Ghana’s new Payment Systems and Services Act, 2019, (Act 987) has created waves in the fintech space in Ghana. FinTechs are now required to hold a license from at least one of five license categories (Enhanced PSP, medium PSP, standard PSP, PSP card scheme, and E-money Issuer) in order to commence or continue operations in Ghana.
Transitioning FinTechs (who were operating before the enactment of Act 987 in May, 2019) have until December 31, 2020 to obtain their license; while new entrants cannot start offering their services without first obtaining the appropriate license for their intended activities.
The licensing requirements span key considerations across corporate governance, systems and technology, enterprise risk management, and consumer protection; and are tailored to the permissible activities and risk profile of each license category. Some key requirements apply across categories, and among these is the local participation requirement.
Section 8 (4) of Act 987 states that a license applicant shall have at least thirty percent local equity participation. Simply put, any company seeking licensing approval to provide payment services in Ghana must have at least 30% of its shareholding owned by Ghanaians.
Even though Act 987 is fairly new, the issue of local participation and content is not. Local Participation refers to the level of indigenous ownership in an industry.
For emerging economies like Ghana, this is a valuable policy tool in the quest to ensure inclusive development that benefits local communities, industries and the country as a whole in various high-value industries. Many of these high-value emergent industries require significant injections of capital and expertise that the country may not be able to supply locally. Thus, the country may open that sector up for foreign investment.
However, in order to ensure that the returns to these investments benefit its citizens, the government may enforce local participation requirements to mitigate investments that result in 100% profit repatriation such that its citizens see very little if any benefit of these investments. Local participation requirements are usually enforced through an industry regulator such as the Bank of Ghana (via licensing) and investment promotion authority (via registration formalities).
While new, the fintech regulation on local equity ownership is in good company with a number of key industries in Ghana.
In November 2013, the government of Ghana passed the Petroleum Local Content and Local Participation Regulations 2013, (L.I 2204). This law states that there shall be at least a five percent equity participation of an indigenous Ghanaian company other than the Corporation to be qualified to enter into a petroleum agreement or obtain a petroleum licence.
Again, On 22nd December, 2017, the Energy Commission (Local Content and Local Participation) (Electricity Supply Industry (ESI)) Regulations, 2017, (L.I. 2354) was passed by the Parliament of Ghana into law. This law requires that Local ownership should be at least 15% in wholesale power supply and development and utilization of renewable energy in addition to local participation in the supply of labour, goods and services.
There are, however, some significant differences in local participation requirements between the Bank of Ghana and other regulatory agencies. For one, the BOG requirement of 30% local ownership is the largest in any industry in Ghana.
Further, Bank of Ghana’s requirement transcends beyond just local ownership. According to stipulations of the law and the guidelines, it is obvious that indigenes should not just hold shares, but should have some form of control and partake in the decision making of the company.
Act 987 states in section 2 that the act is to be read with the company’s Act, 2019 (Act 992). Act 992 clarifies that equity shares are different from preference shares (which has limitations on dividends, voting rights, etc.). Thus, the local equity ownership requirement should have some form of voice in the affairs of the company and should not be limited when it comes to voting rights, etc.
Inclusion in any way, shape or form is often fraught with challenges and trade-offs. With the introduction of this requirement, existing and intending foreign-owned payment service providers are being compelled to rethink their business models in a very significant and stringent way.
The 30% Ghanaian equity required must be ordinary shares; giving the shareholders voting and dividend rights – a rule that is likely to transform the entire governance module of the business. Bank of Ghana regulations further provide that shareholders with 10% or more share ownership and voting rights must include an attestation from a notary public confirming ultimate beneficial ownership.
It is normal that some resistance may arise on the part of the business owners and there exists a temptation to assume that the regulations are lax and would not apply or be strictly enforced. However, the intent of the law and the regulator is clear – Ghanaians must be the beneficial owners of 30% of all payment systems in Ghana, any other arrangement will result in a breach of Act 987, and consequently a revocation of licences already given or a refusal by the regulator to grant new licences.
Foreign firms, who may not want to give up a portion of control of their companies, would thus have to navigate a thin line between compliance with the BOG and retaining control. However, stepping away from the knee-jerk initial rejection of local participation, one begins to see the potential of local participation as a win-win situation for the entire digital payment ecosystem.
This requirement is not meant to punish foreign companies or to discourage foreign direct investments, but to promote cooperation and collaboration between local and foreign investors, and to leverage returns to these cooperative investments for inclusive development of the Ghanaian economy.
Opportunities abound in this time to invest in one of the most promising industries in Ghana. Investors are always looking for opportunities to invest, and local investors in Ghana are no exception. Foreign companies have the opportunity to leverage local investors with the funds, expertise, local network and interest to drive exceptional success for their companies and profits for all.
There are a number of comfortable, legitimate modes of distributing equity and inviting partnership while maintaining the culture, organizational strategy, product strategy and operations management of the company. The core of the company can thrive with the right mindset and strategy.
It is crucial for any foreign company seeking to commence or continue operations in this space, to internally align and determine their key interests, local investor requirements, and the trade-offs they are willing to make. This will enable them approach the local investor conversation empowered for successful cooperation. If the company determines that they do not have sufficient know-how to navigate the course they have chartered, they may then bring in external advisors equipped to fill the gaps identified.
In order to create the right balance between regulatory compliance and preserving the core of foreign owned businesses, it is important for legal and regulatory advisors to understand the needs of the businesses, vis-à-vis the regulations.
ABOUT THE ATHOURS
Jessie is a tech lawyer with The EightGeeks @Law , a tech law firm in Ghana, with extensive experience in legal research, intellectual property, corporate and commercial matters, technology transactions and currently works with tech firms and startups
Yinsongti is a tech lawyer at The EightGeeks @Law. Her practice covers corporate governance, corporate transactions, technology transactions and internet transactions. Yinsongti is currently a technology and entrepreneurial LLM candidate at at Cornell Law School.