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Regulating Artificial Intelligence to Advance
Financial Inclusion in South Africa

 

ST Mota Makore*

 

Pioneer in peer-reviewed,
open access online law publications

 

Author

Shelton T Mota Makore

 

Affiliation

University of the Free State,
South Africa

 

Email

motamakorest@ufs.ac.za

 

Date Submitted

20 December 2023

 

Date Revised

12 June 2024

 

Date Accepted

12 June 2024

 

Date Published

26 November 2024

 

Guest Editor

Prof H Chitimira

 

Journal Editor

Prof W Erlank

 

How to cite this contribution

Mota Makore ST "Regulating Artificial Intelligence to Advance Financial Inclusion in South Africa" PER / PELJ 2024(27) - DOI http://dx.doi.org/10.17159/1727-3781/2024/v27i0a17488

 

Copyright

DOI http://dx.doi.org/10.17159/1727-3781/2024/v27i0a17488

 

Abstract

 

The emergence of artificial intelligence (AI) endowed with the capability to simulate human intelligence through software-coded operations has become a topical issue perplexing the minds of regulators, government officials, non-governmental organisations and the public across the globe. Linked to this increasing AI debate is the view that these technologies have the potential to facilitate financial inclusion. Whilst there are concomitant liability and cyber security-related issues associated with AI adoption, the importance of AI in facilitating financial inclusion cannot be overstated. AI can facilitate financial inclusion by enhancing the quality of the financial products and services offered by key players in the South African financial sector, including the capacity to improve the process of opening bank accounts, data analysis, the assessment of credit scores and the management of risk-linked to various financial products. Drawing significant lessons from a select study of the European Union (EU) and United Kingdom (UK) models on the regulation of AI, this article argues that there is a need for South Africa to develop an effective regulatory framework governing AI in pursuit of advancing the goals of financial inclusion, among other things. Finally, this article offers pertinent recommendations in search of avenues for developing policies, principles, norms and rules that govern AI in South Africa to advance financial inclusion and other important related goals.

 

Keywords

 

Artificial intelligence; financial inclusion; decentralisation.

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1    Introduction

The world has entered the Fourth Industrial Revolution (4IR), which is marked by the development of Artificial Intelligence (AI), rapid digitalisation, and other significant technological discoveries.^[1] The invention of AI technologies represents one of the epitomes of human ingenuity, a journey that started decades ago with the creation of the computer and, subsequently, the Internet.^[2] AI has many capabilities, including the ability to simulate human intelligence through software-coded operations that raise various complex regulatory issues.^[3] In the South African financial sector AI technologies can play a significant role in facilitating financial inclusion by enhancing the quality of the financial products and services offered by various financial institutions and other key industry players.^[4] Although there are concomitant liability issues associated with the adoption of AI, its importance in facilitating financial inclusion cannot be overstated.^[5]

 

However, for the South African financial sector to benefit sufficiently from the adoption of AI, this article argues that there is a need to develop an effective regulatory framework governing AI to advance the goals of financial inclusion, among others.^[6] The article explores the potential financial inclusion benefits derived from the use of AI in the South African financial sector. Finally, this article offers pertinent recommendations for developing policies, principles, norms, and rules that govern AI technologies in South Africa to advance financial inclusion and other important goals.^[7]

 

The article is divided into four parts. Immediately following this introduction is a part dealing, albeit very briefly, with an explanation of the definition and general features of AI, which is then followed by part two, establishing a linkage between AI and financial inclusion. This part unravels the role of AI in facilitating financial inclusion in the South African financial sector. This section not only explores the positive effect of adopting AI in pursuit of financial inclusion but also examines the potential drawbacks which arise from utilising AI as an instrument for advancing financial inclusion. In the third section the article explores the prospects and challenges for the effective regulation of AI in pursuit of advancing financial inclusion in South Africa. This includes Al-related regulatory issues to ensure that technology becomes an effective instrument for promoting financial inclusion. Finally, this article offers recommendations on how to effectively regulate AI to facilitate financial inclusion in South Africa.

 

2    Deconstructing the definition, classifications and features of AI

Before exploring whether AI can be effectively regulated to achieve financial inclusion, it is necessary to define AI as a subject of regulation.^[8] Doing so in a manner that explains the nuances and technological features of what is referred to as "AI" is a cumbersome task that is beleaguered by difficulties and complexity, given the elasticity of the concept itself.^[9] The term "AI" consists of two combined words; artificial and intelligence. The notion of intelligence is manifold and subjective.^[10] Philosophically, many people have the propensity to think that the term intelligence is a monolithic and unitary concept, but it is a compound term often comprising many conflicting attributes.^[11] Intelligence can be conceptualised as the ability to make rational decisions based on the sensory, observatory and hearing faculties.^[12] Whether computers, machines, and non-human entities can, in reality and on a quid pro quo basis, possess the same degree of intelligence that human beings have remains a matter of contestation.^[13] Furthermore, given the elasticity of AI, seeking a definitive definition of AI would be like shooting at a moving target that is undergoing constant metamorphosis.^[14]

 

Notwithstanding the above definitional conundrum, an exploration of the literature on AI demonstrates that many academics have advanced various definitions of AI.^[15] At the elementary level, Alan Turing, one of the earlier pioneers of AI technologies, defined it as the science and engineering of intelligent machines, especially intelligent computer programs.^[16] According to the European Commission High-Level Expert Group, AI comprises systems that display intelligent behaviour by analysing their environment and taking action with some degree of autonomy to achieve specific goals.^[17] The European Union (EU) AI Act defines AI as software developed using the techniques and approaches mentioned in Annex I to achieve various human-defined objectives of generating outputs, content, predictions, recommendations or decisions that influence the environments in which they operate.^[18] From these definitions, it can be deduced that what sets AI apart from other technologies is its anthropomorphic nature, which enables it to operate with some degree of autonomy from human beings.^[19] AI technologies can analyse and generate solutions to complex social and scientific problems, which is similar to what humans can do.^[20]

 

Although AI can simulate human functions and operations, the extent to which these technologies achieve this differs, depending on the nature of the AI technology involved.^[21] AI can be classified into three basic categories: narrow (weak), general (strong), and Artificial Super-Intelligence (ASI).^[22] AI, which falls into the narrow AI category, competes with human reasoning in the same plane.^[23] Examples of such AI technologies include robust IBM's Deep Blue chess-playing programme, which can outplay the best chess player in the world but cannot play other games such as checkers.^[24] When one converses with Siri, one is not conversing with a conscious form of AI technology; rather, Siri is designed to process human language into the Google search engine and extract the results for human beings.^[25] Most of the AI systems that fall in the category of narrowness are not without benefit. They can process data and complete significant tasks faster than humans, thus improving overall productivity, efficiency and the quality of life.^[26]

 

Generally, strong AI comprises machines that exhibit human intelligence.^[27] In other words, these machines can successfully perform any intellectual task assigned to them just as human beings can, beyond the mere merging, synthesising and processing of data.^[28] This is a kind of AI that is often projected in Hollywood science-fiction cinematography, interacting with human beings and operating advanced systems that are conscious, sentient, and driven by a certain degree of emotion and self-awareness.^[29] Sophia, the social humanoid robot developed on the 14^th of February 2016 by the Hong Kong-based company Hanson Robotics, falls into this category of strong AI.^[30] The AI robot lawyer developed by the American firm DoNotPay in 2023, which functions as a smartphone application and is endowed with the capacity to give legal advice to clients much as a human legal practitioner does, can be categorised as strong AI.^[31] These AI technologies process data faster than people can, rationalise strategies, and tap into computer-driven intelligence to make informed decisions or generate new ideas.^[32]

 

ASI refers to technologies endowed with intelligence that surpasses that of humans in all aspects including creativity, general wisdom and problem-solving.^[33] Nick Bostrom defines superintelligence as "any intellect that greatly exceeds the cognitive performance of humans in virtually all domains of interest."^[34] ASI technology is not yet available in the global market.^[35] ASI may have the capacity to exhibit intelligence that human beings have not seen before, even among geniuses.^[36] This is a type of AI technology in which people such as the former Google AI experts Geoffrey Hinton and the Chief Executive of Tesla Company, Elon Musk believe will lead to the extinction of humans.^[37] However, machines that exhibit human-like intelligence must be capable of experiencing consciousness.^[38] Whether this type of AI technology can lead to machines experiencing consciousness remains controversial.^[39]

 

3    Exploring the linkages between AI and financial inclusion

Having discussed the definition and characteristics of AI, it is pertinent to explore the role of this technology in promoting financial inclusion, especially in the South African financial sector.^[40] Since the development of the third category of AI, which is super-intelligence, is still in the embryonic stage, the discussion below will focus only on how narrow and general forms of AI are advancing the goals of financial inclusion.^[41] Further, before examining whether AI can be used as an instrument to facilitate financial inclusion, it is necessary to ascertain the meaning of the term financial inclusion.^[42] In its basic form, the term financial inclusion can be conceptualised as referring to the availability, accessibility and affordability of financial services and goods, including transactions, payments, savings, credit and insurance, provided in a responsible, ethical and sustainable manner.^[43] In the contemporary world financial inclusion is recognised as a conduit for poverty reduction and economic development, as it operates as a catalyst for achieving financial integration for those who are financially excluded or marginalised, especially the poor and those who are within the peripheries of the economy.^[44] Financial inclusion as a concept and instrument is vital to the achievement of the United Nations (UN) Sustainable Development Goals (SDGs).^[45] Notably, the realisation of various UN SDGs, such as eradicating poverty, ending hunger, achieving food security and promoting sustainable agriculture is predicated on the promotion of financial inclusion.^[46] The relationship between financial inclusion and a catalogue of various human rights provided under international, regional and domestic human rights instruments is becoming more apparent.^[47] The full realisation and enjoyment of civil and political rights, socio-economic rights and some third-generation rights hinge upon the creation of a conducive microeconomic environment via the advancement of financial inclusion in South Africa and beyond.^[48]

 

It can be posited that financial inclusion is a key component of the right to human dignity, equality, and freedom of trade and occupation.^[49] This concept enables the underserved population to engage in meaningful economic activities and, ultimately, trade.^[50] The promotion of financial inclusion provides equality of access to a plethora of financial products/services to the poor, including an opportunity to acquire business loans, thereby empowering them to create self-employment and to release entrepreneurial potential, thus improving livelihoods.^[51] Given the utility of financial inclusion as an aspiration, instrument and construct, the view that AI should be harnessed to advance the goal of financial inclusion cannot be overemphasised.^[52] AI plays a vital role in ensuring that South Africa can reap the gains of financial inclusion in the era of the digital economy. This explains why some of the main regulatory objectives of South Africa should be to align the regulation of AI with the goals of financial inclusion, so that the country can derive the maximum benefits from the new technology.^[53]

 

The rapid digitalisation of many financial services, especially in the banking sector in South Africa, has led to the explosion of the big data market, which has had a significant impact on the financial sector.^[54] Banks use AI technologies to advance financial inclusion by ensuring that they interact with their customers in a digital space which is rapidly replacing the traditional model of bank-customer interaction.^[55] It is through this data-based transaction that banks and other financial providers in South Africa can have access and collect voluminous data such as emails, text and voice messages, pictures and videos through the conduit of various customer service edifices and virtual social media platforms such as Facebook, X, TikTok and YouTube.^[56] Banks in South Africa are using data collected from these vital platforms to collect personal data, transactional history and social media interactions to enhance the quality of the financial decisions they make in the process.^[57]

 

The availability of AI-related infrastructure such as high-speed computer hardware, software and clouds is being leveraged by the South African financial sector to promote financial inclusion.^[58] The development of cloud technology, supercomputer resources and AI-related infrastructure allows players in the South African financial sector to make quicker financial decisions relating to credit provision.^[59] AI technologies such as chatbots, which incorporate natural language processing (NLP), are being used by South African banks to interact and engage with customers for the whole twenty-four hours, thereby enhancing online financial conversations.^[60] In addition to the common responses that chatbots offer to customers, they are used to assist customers with the opening of bank accounts and the collection of complaints to the designated customer service units in banks.^[61]

 

Furthermore, various financial service providers in South Africa such as First National Bank (FNB), Nedbank, and Standard Bank have begun to use ChatGPT to perform a multiplicity of financial service-related functions.^[62] ChatGPT can be conceptualised as an AI-driven language model which uses natural language processing and AI machine-learning techniques to process and generate human-like responses to user queries.^[63] ChatGPT was launched on the 30^th of November 2022. One month after its release, ChatGPT reached more than 100 million monthly active users, becoming the fastest-growing application ever recorded in human history.^[64] In South Africa, traditional financial service providers such as banks use ChatGPT to monitor transaction activities, identify suspicious transactions and potential fraud, create content, and do programming, customer service and sales education.^[65] ChatGPT is also utilised to analyse financial market data and assess the potential socio-economic and political risks which may have a negative effect on the viability of investments and the operation of financial service providers.^[66] This application is enabling financial services providers to offer efficient personalised financial services to underbanked and unbanked persons at an unprecedented pace, thereby advancing financial inclusion in South Africa.^[67]

 

In 2017, after amending the Financial Intelligence Centre Act of 2001, South Africa adopted a risk-based customer due diligence regime to combat money laundering and other illicit financial activities.^[68] This shift has empowered South African financial service providers, including banks, to move from a blanket rules-based approach to assessing customers using a risk-profiling approach.^[69] According to the South African Banking Risk Information, in 2022 an increasing rate of 36% in digital fraud cases was recorded in South Africa.^[70] With the sophistication in which digital fraud crimes are committed, enhanced AI technologies are being added as an important layer of risk detection to enhance existing systems of identifying data anomalies.^[71] The deployment of AI applications and technologies makes it possible to identify financial transactions that have previously evaded detection under the traditional anti-money laundering and fraud regulatory regime in South Africa.^[72] This allows for a more proactive approach in which AI is used to prevent fraud before it occurs as opposed to the traditional reactive approach to fraud detection.^[73] The 2022 South African Peer Bank Analysis Report^[74] states that AI technologies in South Africa have empowered banks to take such a proactive approach to preventing fraud before it occurs.^[75]

 

However, the foregoing financial inclusion gains emanating from the use of AI technologies could be eroded and undermined if South Africa does not effectively regulate AI in pursuit of advancing financial inclusion.^[76] It could be maintained that South Africa should develop an AI regulatory framework that addresses the risk associated with the adoption of AI technologies including the accompanying liability and cybersecurity-related issues.^[77] The proliferation of AI usage in the South African banking sector has created new ethical and legal concerns for regulators.^[78] These challenges vary, but the most significant ones are the need to adequately secure customer data and privacy, ensuring that the data gathered and processed by AI is of high quality and meets the criteria of objectivity and non-discrimination in addition to strengthening the current cybersecurity accountability system.^[79]

 

4    Developing an effective regulatory framework for AI in pursuit of advancing financial inclusion in South Africa

4.1   The absence of a comprehensive AI legal framework

Despite the financial inclusion benefits derived from AI alluded to above and the concomitant risk which arises from the use of AI in the financial sector, South Africa currently does not have specific norms, policies or legislation that govern AI, and enable it to maximise the potential gains emanating from its effective regulation.^[80] The absence of comprehensive AI regulations is not unique to South Africa. Internationally, even developed countries, including the United Kingdom (UK) and the United States of America (US/USA) (the European Union is the exception), have not yet enacted stand-alone legislation that specifically governs AI in their territories. US states such as California and New Hampshire have passed legislation to limit or ban AI associated with facial recognition technology due to the human rights infringement concerns arising from the use of these technologies.^[81] Despite these developments, many countries, including the US, still lack comprehensive laws that govern AI.^[82] They currently depend heavily on the combination of problematic existing sector-specific regulations and general principles of law, including those found under privacy-related legislation which focusses on ensuring that there is regulatory fairness and transparency in the usage of AI technologies.^[83]

 

4.2   Lessons from the EU's model of AI regulation

South Africa could draw many lessons from how the European Union regulates AI in pursuit of financial inclusion.^[84] The European Union enacted AI stand-alone legislation (EU AI Act) in 2024, which created a harmonised regulatory framework for AI in the EU community.^[85] The EU AI Act is the first standalone comprehensive legislation in the world that focusses exclusively on AI issues.^[86] The AI Act offers a generalist approach to AI regulation without focussing on one specific sector, although it has a substantial bearing on all areas of the economy, including the financial sector. The EU AI Act was the first of its kind and has become a significant reference point for AI regulations in many jurisdictions, including South Africa.^[87] The importance of the AI Act cannot be overemphasised.^[88]

 

The EU model epitomised by the AI Act follows a risk-based approach to governance.^[89] This model considers the risk associated with the use of AI and industries likely to be negatively impacted (a horizontal approach) and ensures that the application and use of AI comply with current EU regulations, including adhering to assessments and data usage restrictions under the General Data Protection Regulation (GDPR).^[90] The AI Act classifies AI systems into four categories based on their intended purpose and potential effects on health, safety or fundamental rights.^[91] According to the AI Act, the four AI categories are (a) minor- or low-risk AI systems,(b) limited-risk AI, (c) high-risk AI systems, and (d) unacceptable-risk AI systems.^[92]

 

In brief, the EU AI Act requires the use of minor or low-risk AI technologies, such as spam filters, to comply with existing legislation, while limited-risk AI systems, including chatbots and deepfakes, are subject to transparency obligations.^[93] High-risk AI systems are subject to stringent legal requirements and are classified into two subcategories: (i) those that constitute a safety component of a product or the product itself under EU harmonisation legislation and require a third-party conformity assessment; and (ii) those listed in specific sectors, including critical infrastructure management, law enforcement and migration management, among other sectors.^[94] Lastly, the use of unacceptable-risk AI systems, including software for social scoring systems, is prohibited because of its discriminatory results and infringement of human rights, including the rights to human dignity, non-discrimination, equality and justice.^[95] Importantly, Article 52 of the AI Act provides additional rudimentary guidance on the use of high-risk AI technologies created to interact with natural persons.^[96] Article 69 of the AI Act requires operators of all other types of AI technologies to voluntarily observe the same principles applicable to high-risk systems.^[97]

 

Notwithstanding the above, the AI Act's approach to financial inclusion remains unclear in some instances.^[98] Whilst the explanatory memorandum that accompanies the Act identifies finance as one of the main sectors called "high-impact sectors" affected by the use of AI, the Act does not explicitly include financial services among the list of high-risk AI in Annexes II and III of the AI Act.^[99] This shortcoming could be exploited by financial services providers to use high-risk AI systems to the detriment of attaining financial inclusion.^[100] However, the substantive part of the AI Act explicitly mentions credit providers such as banks in various articles.^[101] The AI Act explicitly recognises credit scoring as a high-risk application without defining the meaning of "credit score" in the regulation.^[102] The AI Act also lists access to various financial resources and other essential services such as electricity, housing and telecommunication services, as determined by the credit score.^[103] This implies a broader interpretation of credit scoring than that traditionally used by financial service providers to assess the eligibility of a customer to a credit facility.^[104] The AI Act imposes financial penalties for non-compliance with its provisions in some instances, which are higher than the maximum penalties provided under the GDPR.^[105]

 

4.3   Lessons from the UK proposed model on the regulation of AI

Diametrically opposite to the above EU risk-based AI governance, the UK has recently proposed what it terms a pro-business approach to AI regulation.^[106] The UK's AI regulatory regime is predicated on the need to achieve flexibility in AI regulations to avoid stifling innovation.^[107] This approach encourages AI inventors to voluntarily comply with five principles designed to address AI risks: (a) safety, security and robustness; (b) appropriate transparency and explainability; (c) fairness; (d) accountability and governance; and (e) contestability and redressing.^[108] Whether AI inventors and users can successfully implement these principles through voluntary compliance remains to be determined.^[109] Strict enforcement of these five principles by regulators may be required in the future as the need arises.^[110] The UK approach to AI regulations has three crucial components.^[111] Aside from the enforcement-related issues, the UK's regulatory model depends on the current laws of the country applicable to data protection, the Data Protection Act, and product liability laws including the Consumer Protection Act, rather than the adoption of stand-alone new legislation that is entirely AI-centred.^[112]

 

The UK's AI regulatory regime has both merits and demerits. One of the advantages is that the model proposes to use evidence relating to AI in its suitable context, rather than to follow the simple AI Act approach, which transplants rules from one EU sector to another inappropriately.^[113] Second, the UK AI regime is designed in such a manner that rules can be easily crafted to suit the requirements of the AI used in various sectors. Since the risk posed by AI is not yet fully understood, the UK regulatory model is an adaptive model premised on the difficulty of predicting potential AI risks.^[114] Further, the UK regulatory model eschews the centralisation of AI oversight under the purview of a single national regulator, an approach that could lead to inefficient enforcement.^[115] Notably, regulators with specialised knowledge in various areas such as aviation, financial markets and transport are more suited to regulating the use of AI in their fields of expertise.^[116] This decentralised approach embedded in the UK regulatory regime also potentially minimises the risk of a single regulatory failure caused by regulators directing their attention to areas of insufficient public interest.^[117]

 

5    Shifting South African regulatory governance towards a decentralised AI regulatory framework anchored on Afrocentric principles to advance financial inclusion

Based on the foregoing, it can be deduced that there is no international instrument in general that specifically regulates AI in pursuit of financial inclusion.^[118] Despite this, the UN Secretary-General, António Guterres, on the 26th of October, 2023, announced the appointment of a UN-driven international advisory panel mandated to explore avenues on the key opportunities, risks and challenges in developing international governance of AI.^[119] It can be argued that at the global level South Africa should support initiatives towards adopting an international treaty governing AI.^[120] This is because the absence of a global regulatory framework may potentially result in a haphazard approach to the regulation of AI, which may lead to the fragmentation and regulatory conflict of AI rules.^[121] South Africa should extend support towards efforts both at the continental and global levels, such as African Union and UN programmes, whose goal is to negotiate a global agreement on the adaptation of AI and the incorporation of accountability mechanisms for AI use and adoption. It could be argued that South Africa should play a central role in global conversations concerning AI governance to ensure that developing countries' interests in AI data autonomy and governance, and access to these technologies are taken properly into account when developing the global framework governing AI.^[122]

 

Aside from the international efforts alluded to above, at the domestic level South Africa should move towards a regulatory framework for AI that is benchmarked on the EU and UK models and other emerging models to prevent the evolution of conflicting regulatory norms and the fragmentation of AI regulation. South Africa should adopt effective regulations that do not impose unnecessary burdens on the development of AI technologies.^[123] The proposed model should adequately respond to the risk caused by AI, while striking a balance with the need to incentivise innovators to invest in AI technologies.^[124] Further, the adoption of an effective regulatory framework for AI to facilitate financial inclusion would boost AI consumers' trust in this technology, as their rights would be better protected under law.^[125]

 

It could be maintained that South Africa should develop a proportionate regulatory approach to enable the responsible use of AI in pursuit of financial inclusion.^[126] As mentioned above, a proportionate regulatory approach to AI would not create unnecessarily cumbersome rules which would hinder the application of all AI technologies.^[127] The proposed South African AI regulatory approach should promote the use of AI applications such as generative AI, whilst addressing the legal and ethical issues which arise from their increased use. This means that the regulation of AI in South Africa should be deployed to enable the use of AI rather than banning the technology itself.^[128] Currently South Africa has made no concrete move towards creating a legal environment conducive to embracing and addressing the legal conundrum of the use of AI in a manner that promotes innovation.^[129] Despite this, in April 2019, the South African president, Cyril Ramaphosa, appointed members of the Presidential Commission on the Fourth Industrial Revolution (4IR Commission), which produced a report on policies, strategies and action plans that South Africa should implement to position itself as a global competitive player in AI technologies.^[130] The establishment of the 4IR Commission shows that South Africa is taking initial steps towards regulating AI technologies in pursuit of facilitating financial inclusion.^[131]

 

It could be strongly argued that the patchwork of legal frameworks that currently exist in South Africa and which could be used to regulate some areas of AI, such as data protection, including the Protection of Personal Information Act (POPI),^[132] does not sufficiently address the risks posed by the use of AI.^[133] The Financial Sector Regulation Act (FSRA) promulgated in August 2017 established the Twin Peaks supervisory model in the form of the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA) to promote financial stability.^[134] The PA operates under the South African Reserve Bank (SARB) administration, and the FSCA is the legal successor of the former Financial Services Board (FSB).^[135] The old elements drawn from the current self-regulatory and institutionalised South African Twin Peaks regulation system relating to financial safety and market conduct may apply to AI technologies but do not regulate them with specificity.^[136] This is because neither the POPI nor the preamble to the FSRA, including section 1, which defines the terms used in the Act, explicitly refers to and defines AI technologies, a regulatory loophole that renders the current regulatory framework largely inoperative.^[137]

 

The envisaged South African framework for AI governance should be steeped in the principles of ubuntu, egalitarianism, the elimination of risk, and social justice to ensure the responsible and ethical use of AI.^[138] Further, the South African government should ensure that companies and organisations adopt AI in an ethically sound manner.^[139] Given that AI technologies, especially general and strong AI, are disruptive in nature and capable of causing massive industrialisation and job losses by replacing people in a range of professions, there is a need to facilitate the transition to mitigate the negative effects of these technologies.^[140] This means that the proposed regulatory framework should be informed by the risk that AI poses and should allow regulators to perform a cost-benefit analysis before allowing the use of general and strong AI.^[141] It should require all AI developers and users to be licensed and have an AI regulatory body or committee consisting of AI experts and regulators to spearhead the 4IR in light of the South African National Development Plan.^[142]

 

The proposed regulatory framework should address the comprehensive societal and regulatory challenges linked to the development and use of AI.^[143] This includes issues such as access to data, sustainability, the protection of the rights of users, and striking a balance between AI developers and their obligations under various legislation, including POPI. South Africa should take wider action to ensure that the country attains the status of a global leader in AI by developing rules related to intellectual property law and generative AI.^[144] This would ensure that South Africa maintained the right balance between protecting rights holders and establishing an AI-driven thriving economy while supporting AI developers to access the data they need in pursuit of advancing financial inclusion.^[145] A new AI regulatory body should be established and granted enforcement powers so that it can issue fines and impose criminal liability where necessary.^[146]

 

6    Concluding remarks

This study has demonstrated that the use of AI in the financial sector has the potential to advance financial inclusion in South Africa.^[147] It has been argued that AI facilitates financial inclusion by enhancing the quality of a plethora of financial services and products, including improving the process of opening bank accounts, data analysis, the assessment of credit scores, and the management of risk linked to financial products.^[148] Given the various financial inclusion benefits derived from the adoption of AI, this study posits that there is a need for South Africa to develop an effective regulatory framework governing AI in pursuit of advancing its goals of financial inclusion, among others.^[149] South Africa should develop effective AI governance that addresses the liability- and cybersecurity-related issues associated with AI use.^[150]

 

The article maintains that there is a need for South Africa to develop an effective decentralised proportionate regulatory framework governing AI which is based on the universal principles of ubuntu, egalitarianism, the elimination of risk, and social justice, to ensure the responsible and ethical usage of AI.^[151] The article has proposed that, in light of lessons derived from the EU and UK models on the regulation of AI, South Africa should develop a decentralised proportionate approach to AI governance.^[152] Such an approach to AI regulation would strengthen the existing inadequately formulated rules on AI. This would enable South Africa to be regarded as one of the leading countries in AI, harnessing the ability of technology to drive economic development and the goal of financial inclusion.^[153]

 

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Legislation

European Union

European Parliament legislative resolution of 13 March 2024 on the proposal for a regulation of the European Parliament and of the Council on laying down harmonised rules on Artificial Intelligence (Artificial Intelligence Act) and amending certain Union Legislative Acts (COM(2021)0206 – C9-0146/2021 – 2021/0106(COD)) Document P9_TA(2024)0138

Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) OJ L 119/1

 

South Africa

Financial Intelligence Centre Act 38 of 2001

Financial Sector Regulation Act 9 of 2017

Protection of Personal Information Act 4 of 2013

 

United Kingdom

Data Protection Act, 2018

Consumer Protection Act, 1987

 

United States of America

California Assembly Bill 1814 (Law Enforcement Agencies: Facial Recognition Technology)

New Hampshire House Bill 1596-FN (Requiring a Disclosure of Deceptive Artificial Intelligence Usage in Political Advertising)

 

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South Africa

GN 591 in GG 43834 of 23 October 2020

 

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List of Abbreviations

4IR	Fourth Industrial Revolution
AFI	Alliance for Financial Inclusion
AI	artificial intelligence
AJLM	American Journal of Law and Medicine
ASI	artificial super-intelligence
CBI	Confederation of British Industry
CYELS	Cambridge Yearbook of European Legal Studies
EU	European Union
Fordham L Rev	Fordham Law Review
FSCA	Financial Sector Conduct Authority
FSRA	Financial Sector Regulation Act 9 of 2017
GDPR	General Data Protection Regulation
Harv J L & Tech	Harvard Journal of Law and Technology
IMF	International Monetary Fund
JeDEM	eJournal of eDemocracy and Open Government
MJ	Maastricht Journal of European Comparative Law
LDD	Law, Democracy and Development
LFMR	Law and Financial Markets Review
OECD	Organisation for Economic Co-operation and Development
OHCHR	United Nations Human Rights Office of the High Commissioner
PA	Prudential Authority
PELJ	Potchefstroom Electronic Law Journal
POPI	Protection of Personal Information Act 4 of 2013
SABRIC	South African Banking Risk Information Centre
SAJHR	South African Journal on Human Rights
SALJ	South African Law Journal
SARB	South African Reserve Bank
SDGs	Sustainable Development Goals
UK	United Kingdom
UN	United Nations
UNDP	United Nations Development Programme
UNSGSA	United Nations Secretary-General's Special Advocate for Inclusive Finance for Development
US/USA	United States of America
Wash L Rev	Washington Law Review

 

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