Fintech Entrepreneurship vs. Regulations in our Financial Sector

There has always been a constant battle to maintain high levels of integrity and competence in the financial sector. Financial markets stakeholders have long recognized this to be the truth — that fiercely engaging in this battle in establishing minimum set of behaviors and standards for its institutions, its intermediaries and other users of these financial services is in the sectors’ best interest. That is why, Regulators and Self-Regulatory Organizations sets of rules that regulates the conduct of its stakeholders. Having laws, rules and regulations to regulate the conduct of its members is necessary for the financial markets mainly because, if users of financial services loses trust and confidence instead develop a fear that malpractice is prevalent in the markets, they will not allow their deposits and funds to flow through the financial market systems.
If the conducts of financial markets were to be left into gentlemen’s agreement, assuming that all participants have good intents and that they will behave ethically, would have created a room where crooks and incompetents would have joined the band wagon and become industry’s intermediaries free-riding on the industry’s reputation. Thus, the need for regulations, rules and minimum standard of conduct is a necessary hindrance.
The other key reason for the necessity of rules and regulations is that in financial markets, the failure of one player or an intermediary may lead to the situation of systematic failure and instability into the whole system. In our recent memory, the failure of Lehman Brothers led to contagion effect, with very serious consequences not only for the United States financial system, but for the overall global economic health where businesses failed to meet their obligations, banks and businesses collapsed, investors wealth were eroded, insurances and pensions were lost, etc.

Furthermore, if left to their own devices, would tend to move towards a structure where one or a few players exerts undue power to the market, affecting its pricing mechanism in favor of a few over many. If not well managed, this undue influence, creates the desire for beneficiaries to control prices products. In the case of a stock market, this will be the situation where few individuals or institutions manipulates the price mechanism in the market by controlling liquidity and the price of a listed stock towards a direction of the choice of the influencer.

So, regulations have significant benefits for the proper conduct of any financial markets’ activities. However, despite these benefits and necessities, it is important for the society to ensure there is a good tradeoff between benefits of regulations and its negative effect on the innovation, enterprising, creation and growth. Without a good balance and tradeoff between regulations and innovations; regulations may be particularly detrimental to industries and economic prosperity.

I recently read an Article in the Harvard Business Review by Efosa Ojomo titled: “6 Signs You’re Living in an Entrepreneurial Society”. In the article, Ojomo mentions six major signs and the one that caught my attention mostly, is the one saying that if you are in a society where innovation precedes regulations, and not the other way round, then you know you are living in an innovative and entrepreneurial society. Oromo argues that in entrepreneurial societies, innovation always precedes regulation. In the United States, he argues, scientist and engineers in Silicon Valley, Boston and New York are always one step ahead of regulators, in developing innovations that helps societies to solve some of its most critical problems. The regulators eventually catch up, but not before the innovators have developed viable solutions for us to improve our lives. Ojomo says, if regulations in your society precede innovation from entrepreneurs, this is likely to curb the entrepreneurial spirit of innovators and therefore limits the growth and development that the society, in often cases, needs.

Last week I attended the Afro-Asia Fintech Festival where fintech entrepreneurs from the East Africa region and Singapore show-cased how they have allowed majority of us to have an easy access, as well as an efficient, flexible and better user experience in some aspect of financial services, especially on payments and access to credit. Besides this, I also have met several young Tanzanian innovators and entrepreneurs in the fintech who are in the verge of creating technological breakthroughs that can unlock some of the existing potentials in developing and growing some of our industries, but in several cases these young, ambitious and energetic young professionals are being hindered by the practice of letting regulations precede innovation and entrepreneurship.

As said above, markets are always a step ahead of regulators, important as regulations and regulators are, we should learn to let innovators and entrepreneurs help us solve our most critical problems, underscoring that, as Ojomo’s puts it the entrepreneurial society is a prosperous society, where more and more people are able to choose what they do, and when they do it. Innovation and entrepreneurship are the necessary ingredients for any economy or market flourish. This is topical matter, requiring a serious debate like it is other — but is a good debate for us to engage in.

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