Ronald Langat, partner and Head of Banking and Finance, explores how Bahrain has created a stable and predictable regulatory environment that allows the FinTech sector to innovate and flourish, in Global Banking and Finance Review.
FinTech is flourishing. By challenging traditional financial services in providing a faster, often cheaper and invariably better service or product, it is developing as an increasingly important sector of the financial services industry in the Kingdom of Bahrain (Bahrain) and throughout the MENA region.
The Central Bank of Bahrain (CBB) has ensured that it provides a stable, predictable regulatory environment for FinTech to grow. As Bahrain has long been home to most international banks in the region, it continues to spearhead regulation and growth in all new developments in the financial sector regionally, as well as nationally.
As the Gulf Cooperation Council’s (GCC) oldest and most established financial services sector, Bahrain fully appreciates the effect of enabling financial innovation while also offering a solid, proven regulatory environment. Global FinTech firms and payments platforms have surged in popularity, driving what will potentially become a multi-billion-dollar market across the MENA region.
To ensure this growth, the CBB launched a pioneering onshore FinTech Regulatory Sandbox in 2017, enabling companies to test their tech-based solutions for up to a year under supervision. The sandbox is an opportunity for FinTech businesses to expand and thrive in the GCC. 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. Critically, this initiative offers smaller enterprises a safe and partially deregulated environment, further strengthening Bahrain’s position as a GCC financial services hub for businesses of every size.
Bahrain’s approach has officially been recognised as a model for global excellence by the World Bank’s Consultative Group to Assist the Poorest (CGAP) think tank. Members of the group consulted with the CBB while creating a best-practice technical guide for financial regulators around the world seeking to build their own sandboxes.
The resulting paper reveals how such initiatives can foster financial inclusion by enabling firms to experiment in a safe space and highlights Bahrain’s approach, which involves an independent auditor deciding on the success of each experiment. It also showcases Bahrain 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.
However, Bahrain does not stop there. It is encouraging FinTech innovation amid a strong appetite from traditional players to partner with up-and-coming enterprises. Bahrain has created 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 fuelled 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 CBB is also extremely agile when it comes to introducing new regulation. In February 2019, it was the first regulator in the Middle East to launch rules for the licensing of cryptocurrency asset services. The country’s landmark bankruptcy law also provides essential breathing space for entrepreneurs to experiment with new ideas. This approach has been recognised internationally, with the CBB receiving the Most Innovative FinTech Regulator award at the FinX Awards 2019 in Dubai.
The CGAP guide provides practical step-by-step guidance for regulators on how to set up a sandbox which serves as a useful foundation. As part of the CBB’s ongoing initiatives towards financial digital transformation in Bahrain and developments in digital financial services, it established a dedicated Fintech & Innovation Unit, which ensures that the best services are provided to individual and corporate customers in the financial services sector by encouraging an astute regulatory framework that fosters FinTech and innovation.
This follows the CBB’s other initiatives, which include introducing a Regulatory Sandbox that will enable start-ups, FinTech firms and licensees to provide innovative banking and financial solutions, in addition to the issuance of crowdfunding regulations for both conventional and Sharia-compliant services.
The CBB’s FinTech & Innovation Unit has other responsibilities: approval of participation in the Regulatory Sandbox, supervision of authorised Sandbox companies’ testing progress, and monitoring technical and regulatory developments in the FinTech field, both regionally and internationally, to lead on strategic FinTech initiatives and to work closely with all stakeholders within the FinTech ecosystem in Bahrain.
The CBB’s FinHub 973 is the region’s first cross-border digital innovation platform that connects and facilitates collaboration between financial institutions and FinTech companies under the supervision of a regulator. Powered by Fintech Galaxy, FinHub 973 enables local and global FinTech companies to connect seamlessly with Bahrain’s financial institutions for exploring, testing, and prototyping on a centralised digital sandbox.
FinHub973 integrates the technical testing and validation of digital solutions with the regulatory framework of the CBB. The platform also showcases qualified FinTech companies in collaboration, procurement, partnerships and investment within Bahrain’s ecosystem, while also interfacing with regulatory authorities to facilitate quicker and easier regulatory testing and supporting business scalability.
Responsible for maintaining monetary and financial stability in Bahrain, the CBB launched the FinHub 973 platform in an effort to further cement Bahrain’s position as the region’s financial hub, providing robust infrastructural support to the domestic financial services industry and driving innovation as well as cross-border industry and collaboration across the region.
The Global Financial Innovation Network (GFIN) was formally launched in January 2019 by an international group of financial regulators and related organisations, including the UK’s Financial Conduct Authority (FCA). This built on the FCA’s 2018 proposal to create a global sandbox. The GFIN is a network of 28 organisations committed to supporting financial innovation in the interests of consumers. It seeks to provide a more efficient way for innovative firms to interact with regulators, helping them to navigate among countries as they look to scale new ideas. This includes a pilot for firms wishing to test innovative products, services or business models across more than one jurisdiction. It also aims to create a new framework for co-operation between financial services regulators on innovation-related topics, sharing different experiences and approaches.
Firms wishing to participate in this pilot phase must meet the application requirements of all the jurisdictions in which they would like to test. For example, a firm wishing to test in the UK, Australia and Hong Kong must independently meet the eligibility criteria, and/or other relevant standards, of regulators in those jurisdictions. Interested firms should note whether a particular regulator is the relevant authority for the proposed activity before applying to test in their jurisdiction.
Each regulator will decide whether a proposed test meets its individual screening criteria, areas of interest, and ability to support the activity. It will also ensure that appropriate safeguards for its jurisdiction are in place. Regulators are only responsible for tests in their jurisdictions and should consider the associated risks, which is important to maintain high standards of consumer protection and market integrity in regulators’ respective jurisdictions.
Ronald’s article was published 28 September 2021, in the Global Banking and Finance Review, and can be found here.
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