Know Your Customer (KYC) protocols play a vital part in the growth of any industry. Where the flow of money is concerned, strong KYC measures are needed to confirm the identities of people that are involved in the transaction. The banking sector is one of the critical industries where KYC is of utmost importance.
African businesses and startups are seeing constant growth which has put the continent in a position to become an economic powerhouse. This growth is being pushed by a variety of factors such as improved policy-making, a young population, and increased investment into African startups. Innovations such as mobile money services are also driving economic growth by giving more people access to participate in economic activity.
While all these factors are contributing to the progression of African businesses, KYC compliance remains a challenge. Here are some factors that affect KYC compliance, and by extension, the further growth of business on the continent:
- Unsystematic KYC requirements – there are 54 countries in Africa and generally, each of these has different KYC requirements. This means that a business operating across borders will need to change their methods regularly as they enter each jurisdiction. These differences also affect the movement of personal finances across borders and thus, individuals are limited when it comes to the commercial activities that they are able to participate in.
- The dominance of the informal sector – the informal sector remains the biggest source of employment and economic activity in Africa. It is reported that as much as 83% of African adults are employed in the informal sector. This means that the bulk of economic activity on the continent is done in areas that do not comply with the KYC requirements of the broader business world. This has a ripple effect that leaves the banking sector in a vulnerable position while also limiting the participation of the majority of the continent’s population in the formal economy.
- Slow bureaucratic processes – one of the pressing challenges in Africa is the addressing systems that are used by most governments. Knowing where an individual resides is one of the key pillars of KYC. However, it is difficult for many people on the continent to produce documents such as utility bills to verify their addresses. Many people live in areas that have not been properly serviced and as a result, they do not have the utility bills to confirm their address. While authorities take a long time to process the relevant paperwork, people are affected by these slow systems which hold them back from meeting the KYC demands of the formal economy.
What can be done?
Africa is a vast territory where blanket solutions can be difficult to apply. This does not mean that possible solutions to the KYC challenges being faced cannot be found. The first step in making it easier for people to meet the regulations is to employ digital record-keeping systems where users can input their information which is then verified by the relevant authorities. This will improve the speed at which things like addresses are captured and confirmed.
Policies that bring the informal sector into the formal economy are another need on the African business scene. In most cases, policies are created with the aim of breaking the informal sector and forcing the participants into the formal sector. However, we can see that such policymaking only serves to increase the gap between these two sectors. Instead, governments should create inclusive and supportive policies which will close the gap between the informal sector and the formal economy.
Regional bodies such as SADC also have a part to play in encouraging cross-pollination of businesses across physical borders. These governing bodies should encourage synergy between countries that fall under their jurisdiction. An example of this would be the recent agreement between Botswana and Namibia which allows citizens of either country to cross their border without the need for a passport. A valid national ID card is enough to allow an individual to cross either way. Such policies have the potential to increase the economic exchange between neighboring countries.
KYC measures are a necessity in the bid to protect financial institutions and systems from potential illegal activity. They also help policymakers and authorities to create systems that benefit the general populace. The nature of the general African economy makes it difficult for most people to fulfill the KYC requirements needed from them and this leads to economic exclusion which in turn limits the economic potential of the continent as a whole. There is a need to ease the processes that help people to reach KYC satisfaction.