a re-insurer, a payment instrument issuer, and a payment system operator, among others. But when it lists the activities of a payment instrument issuer, it refers to it only as a facilitator of transactions between financial institutions, not as a financial institution itself.

However, given the ongoing heated debates between Safaricom, the NBE, and the HPR legislators, this is not the only point of contention.

The NBE refused to recognize MPesa as just a business unit of Safaricom. Instead, it insisted that MPesa should be licensed as an independent FDI. This complication was caused by the draft amendment to the Payment Systems Proclamation, which limited such venues.

The proclamation states foreign investors who want to get a license in the fintech sector should pay a license fee and an “investment protection fee,” since they are joining a sector that has been closed to foreign investment.

In fact, the proclamation, though it prohibited foreign companies from establishing subsidiaries in Ethiopia, made exceptions. “Subsidiary” means a business organization as defined under the Commercial Code of Ethiopia controlled by a telecom operator, a payment instrument issuer, or a payment system operator and registered under the laws of the country and having its head office in Ethiopia, it states.

Hence, the shareholder of Safaricom Ethiopia has to inject more capital to establish MPesa Ethiopia.

The Plan, Budget, and Finance standing committee at Parliament approved the amended payment system proclamation last week and it has been forwarded to the parliament for legislation. During the deliberation, officials at the central bank, ethio telecom, legal advisors of Safaricom Ethiopia, and other stakeholder groups engaged in back and forth.

“The foreign telecom operator should be allowed to run the mobile money business just as a business unit in itself,” Dawit Sahle, legal advisor of Safaricom Ethiopia, said. “We are being requested to establish another license for payment instrument issuers and payment operators.

Dawit says this law should not prohibit a payment instrument license holder to do payment operation business. He believes that two different licenses should not be required for these two businesses since they are related.

“Foreign investors come in with large sums of money, but once they arrive, they are required to pay different license fees for related businesses. This can discourage foreign investors,” Dawit explained.

The modality of subsidiary should be left to companies, according to Dawit. “The modality of relationship between the mother company and a subsidiary should not be limited by a proclamation. The investor should choose whether the subsidiary will be a PLC share company or another type of company.”

Under Ethiopia’s law, more than five shareholders are required, Dawit stated. “But shareholders of our telecom company might not number more than five. So this proclamation must lift the minimum shareholder composition for us. This method of separating subsidiaries from the parent company results in double taxation and other complications.” 

Kifle Haileyesues, another legal advisor from Safaricom Ethiopia, also complained that a payment instrument issuer should not be a separate business for a telecom operator.

He says establishing a separate subsidiary company for the foreign telecom operator to conduct mobile money business creates a very complicated scenario both for the company as well as the regulatory authorities in Ethiopia.

“A foreign telecom operator should be able to conduct other businesses like mobile money just as part of the telecom business. They should not be separate, and the proclamation must consider this,” Kifle said.

Safaricom’s legal advisors opposed the amended proclamation and urged the standing committee not to ratify it without amending those issues.

However, Solomon Desta, vice governor for financial institutions supervisor at the NBE, presented two factors to justify the decision to amend the proclamation.

“We have discussed combining telecom and mobile money businesses in one license intensively. They are two different businesses that require different work licenses, different capital, different structures, and different regulators,” Solomon said.

He stated that they are facing challenges regulating ethio telecom, which is regulated by the ECA, and telebirr regulated by the NBE.

“From the beginning, we allowed such a bond for ethio telecom and telebirr, because we thought we could solve the regulatory amalgamation by signing a MoU with ECA,” Solomon said.

Explaining why it overlooked the minimum capital requirement and other requirements, Solomon stated that “It was concluded that there would be no problems since both are state-owned. So we introduced a separate regulation to allow telebirr, because ethio telecom’s establishment proclamation does not allow it to do business.” 

The vice governor explained there is no problem if the state-owned ethio telecom and telebirr operate as one, but this cannot be allowed for foreign operators because it would become difficult to regulate. He underlined that foreign investors must establish a new subsidiary for mobile money.

“Safaricom asked to include a payment instrument issuer (mobile money) business as one of its business departments under the telecom license, but we refused because it is very difficult to regulate,” Solomon said.

He believes if the two are separate businesses operating under two different licenses, it is transparent and simple to regulate.

Another factor behind the decision, according to Solomon, is to avoid risks. “If a crisis happens to the telecom operator abroad and the mobile money business is attached to the telecom company, then the damage also transfers to the mobile money business here.”

So, for him, each business must be seen on the basis of its own merit.

Yohannes Woldegebriel, an official of the Addis Ababa Chamber, stated that the central bank’s new proclamation is creating segregation between state owned ethio telecom and foreign telecom operators.

“The NBE said it is difficult to control. But it should develop its regulating capacity,” Yohannes said. He stated that instead of obtaining separate licenses and developing separate infrastructure, telecom operators should be allowed to conduct payment instrument issuer and payment operator businesses using their infrastructure.

“Such favoritism is unnecessary. We are already observing certain payment systems and the public utility bill being directly given to telebirr. Our chamber recommends any payment system be given to the most efficient operator,” Yohannes adds.

While the NBE claims that combining mobile money and telecom creates control issues, Safaricom’s legal counsel claims that unbundling the licenses creates more complexity for regulatory authorities.

But it is clear the intention of the Ethiopian government is to generate more revenues from the separate licenses. On the other hand, separating the businesses creates more hassle for Safaricom.

Solomon Damtew, director, payment and settlement systems directorate, at the NBE stated that there are two questions raised by the investors.

“The first is to combine mobile money and telecom under one license, which is impossible due to the risks involved. The second question is whether the telecom operator in Ethiopia can establish its own subsidiary here for the payment operator businesses. That is also impossible,” said Solomon.

The new proclamation, according to him, states that only strategic investors can establish subsidiaries in Ethiopia, and Safaricom Ethiopia is not a strategic investor, but the owners of the telecom company [Safaricom shareholders] are considered strategic investors.

“So they can establish another company in Ethiopia under a separate license. But this company is not a subsidiary of the telecom company here. They can form a share company, or PLC. For non-strategic investors, they must come as a share company. This is simply for control reasons. At least five shareholders are required to form a share company, but for this specific case, we might consider it in the upcoming directive,” Solomon expounded.

Though the amendment allows strategic investors to establish subsidiaries, Solomon believes this article is included only to encourage strategic investors.

“A subsidiary can be a PLC, a SC, or a one-person PLC, but establishing a subsidiary company of such types is allowed exceptionally only for telecom operators, payment instrument issuers, and payment operators,” Solomon, systems directorate, said.

The core business of a payment instrument issuer, according to Solomon, is to activate electronic payments. He says the capital comes from financial institutions, and the issuer is only a facilitator of a transaction here.

“The issuer cannot collect savings and give loans. We are allowing payment instrument issuers to facilitate payment systems, not collect savings or give credits. That is the responsibility of financial institutions, and Ethiopia has not yet made this available to foreign investors,” he explained.

Bahakal Abate, who works at Aman and Associates Law Office, a law office that has a relationship with Safaricom Ethiopia, tried to devise a middle ground for both the NBE and Safaricom.

Safaricom’s legal advisors also submitted their written recommendations to the HPR’s standing committee on how to resolve the impasse regarding the legal relationship between MPesa and Safaricom in Ethiopia. This will also be the basis for upcoming foreign telecom operators.

“There is no question that the financial sector needs serious control. If the NBE and ECA sign a memorandum of understanding and work hand in hand, it is simple to regulate the company. So the investor can run the telecom and mobile money businesses as two units under the same company,” Bahakal, a former advisor to Diegeo, said.

From the investor’s side, this is preferable for the efficiency objective, according to Bahakal. “So this proclamation should not prohibit this. It is better to strengthen the regulating capacity of NBE and ECA instead of prohibiting the investors from having separate licenses for related businesses.”

For him, the subsidiary complication can also be solved if the NBE considers the Safaricom consortium as a strategic investor for MPesa too.

“In any case, the capital comes from foreign investors. So the foreign investors should be considered strategic investors. This means the shareholders of the telecom company must be able to form another company for the fintech,” Bakhal said. “The shareholder structure must be maintained under the telecom and fintech licenses.”

For Bakhal, if the NBE insists the telecom firm must acquire a separate license for the digital financing service [MPesa], the government must allow the shareholders of the telecom [Safaricom] to form the fintech company without altering their current shareholding structure.

“If the NBE is concerned that international financial disruptions will harm Ethiopian fintech, it should impose minimum capital requirements on the fintech. Liquidity adequacy can be achieved with other controlling mechanisms,” Bakhal said.

The minimum number of shareholders required to form a share company in Ethiopia is five, and foreign investors may not necessarily be more than five, which needs to be amended. Bakhal says that if this is included in the amendment payment system proclamation, it will be difficult to revise soon.

For the central bank, it seems the capital registration of telecom and Fintch is not a problem, as much as the separate capitals coming into Ethiopia.

“If Safaricom Ethiopia wants to establish a subsidiary company for the payment instrument issuer business, and if we say the capital required to establish the payment instrument issuer is USD 100 million, then Safaricom Ethiopia raises and injects that capital from its shareholders. For the NBE, it is not difficult to register that capital,” Mesfin Getachew, director, Legal Service Directorate, NBE, said.

The standing committee finally gave way to NBE officials after heated debates inside the Parliament.

“We had a lengthy and heated debate with NBE officials. We suggested that the payment system proclamation be introduced as a new proclamation rather than amended,” Desalegn Wodaje, chair of the standing committee, said.

The existing one has been in place for over ten years, and according to Desalegn, today’s scenarios have changed so much that they cannot be covered solely by an amendment.

“Today, executives from telecom and fintech firms provided critical input. Some of their concerns are addressed by the commercial code. Strategic investors can directly form the company here. Otherwise, the Ethiopian company can establish a subsidiary company under a different license,” Desalegn explained.

Despite the fact that Safaricom’s legal counsel appeared to have fallen short, Desalegn decided to gather more input from stakeholders before the parliament ratified the payment system proclamation.

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