With the support of the European Union, UNCDF is pioneering crowdfunding projects in West Africa.1

As part of the ‘"Lessons learned from practitioners: Crowdfunding in Ghana" series, UNCDF is sharing the main findings from its pilot projects in order to inform development partners and to shape the digital financial inclusion agenda in Ghana.

Under the partnership with Pezesha Africa, the consortium led by SIA and FundRaising Africa for the GrEEn Project, UNCDF is supporting its partners in developing and adapting their existing platforms to make sure they meet the needs of young entrepreneurs while designing a sustainable business model. The in-depth market study exercise and first findings from the pilot indicate that regulatory framework plays a critical role in shaping the flow of the crowdfunding models.

Efforts in order to create regulation on crowdfunding has been made at international level. However, in Sub-Saharan Africa crowdfunding is relatively nascent, with only a few countries having regulations in place. While there has been an increased activity in donations for COVID-related causes, it is very uncommon for small businesses to raise capital using crowdfunding. Some countries, like Kenya and South Africa, benefit from a more flexible regulatory framework allowing such innovation (e.g. regulatory sandbox programme in Kenya), while others such as Nigeria are working towards building the regulatory framework needed to ensure investor funds are secure and protected. In most cases, where there is no crowdfunding regulation, the crowdfunding platform may be subject to banking regulations, stock exchange regulations, regulations relating to Securities and Exchange Commissions (SEC).

In Ghana, specific regulatory framework for crowdfunding providers just saw the light. On February 18, 2021, Bank of Ghana issued a policy to promote and guide the development and use of crowdfunding products and services for the banking sector. This confirms clear vision of Ghana's policy making towards innovation. While it exits a solid foundation for digital delivery of crowdfunding product and services at country level, the policy promotes solutions that comply with data protection and customer privacy regulations, good governance and accountability. Given the comprehensive nature of crowdfunding, the regulatory frameworks fall within both the regulatory jurisdiction of the Bank of Ghana and the Securities and Exchange Commission (SEC). Models of crowdfunding currently permitted under Bank of Ghana’s policy are donation-based and reward-based crowdfunding. These models entail the collection, holding and disbursement of funds, and are available to banks, Specialised Deposit-Taking Institutions (SDIs), Dedicated Electronic Money Issuers (DEMIs) and Enhanced Payment Service Providers (EPSPs).

Policy makers are currently working on establishing a regulatory framework both to reduce the risks associated with unregulated crowdfunding and to build trust for both investors and entrepreneurs while supporting the digital transformation and financial inclusion agenda. The new regulation will enable MSMEs to raise capital without going through the process of applying directly to financial institutions.

Crowdfunding institutions have now the option to operate as a FinTech providing the technology for lending decision making and credit scoring. Institutions providing crowdfunding services therefore have the option to apply for a Bank of Ghana (BoG) license under the FinTech regulations (Ghana Payments Systems & Services Act 2019). The process of acquiring the FinTech BoG licence is less stringent as compared to the non-banking financial institution license, however, some grey areas still remain as the regulatory space for crowdfunding is not yet defined.

Innovative providers are finding ways to offer solutions while complying with the national regulation. UNCDF supported donation-based crowdfunding model for example, lays its foundation through the Emergent Payment, the owner of FundRaising Africa, which is in the process of obtaining the above-mentioned license of Enhanced Payment Service Provider. While the platform cannot issue loans given it does not have a lending license from the Bank of Ghana, beneficiaries who set up campaigns on the platform will be offered loans in conjunction with financial services partners identified by SIA. Specifically, UNCDF will work with its partners to link the crowdfunding platform to banks, microfinance institutions and other financial providers interested in the donations collected through the crowdfunding campaigns as an initial contribution for the entrepreneurs’ loan application.

On the other side, Pezesha and its crowdlending platform, acts as a service provider by facilitating the transaction and does not own the funds collected through the platform. The crowdlending infrastructure Pezesha provides a service and not a lending activity from its own balance sheet. For its pilot phase, Pezesha, entering the Ghanaian market thanks to the support of UNCDF under the GrEEn project, is partnering with a licensed Ghanaian company for payments processing, collections and deposits through their existing infrastructures and licenses of Dedicated Electronic Money Issuers (DEMIs).

However, questions remain to ensure robust processes for investor, e.g. Know Your Customer (KYC) and Anti-Money Laundering (AML) policies, in line with established regulations – both in Ghana and other countries where the diaspora lives - to provide investors with the necessary information to make decisions. To successfully manage crowdfunding, platform providers need to apply for Customer Due Diligence (CDD), KYC and AML procedures to all investors and fundraisers. Crowdfunding companies can also set amount limits to reduce risks and set a minimum period after which funds can be withdrawn to allow time for any investigations to occur.

Learnings for robust regulatory framework for crowdfunding

The African Crowdfunding Association (AfCA) has developed a free resource for securities based crowd-funding called the ACfA Label Framework, to serve as a guide for any regulator seeking to implement crowdfunding regulation. Building on these international best practices and on the specific learnings from the UNCDF funded project, here are some recommendations from a regulatory perspective for the development of crowdfunding stakeholders:

• MSME investment readiness for investor protection should be at the forefront of the regulatory efforts as there is a clear lack of trust in non-traditional financial services. For example, the use of risk-based KYC to avoid fraud and strong capacity building to all stakeholders should be encouraged and streamlined.
• Regulatory authorities should review and endorse marketing awareness campaigns to ensure the concepts are well outlined and understood by SMEs and investors alike.
• Regulatory authorities need to ensure the formalization of MSMEs using such platforms (e.g. registration, skills development, etc.) to minimize any risk of fraud.
• The regulator should set up a regulatory sandbox to enable platform providers to test innovative ideas and boost innovation in the country. This will also make it easier for regulatory policies to be developed in partnership with all stakeholders.

Crowdfunding platforms can reach MSMEs which banks have traditionally not managed to reach. They can link young entrepreneurs with investors outside of their countries, especially with the African diaspora and international inverstors. They also provide local currency investment, which is critical as African currencies are often affected by market volatility. Moreover, in the “new normal” of travel bans and social distancing, crowdfunding seems the appropriate channel to bridge the financing gap and help young entrepreneurs and MSMEs in their journey towards economic independence. There is space for the development actors to support regulators in designing appropriate and conducive regulatory frameworks to allow private sector to innovate while protecting customers.

Supported by:

1 Among other development actors, FSD Africa has supported the African Crowdfunding Association (ACfA), an industry association for crowdfunding professionals in Africa, received a grant to deliver on its mission to foster the development of the crowdfunding industry in Africa. Kiva, a crowdlending provider received a grant from Chevron Corporation to fund its due diligence program and provide loans to entrepreneurs around the world.