Risk-Based Approach to Licensing and Authorisation

Risk-Based Approach to Licensing and Authorisation

Nombre de réponses : 24

Licensing – also called authorisation and/or designation – is the gateway to a country’s financial services market. By licensing a financial services provider (FSP), a regulator allows that provider into that market.

The licensing process is complex and must include: 

  • a sound legal framework
  • criteria for approving or rejecting applications
  • clear policies and procedures
  • formal communication channels between the regulator and firms. 

Licensing is fundamental for DFS supervision because it is a means to prevent the entry of undesirable and unfit players into the market. It also prevents the launch of harmful or unsuitable products that pose risks for vulnerable customers. For DFS providers, the licensing process can also help identify deficiencies in their business model, internal controls, or operations that they can resolve before entering the market. 

However, excessively strict licensing requirements and burdensome procedures can create undue barriers to entry. Conversely, excessively permissive approaches may attract DFS providers that lack the financial and technical capacity to reach scale. Such providers could harm consumers, impact market integrity, breach public trust, and sully the supervisor’s reputation. 

Licensing not only needs to strike a balance between allowing and barring entry, but it also needs to adapt to the evolution of DFS. Otherwise, licensing will become a barrier for safe DFS development and competition. 

In this next video, we explore how supervisors can strike a balance between barring unsuitable candidates and allowing those who are fit and proper to enter and compete.  

 

 

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Click to view the transcript.

In this video, we explored how both individual supervisors and supervisory authorities can approach licensing to appropriately balance the need for competition and innovation with consumer protection and regulation. 

Additional Reading 

To learn more about licensing and authorisation, we recommend the following:

Reflection Questions for Discussion

Here are some more reflective questions. Please post your response using the forum functionality to share your insights and thoughts with your fellow students. 

  1. How can supervisors strike the right balance between preventing unfit providers from entering the market and ensuring that licensing does not stifle innovation and competition?
  2. In what ways can flexible licensing approaches improve supervisory understanding and contribute to inclusion and innovation in the market?
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Re: Risk-Based Approach to Licensing and Authorisation

par Erah, Dominic Ose Erah, Group 1
1. Supervisors can strike this balance by applying proportional, risk-based licensing that screens out unfit providers while keeping requirements flexible enough to allow low risk, innovative entrants to compete.
2. Flexible licensing approach improve supervision and support inclusion and innovation by allowing regulators to tailor requirements to different risk profiles, which helps them better understand new business models while enabling safe entry for diverse, low risk providers that expand market access and foster innovation.
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Re: Risk-Based Approach to Licensing and Authorisation

par LEILAH ABDALAH MUBEYA, Group 6
1. Supervisors can strike the right balance by implementing a phased or pilot approach by allowing new entrants to operate under limited conditions while demonstrating their capacity to manage risks. Also, modernizing licensing by setting minimum requirements for licensing but considering company's business model and assess the risk which it poses.
2.Flexible licensing supports innovation while protecting customers, increasing the availability of digital financial services and building trust, which boosts usage. As more DFS providers enter the market, accessibility and competition improve, encouraging providers to offer better services and fostering further innovation.
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Re: Risk-Based Approach to Licensing and Authorisation

par Beyene Getenet Getu, Group 2
1. Supervisors can strike the right balance by protecting the financial system and consumers without creating barriers that discourage innovation or competition. This balance is at the heart of effective DFS (Digital Financial Services) regulation. Supervisors strike the right balance by using tools like proportionate and risk-based licensing, tiered or phased authorization, transparent & predictable requirements, strong but fair fit-and-proper checks, implementing ongoing supervision and coordination with other regulators.
2. Flexible licensing approaches help supervisors better understand new business models while also supporting innovation and financial inclusion. Here are the clearest and most practical ways they achieve this:
 Deepening supervisory understanding of new technology and business models
 Reducing entry barriers for innovators that target underserved populations
 Promoting healthy competition and reducing market concentration
 Supporting gender and financial inclusion goals
 Allowing learning through real-world experimentation
 Ensuring proportionate, risk-based regulation and
 Building stronger dialogue between regulators and innovators
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Re: Risk-Based Approach to Licensing and Authorisation

par Mariam Nansubuga, Group 4
1. Supervisors can strike the right balance by adopting a risk-based, proportionate licensing framework that is a combination of proportionality, transparency, flexibility, and adaptive oversight.

2. Flexible licensing improves supervisory understanding by giving regulators direct visibility into emerging business models and risks through sandboxes. It also promotes inclusion and innovation by lowering entry barriers for providers serving underserved populations and also creates and environment that encourages competition hence innovation.
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Re: Risk-Based Approach to Licensing and Authorisation

par Sarah Davinah Namata, Group 4
1. Supervisors can implement a risk based licensing process where they set clear competency standards as well as use of sandbox environments to test products.
2.Flexible licensing gives regulators clear insight into emerging business models, and encourage fintech inclusion.
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Re: Risk-Based Approach to Licensing and Authorisation

par Benedict Muhiire Hamenya, Group 4
Supervisors can strike the right balance by simply requiring the different companies (different sizes and different levels of complexity) to comply differently based on their business models e.g. requiring bigger DFS providers to hold more capital than smaller DFS providers prior to obtaining a license.
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Re: Risk-Based Approach to Licensing and Authorisation

par Faith Fxentirimam Envuladu, Group 1
1. The supervisors need to use risk-based licensing frameworks because this system helps them to prevent unfit providers from entering the market while maintaining their need to protect both licensing processes and competitive market innovation. The assessment requires organizations to evaluate potential providers through two risk assessment levels, which determine their operational requirements based on their potential danger to consumers and the financial system. The supervisors establish regulatory sandboxes and innovation hubs to create spaces where businesses can test their new models and technologies, which enables supervisors to track emerging risks without needing immediate licensing enforcement.
2. Flexible licensing approaches demonstrate their ability to enhance supervisory understanding while promoting market particle inclusion and innovative development because they enable supervisors to create customized licensing requirements which match the distinct needs of each business model and technological framework. The organization will establish temporary licenses to start new business operations under controlled conditions, which will enable them to collect operational data while bettering their business model development process. Supervisors who maintain continuous dialogue with market participants while practicing learning-by-doing methods will gain enhanced risk and opportunity understanding about emerging innovations, which will help them create more effective licensing policies and build a competitive marketplace that welcomes all participants.
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Re: Risk-Based Approach to Licensing and Authorisation

par Lyonah Murungi Murungi, Group 4
1. By having sound knowledge to of regulated licensees in order to implement a pilot‑phase approach that allows new entrants to operate within regulatory sandboxes, and by modernize the broader licensing framework that reflects each company’s capacity and risk profile.
2.Supervisors should tailor requirements to each applicant. This means they can adjust rules based on what the applicant does, how the organization is structured, and the level of risk involved.
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Re: Risk-Based Approach to Licensing and Authorisation

par Sheena Rebecca Nantumbwe, Group 4
1.Supervisors can strike a balance by implementing a pilot phase approach in order to carefully analyze and assess the risk and impact of various products before they are rolled into the market in order to let in fit providers and prevent unfit providers.

2.Flexible licensing such as phased or restricted licenses helps supervisors understand new business models, supports innovation and competition, and can improve financial inclusion while maintaining oversight.
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Re: Risk-Based Approach to Licensing and Authorisation

par Michael Sserwanga Sserwanga, Group 4
Supervisors need to have adequate knowledge relating to the providers such as the business models and risk profiles, as well as communicate adequately to the providers especially when it comes to requests for additional information

Flexible licensing approaches such as pilot phases allow supervisors to engage closely with applicants before full-scale operations begin, allowing supervisors to get a practical understanding on how the innovator addresses the risks associated with the innovation
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Re: Risk-Based Approach to Licensing and Authorisation

par TAHIR SAIDU, Group 1
1. Supervisors can strike a balance by modernizing the licensing process in such a way that is more flexible with varied level of requirement which will depend on the potential risk of such innovation. It is very important for supervisors to have sound knowledge of such businesses/innovations, this will enable them to determine the appropriateness of allowing such innovation as well the appropriate requirement for licensing.
2. Flexible licensing will enable supervisors to lower entry requirement for low risk innovation instead of having a one size fit all kind of licensing requirement which may stifle innovations that may have the potential to improve financial inclusion
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Re: Risk-Based Approach to Licensing and Authorisation

par Basil Paul Buyondo, Group 4
1. Set stricter licensing standards for higher-risk activities, tailor capital, governance, and compliance requirements to the scale and complexity of the provider and provide guidance to applicants.
2. Supervisors identify operational, cyber, consumer protection, or outsourcing risks early, lowers entry barriers for new players and improves risk classification and resource allocation.
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Re: Risk-Based Approach to Licensing and Authorisation

par Jemimah Precious Kuteesa , Group 4
1. Supervisors remain continually communicate with providers to ensure that all requirements set promote consumer protection while allowing providers meet capacity and compliance requirements in a phased approach.

2. Flexible licensing approaches enable supervisors assess innovative business models and tailor requirements using practical risks rather than traditional or rigid risk classifications.
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Re: Risk-Based Approach to Licensing and Authorisation

par Rehan Masood, Group 5
Supervisors can strike the right balance by applying risk-based, proportionate entry requirements that focus on outcomes rather than rigid form. This means setting clear minimum standards on governance, safeguarding of funds, consumer protection, and operational resilience, while calibrating the depth of scrutiny to the applicant’s risk profile and business model. Early engagement mechanisms, such as pre-application consultations, help supervisors understand innovations and guide firms toward compliant designs before formal licensing. Transparent criteria and predictable timelines also reduce uncertainty, enabling competition without lowering prudential or conduct standards. In practice, approaches similar to those used by the State Bank of Pakistan demonstrate that strong baseline safeguards can coexist with space for new entrants when supervisory expectations are clearly articulated.

Flexible licensing approaches can further strengthen supervisory understanding while promoting inclusion and innovation. Tiered or phased licences allow providers to start with limited activities, transaction caps, or geographic scope, giving supervisors real-world visibility into risks and operational capabilities before full authorisation. Restricted licences or pilot permissions generate supervisory intelligence on customer behaviour, technology performance, and risk controls, which can inform future policy and risk assessments. These approaches also lower entry barriers for providers targeting underserved segments, such as low-income or rural customers, because compliance obligations scale with risk and complexity. Over time, the iterative learning gained through flexible licensing not only improves supervisory effectiveness but also supports a more diverse, competitive, and inclusive DFS ecosystem.
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Re: Risk-Based Approach to Licensing and Authorisation

par AISHA UMARU HADEJIA, Group 1
1) Supervisors can keep the balance by setting clear rules that block unsafe providers while leaving space for new ideas to grow. They should demand basic standards like good governance, consumer protection, and data security, but adjust the level of requirements depending on the size and risk of the provider. For startups, phased or conditional licenses can let them prove themselves gradually, while sandboxes or pilot programs give room to test innovations safely. This way, supervision protects consumers and the market without shutting out healthy competition or creativity.
2) Flexible licensing makes supervision and market growth easier by giving regulators a clear view of new business models through sandboxes, while lowering entry barriers for smaller providers serving underserved communities. This promotes financial inclusion, encourages competition, and drives innovation, all while helping supervisors learn and adapt faster.
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Re: Risk-Based Approach to Licensing and Authorisation

par Elsabet Getachew Mulugeta, Group 2
1. putting in place the right and clear requirement and regulation, clear and timly response
2. follow up the applicants and understand the business type for operations to be fully applied
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Re: Risk-Based Approach to Licensing and Authorisation

par Zedi Muyingo Muyingo, Group 4
Supervisors can apply proportionate, risk-based licensing requirements that focus on safeguards such as governance and financial soundness.

Approaches like tiered licensing, regulatory sandboxes, etc..help supervisors to observe new business models in a controlled environment before granting full authorization.
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Re: Risk-Based Approach to Licensing and Authorisation

par Usman Bayero , Group 1
1. Supervisors achieve this by implementing tiered licensing that matches requirements to the provider's specific activities. By lowering capital barriers for low-risk, payment-only fintechs while maintaining high fit and proper standards, Nigeria can encourage competition without compromising the integrity of the broader financial system.
2. Flexible test and learn approaches, like the Regulatory Sandbox, provide supervisors with real-time data on how novel products interact with Nigerian consumers. This reduces regulatory uncertainty, allows for evidence-based policy adjustments, and enables niche providers to reach underserved populations, directly driving financial inclusion and innovation.
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Re: Risk-Based Approach to Licensing and Authorisation

par Aliyu Mohammed, Group 1
Adequate knowledge of the business of the operators and proper risk profling will help in determining the right balance between preventing unfit providers from entering the market and ensuring that licensing does not stifle innovation and competition.
By adopting a tiered licensing regime and innovations like the regulatory sandbox (as implemented in Nigeria) supervisors can have flexibility in their licensing approach to enhance inclusion in a market.
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Re: Risk-Based Approach to Licensing and Authorisation

par KABIRU MUDASHIRU, Group 1
1. This can be achieved by having a good knowledge of the business of the DFS. Once this is achieved, the requirement should be flexible or dynamic based on the situation and business model. However, there must be a minimal requirement, for example, capital requirement, feasibility study, etc

2. Flexible licensing allows the supervisor to have a better understanding of the business model, innovation, and the technology that underpines them. This allows proportionality to be applied in licensing without stifling innovation with requirements.
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Re: Risk-Based Approach to Licensing and Authorisation

par Agaba Albert Busingye Agaba, Group 4
1. Supervisors can strike a balance by using Licensing approaches in understanding the business models of the DFS providers (encourage innovation of products and systems), compliance with the sound legal framework (supervision and regulations) and communicate appropriately to the applicants on the status of their application.
2. Flexibility in licensing approaches can improve supervision through use of proportionality for the supervisors to scale down in relation to supervision of complex business models, risk profiles and mitigation of risks for a suitable market.
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Re: Risk-Based Approach to Licensing and Authorisation

par Doreen Ninsiima, Group 4
1. Supervisors can strike the balance by carrying out a pilot phase approach to understand the business of the providers. In so doing, They will stop unfit providers from entering the market. By conducting a pilot study, supervisors will be promoting innovation.
2. This approach enables the supervisors understand the risks of the different players through flexible approaches like the Pilot Phase Approach and leads to inclusion and innovation.
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Re: Risk-Based Approach to Licensing and Authorisation

par Aboo Badhasa Aboma, Group 2
1. Supervisors can achieve this balance by implementing proportional licensing, where regulatory requirements (such as capital and reporting) scale with the provider's size and risk profile. By moving away from "one-size-fits-all" banking licenses to tiered or specialized licenses (e.g., for e-money issuers), authorities lower the barrier to entry for smaller innovators. This is often coupled with a risk-based assessment during the vetting process to ensure "fitness and propriety" without demanding unnecessary overhead. Consequently, competition increases while the core financial system remains protected from high-risk or incompetent actors.

2. Flexible approaches, such as Regulatory Sandboxes, allow supervisors to observe new technologies in a controlled environment, gaining firsthand data on risks before formalizing rules. This "test-and-learn" method improves supervisory understanding by turning regulators into active observers of innovation rather than just reactive enforcers. For the market, this flexibility fosters financial inclusion by allowing providers to test low-cost delivery models that reach underserved populations. Ultimately, it creates a feedback loop where regulations evolve alongside technology, ensuring the legal framework supports rather than hinders progress.
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Re: Risk-Based Approach to Licensing and Authorisation

par Sarim Ali, Group 5
1. Supervisors can strike this balance by focusing on the risks posed by each applicant rather than applying rigid, bank-style requirements to all providers. Clear communication, proportional requirements, and a strong understanding of different business models help protect consumers without discouraging innovation.
2. Flexible approaches, such as pilot phases, allow supervisors to observe new models in practice and better understand their risks before full authorisation. This builds supervisory knowledge while giving innovative providers space to test solutions that can expand financial inclusion.