Traditional banking dominates the financial system of North Macedonia with a share in the total assets of the financial system of over 80%, according to the statistical data of the National Bank of North Macedonia. The rest of the financial assets are distributed between non-banking financial institutions such as pension and insurance funds, investments funds, and alternative financial services institutions.
Concerning the lending market, the global trend of increasing alternative financing has affected North Macedonia as well, with a five times rise in the financial assets of alternative financial institutions between 2015 and 1019 and reaching over EUR 60 million by 2020. In the same period, the share of alternative financial institutions in the total financial assets raised from 0,4% to 0,6%, which is the highest growth rate in the North Macedonian financial sector. The number of registered alternative financial services institutions also tripled from 10 in 2015 to 32 registered market players in 2021.
The rapid growth of alternative financial services in North Macedonia in recent years was driven by local market developments and the changing needs of the consumers. Alternative financial services gained even more traction a drive for financial inclusion and access to finance for the population and small enterprises that usually don’t have access to traditional financing channels. The essence of alternative finance is to provide financial services to consumers in a fast, easy, and accessible manner based on the use of modern and innovative technology focusing on digital channels. Even more in a situation of the persistent COVID-19 crisis, fintech is a new reality that regulators and other stakeholders need to acknowledge.
The latest survey of the National Bank supported by the European Fund for Southeast Europe of 2020 shows that nearly 90% of the participants in the survey representing all stakeholders recognize the need for the development of the fintech sector in North Macedonia. However, a regulatory framework that supports growth and innovation is required for fintech development, digital transformation, and the modernization of the financial system. The National Bank’s survey pointed out that regulatory capacity to support this process is not sufficient and that regulations often pose challenges to the innovations in financial technology and the entry of new players into the market.
While the banks are regulated by the National Bank, alternative financial institutions in North Macedonia are regulated by the Ministry of Finance, and the regulatory framework is limited to the Alternative Financial Institutions Law. Secondary legislation has not been adopted to ensure a more detailed regulation of the operation of the alternative financial institutions as is the case with the banks. This often leads to the parallel operation of alternative financial services providers along the legal lines as the legal framework appears to be limited and inadequate to accommodate modern financial operations based on technology.
Consumer protection regulations with respect to consumer lending as well revealed ambiguities and inconsistencies in practice. There are regulations on electronic signature, electronic documents, and the use of electronic services, but there are still challenges in their practical implementation. The institutional and regulatory capacity for data privacy protection and cybersecurity is still developing and a new cybersecurity law is under consideration.
Nevertheless, North Macedonia needs to keep up with the trends in fintech. Obviously, there is an awareness of the benefits that fintech brings, as well as of the risks of cyber-attacks, financial crime, and money laundering associated with the use of financial technology. While building institutional and legal capacity, special attention needs to be paid to the financial literacy of the population. This is an area that requires coordinated efforts by the regulators, businesses, educational institutions, and associations in educating the public on the use of modern technology in financial services. A survey conducted within the Alternative Financial Services Association in North Macedonia pointed out a low level of knowledge and understanding of financial services by the aged population as well as by the population in rural areas. 59% of the population evaluated its financial literacy level as average and weak in this survey.
By Svetlin Adrianov, Associate Partner and Law Leader Bulgaria, North Macedonia, Albania, and Kosovo, and Jana Nikodinovska, Law Manager, EY Law North Macedonia