Thinking inside the box: Why Bahrain’s regulatory sandbox is a model for FinTech excellence

By Yasmeen Al Sharaf, Head of FinTech & Innovation Unit at the Central Bank of Bahrain

With the region’s oldest and most established financial services sector, Bahrain knows the importance of enabling innovation while also offering a stable, predictable and proven regulatory environment. The Kingdom has long been home to hundreds of traditional financial institutions, from banking stalwarts like Standard Chartered and BNP Paribas to card processors and finance providers. In recent years, the financial landscape has shifted substantially towards a new generation of businesses. Global FinTech firms like online bank Monzo and payments platform Stripe have surged in popularity, driving a market that is set to be worth $2.5 billion in the MENA region alone by 2022. Yet this exponential growth means legislative frameworks have had to adapt fast to keep up with the staggering pace of change – creating an opportunity for agile economies to cater for fledgling startups still experimenting with their ideas.

Enabling new FinTech innovations

To empower this wave of innovation, the Central Bank of Bahrain launched a revolutionary on-shore FinTech Regulatory Sandbox in 2017, enabling companies to test their technology-based solutions for up to a year under supervision. The region’s first initiative of its kind, the Sandbox is an opportunity for FinTech businesses to expand and thrive in the Gulf. To be eligible, solutions need to demonstrate innovation, customer benefit, technical testing, and an intention to be deployed in Bahrain after the sandbox period ends. Since its inception, the sandbox has nurtured several innovative FinTech businesses, with the first graduate Tarabut Gateway already working with financial institutions across the region to roll out open banking technologies. Critically, the initiative offers smaller enterprises a safe and partially deregulated environment while further strengthening Bahrain’s position as a GCC financial services hub for businesses of all sizes.

A model for global excellence

Now, following years of success, Bahrain’s approach has officially been recognised as a model for global excellence by the World Bank’s CGAP think tank. Members of the group consulted with the Central Bank of Bahrain while creating a best-practice technical guide for financial regulators around the world seeking to build sandboxes of their own. The resulting paper reveals how such initiatives can “foster financial inclusion by enabling firms to experiment in a safe space” and highlights the Bahrain approach, which involves an independent auditor deciding on the success of each experiment. The report also showcases the Kingdom as a place where the sandbox has helped to increase the number of contenders in the FinTech market, promoting effective competition and improving financial inclusion throughout the country and the wider region.

GCC’s home of FinTech

Yet the regulatory sandbox is not the only way Bahrain is encouraging FinTech innovation amid a strong appetite from traditional players to partner with up-and-coming enterprises. The Kingdom has built a robust ecosystem including the first and largest FinTech hub in the Middle East, connected through a consortium to Asia and the US. Meanwhile, Al Waha – Bahrain’s $100 million government Fund of Funds – invests in bringing new ideas and technologies to the GCC from leading global markets like Europe, the US and the UAE. These developments are fueled by a deep pool of international talent that is as skilled as it is diverse – for example, more than 60% of computer science students at the University of Bahrain in 2018 were women, and dedicated initiatives (such as the Women in FinTech group) exist to promote equality in the ecosystem. The Central Bank of Bahrain is also extremely agile when it comes to introducing new regulation. In February 2019, we were the first regulator in the Middle East to launch rules for the licensing of cryptocurrency asset services – and the country’s landmark bankruptcy law provides essential breathing space for entrepreneurs to experiment with new ideas. Our approach has been recognised internationally too, with the CBB named “Most Innovative FinTech Regulator” award at the FinX Awards 2019 in Dubai.

Thinking inside the box

Sharing the expertise of Bahrain and other sandbox economies, the CGAP guide provides practical step-by-step guidance for regulators on how to set up a sandbox and serves as a useful foundation. Yet over the years, we at the Central Bank of Bahrain have learned that it is essential to look beyond the basics and approach FinTech innovation with an open mind – after all, the very purpose of launching such an initiative is to experiment with new ideas. As the old saying goes, it takes a village – and a regulatory sandbox is not a one-stop solution. But by building the right foundations, fostering new ideas and putting in place an agile ecosystem surrounding such an initiative, countries can harness the Bahrain approach and build out a successful FinTech future.

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