If you have been wondering what the latest big trend in Fintech is, wonder no more. It’s the “Regulatory Sandbox”.
What is a regulatory sandbox? Essentially, it’s a strategy being adopted by different governments and regulatory authorities in order to encourage young Fintech startups to experiment with new products, services, and systems, without having to worry about breaking the law.
The regulatory sandbox is a place where regulatory free testing can occur. Fintech firms can use it to trial new services, and if those services prove to be unworkable or breach an existing finance law, they can go back to the drawing board safe in the knowledge that they will not be prosecuted for having run their trials. The authorities, for their part, might consider changing the law.
The Japanese Banking Association (JBA), the country’s equivalent of the FCA in the UK, has created a sandbox, apparently worried that emerging fintech firms are struggling to compete with the big players, who are already testing technology like blockchain – in collaboration with the JBA.
And the Monetary Authority Singapore (MAS) has also created one – which in turn has inspired Bahrain to create one.
In April, Bahrain hosted the first Middle East and Africa Fintech Forum, organised by the Arab Financial Services.
At the conference, The Bahrain Economic Development Board’s executive director. David Parker, commented:
“We have seen over the last two to three years, as Singapore became a recognised global hub, an innovator within the fintech space. MAS is at the heart of that. So for us, it is a natural partnership to go with Singapore. We believe that it is a great model to follow.”
The regulatory sandbox established by MAS was announced in Singapore at a Fintech festival last year, by Ravi Menon, Managing Director of MAS.
At the same time, Menon announced the launch of the Looking Glass, “an innovation lab that would enable players to experiment with fintech solutions and provide consultation to startups”, reports Asianbankingandfinance.net.
Those responsible for the development of fintech in Bahrain have made no secret of the fact that they see Singapore as a guiding light when it comes to growing financial technology in the region. And well they might, since Singapore regularly tops lists of the world’s most influential tech hubs.
Bahrain’s Central Bank Governor Rasheed Mohammed Al Maraj announced that a white paper has been published that outlines how a Bahrahnian Regulatory Sandbox might work.
Al Maraj is quoted as saying: we understand the disruptive nature of fintech to business models and jobs but we have made a conscious decision to adopt it. The pace of innovation is not reversible, so the only choice we have is how well we prepare ourselves for the disruption”.
Amongst the services the Central Bank of Bahrain (CBB) want to introduce are crowdfunding platforms, cloud computing, payments services, providing financial services to the “unbanked” (another fintech buzzword) and the introduction of an Electronic Funds Transfer System.
Bahrain is a leader in financial services in the Middle East, having diversified away from oil and gas earlier than other states in the region.
The Bahraini banking sector comprises more than 400 institutions, including both Islamic and conventional banking – the sector had an asset value of more than $192 billion US dollars as of September last year, according to AsianBankingFinance.
Fintech is seen in Bahrain as a way to address the decline of the industry since the global financial crisis, which hit the country’s financial services industry harder than most.
Bahrain will enlist the help of the Singapore Fintech Consortium (SFC) to help it develop, as well as Dubai based asset management and advisory firm Trucial Investment Partners.
The three entities have signed an agreement to develop commercial and legal infrastructure, and attract investment, and fintech startups of course, to Bahrain.
The three key pillars the partnership wants to address are insurtech, regulatory technology and – no surprises here – blockchain.
The insurance sector in the Gulf region is expected to reach $62 billion by 2020, and yet David Parker has called it “saturated”, and believes it can be successfully disrupted.
Besides these three pillars, Islamic finance is another industry being taken very seriously by the new partnership. The industry could be worth as much as $2t.
Says Parker: Shari’a compliant products are much more expensive. That puts the industry at a disadvantage. But with the adoption of Fintech, you will see a lot of Islamic financial institutions will be competitive moving on in the future,” Parker explained.
Meanwhile, SFC co-founder Gerben Visser believes that the new consortium can help Bahrain grow as a Fintech hub in the same way it helped Singapore. He said.
“On one hand we work here to see how we can set up a dedicated fintech hub, which is a platform neutral space not just for startups locally, but also for companies outside to come to Bahrain and soft launch, and to have a place they can call home. This is also for incumbents and larger players here in Bahrain to have their innovation teams to sit and collaborate with early stage companies.”
Wherever you are in the world, and not least now in Bahrain, you can legitimately get excited about the effect fintech, and its latest craze, the regulatory sandbox, is having, and will have.