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Al Doseri Law: Fintech Growth and Innovation in Bahrain

Fintech continues to flourish in the Kingdom of Bahrain and the wider MENA region. In order to provide sustained growth, fintech innovations must be met by an accommodating regulatory environment.

Ronald Langat, Partner and Head of Banking and Finance, Al Doseri Law
Ronald Langat, Partner and Head of Banking and Finance, Al Doseri Law

In order to convey how this need for support is being met from those at the top, whilst facilitating the future of fintech within Bahrain, Ronald Langat, Partner and Head of Banking and Finance at Al Doseri Law, discusses the techniques of the Central Bank of Bahrain (CBB) in encouraging innovation in the country’s fintech sector, as well as harbouring collaboration with innovators in the wider MENA region.

In this guest article for The Fintech Times, Ronald explores how Bahrain’s regulatory landscape compares with other regulatory regimes across the globe and how it connects with them through the Global Financial Innovation Network (GFIN). 

As fintech companies continue to disrupt the traditional global finance industry, they are becoming an increasingly important part of the financial services sector in the Kingdom of Bahrain and throughout the wider MENA region.

Thanks to the Central Bank of Bahrain (CBB), there is a stable, predictable regulatory environment for fintech to flourish. A longstanding home to international banks in the region, Bahrain pioneers regulation and growth in the financial sector, both regionally and nationally. As the most established financial services sector in the Gulf Cooperation Council (GCC), Bahrain facilitates financial innovation which is supported by a proven regulatory environment. Their surging popularity means that the MENA region will potentially become a multi-billion-dollar market for fintech firms and payments platforms.

In anticipation of this, the CBB launched a Fintech Regulatory Sandbox in 2017, enabling companies to test their solutions under supervision for a year, and providing an opportunity for them to thrive in the GCC. Eligible companies must demonstrate innovative solutions, customer benefits, technical testing, and an intention to operate in Bahrain once the sandbox period ends. The sandbox has nurtured several innovative fintech businesses by offering smaller enterprises a safe, partially deregulated environment, which further strengthens Bahrain’s position as a GCC financial services hub.

The World Bank’s Consultative Group to Assist the Poorest (CGAP), a think tank, has recognised Bahrain as a model for global excellence. CGAP members consulted with the CBB to create a best-practice technical guide for financial regulators around the world seeking to build sandboxes. The resulting paper concludes that such initiatives can “foster financial inclusion by enabling firms to experiment in a safe space” and highlights Bahrain’s approach, involving an independent auditor to determine the success of each experiment. It also showcases Bahrain’s sandbox for its role in increasing contender numbers in the fintech market, promoting effective competition and improving financial inclusion throughout the region.

But it does not stop there. Bahrain is encouraging fintech innovation as traditional players seek partnerships with fintech start-ups. Bahrain’s ecosystem includes the first and largest fintech hub in the Middle East, which is 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.

These developments are supported and fuelled by a deep pool of diverse talent: over 60% of computer science students at the University of Bahrain in 2018 were women, for example. Furthermore, dedicated initiatives (such as the Women in Fintech group) exist to promote equality.

The CBB is also very agile in introducing new regulations. In 2019, it was the first Middle Eastern regulator to launch rules for licensing cryptocurrency asset services. Bahrain’s bankruptcy law also provides entrepreneurs with breathing space to experiment. These initiatives have been recognised internationally: the CBB was acknowledged as the “Most Innovative Fintech Regulator” at the 2019 FinX Awards.

In its drive to roll out digital transformation across Bahrain’s financial services sector, CBB’s initiatives have included establishing a dedicated Fintech and Innovation Unit to ensure that the best services are provided to customers by encouraging an agile regulatory framework. In addition to the Regulatory Sandbox enabling start-ups, other CBB initiatives include requiring fintech firms and licensees to provide innovative banking and financial solutions, and issuing crowdfunding regulations for conventional and Sharia-compliant services.

The CBB’s Fintech and Innovation Unit also has other responsibilities: approving participation in the Regulatory Sandbox, supervision of Sandbox companies’ progress under the scheme, monitoring technical and regulatory developments internationally in fintech, leading on strategic fintech initiatives, and working closely with stakeholders within Bahrain’s fintech ecosystem.

As the region’s first cross-border digital innovation platform, CBB’s FinHub 973 facilitates collaboration between financial institutions and fintech companies under central bank supervision. The platform was launched in an effort to further cement Bahrain’s position as the region’s financial hub, providing robust infrastructural support to domestic financial services and driving innovation and cross-border collaboration across the region.

FinHub 973 enables fintech companies to connect seamlessly with Bahrain’s financial institutions for testing and prototyping on a centralised digital sandbox, integrating the technical testing and validation of digital solutions with the CBB’s regulatory framework. The platform also showcases fintech companies in collaboration, procurement, partnerships and investment, while interfacing with regulatory authorities to enable quicker and easier regulatory testing and supporting business scalability.

In January 2019, the Global Financial Innovation Network (GFIN) was launched 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 network, which comprises 28 organisations committed to supporting financial innovation for the benefit of consumers, seeks to provide a more efficient way for innovative firms to interact with regulators, helping them to navigate between countries as they look for the opportunities to scale new ideas. Its ambition is to create a new framework for cooperation between financial services regulators on innovation-related topics, sharing different experiences and approaches. This includes a pilot for firms wanting to test innovative products, services or business models across two or more jurisdictions.

Firms aspiring to participate in the pilot phase must first meet the application requirements of every jurisdiction in which they would like to test. For example, a firm wanting to test in the UK, Australia and Hong Kong must independently meet the relevant eligibility criteria, and/or other standards, of the regulators in those jurisdictions.

Each regulator will then decide whether a proposed test meets its individual screening criteria, areas of interest, and ability to support the proposed activity. It will also ensure that appropriate safeguards are in place for its jurisdiction. Bearing responsibility for tests in their jurisdictions, each regulator will also consider any associated risks. This is imperative to maintain high standards of consumer protection and market integrity in their respective jurisdictions.

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