Ronald Langat, partner and Head of Banking and Finance, examines in The Banker how Bahrain’s stable and predictable regulatory environment has allowed the FinTech sector to innovate and flourish.
Ronald’s article was originally published in The Banker, 12 November 2021, and can be found here.
FinTech’s are an increasingly important feature of the financial services landscape in the Kingdom of Bahrain (Bahrain) and throughout the MENA region. As the Central Bank of Bahrain (CBB) provides a strong and stable regulatory environment, Bahrain continues to pioneer regional growth. The most established financial services sector in the Gulf Cooperation Council (GCC), Bahrain facilitates innovation while the MENA region has the potential to become a multi-billion-dollar FinTech market.
In 2017, the CBB launched a FinTech Regulatory Sandbox, which enables companies to test their solutions under supervision. To be eligible, companies must demonstrate innovative solutions, customer benefits, technical testing, and an intention to operate in Bahrain long term. The sandbox nurtures innovative FinTech businesses by offering them a safe, partially deregulated environment.
The World Bank’s Consultative Group to Assist the Poorest (CGAP), a think tank, has recognised Bahrain as a model for global excellence. CGAP worked with the CBB to create a technical guide for other financial regulators seeking to build sandboxes. Beyond showcasing Bahrain’s role in supporting FinTech market players, it also promotes effective competition and enhances financial inclusion throughout the region.
Innovation is further encouraged as traditional players seek partnerships with FinTech start-ups. Bahrain’s ecosystem includes the first and largest FinTech hub in the region, which is connected through a consortium to Asia and the US. Notably, Bahrain’s $100 million government Fund of Funds, Al Waha, invests in attracting new ideas and technologies to the GCC.
A deep pool of diverse talent supports these initiatives: women comprised more than 60% of computer science students at the University of Bahrain in 2018, for example, while initiatives (such as the Women in FinTech group) exist to promote equality. The CBB has been agile in the regulatory space. In 2019, it became the first Middle Eastern regulator to devise rules for licensing cryptocurrency asset services. In recognition of these initiatives, the CBB was acknowledged at the 2019 FinX Awards as the “Most Innovative FinTech Regulator”.
To roll out digital transformation across its financial services sector, the CBB has established a dedicated Fintech & Innovation Unit which ensures that customers receive the best services via an agile regulatory framework. Other CBB initiatives include requiring FinTech firms and licensees to provide innovative financial solutions and drafting crowdfunding regulations for conventional and Sharia-compliant services.
The CBB’s specialist Unit has other responsibilities: approving participation in the Regulatory Sandbox, supervising companies’ progress under the scheme, monitoring international technical and regulatory developments in FinTech, leading on strategic FinTech initiatives, and working closely with stakeholders in Bahrain’s FinTech ecosystem.
The region’s first cross-border digital innovation platform, CBB’s FinHub 973 encourages collaboration between financial institutions and FinTech start-ups under central bank supervision. It is designed to cement Bahrain’s position as the region’s financial hub, providing robust infrastructural support to domestic financial services and driving cross-border innovation.
FinHub 973 enables FinTech companies to connect with local financial institutions for testing on a centralised digital sandbox and integrating the validation of digital solutions with the CBB’s regulatory framework. The platform also showcases FinTech companies in procurement, partnerships and investment, interfacing with regulators to enable quicker and easier regulatory testing and supporting business scalability.
In 2019, a group of financial regulators and related organisations, including the Financial Conduct Authority (FCA), launched the Global Financial Innovation Network (GFIN), which built on the FCA’s proposal to create a global sandbox. Comprised of 28 organisations committed to supporting financial innovation for consumers’ benefit, the GFIN network aims to provide a more efficient way for innovative firms to interact with regulators, helping them to navigate between jurisdictions as they seek opportunities to scale new ideas. Its mission is to create a new framework for co-operation between financial regulators on innovation-related topics, sharing their experiences, and a pilot for firms wanting to test innovative products, services, or business models across jurisdictions.
To participate in the pilot phase, firms must meet the application requirements of every jurisdiction where they would like to test. A firm wanting to test in the UK, Singapore and Hong Kong, for example, must meet all relevant eligibility criteria and other regulators’ standards in those jurisdictions.
Individual regulators must then decide whether a proposed test meets its screening criteria and its ability to support the proposed activity. They will also ensure that appropriate safeguards are in place. To maintain high standards of consumer protection and market integrity in their respective jurisdictions, each regulator will bear responsibility for the tests and consider any associated risks.
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