Bahrain Regulatory Sandbox for Fintech Startups

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The Bahrain Regulatory Sandbox for Fintech Startups is an initiative introduced by the Central Bank of Bahrain (CBB) in 2017 to encourage the growth and development of the financial technology (FinTech) sector.
What are the main aims and objectives?

Financial Technology (FinTech) is a rising trend globally and the Sandbox is a calculated way for the Regulator to cope with the pace of technological change. Bahrain has long been a regional financial hub; it is natural to position itself as the FinTech hub of the region, including Shari’ah compliant Fintech solutions. CBB is launching the Sandbox in order to promote effective competition, embrace cutting-edge technology, encourage financial inclusion and improve customer experience. 

The main aims and objectives of the Bahrain Regulatory Sandbox for Fintech Startups are: 

  1. Encourage innovation: The sandbox provides an environment for firms to develop and test innovative financial technology solutions without restrictive regulations. 

  1. Facilitate collaboration: The sandbox aims to foster collaborations between startups, fintech companies, and the financial sector, helping them work together in a regulated environment. 

  1. Enhance customer benefits: By allowing companies to experiment with new products and services, the sandbox aims to deliver improved financial solutions that benefit customers. 

  1. Support regulatory testing: The sandbox enables firms to test their solutions in compliance with regulatory requirements, ensuring that they can be safely implemented in the market upon completion. 

  1. Attract fintech businesses: The sandbox aims to attract fintech businesses from around the world to expand and thrive in the Gulf region, supporting the development of a robust fintech ecosystem in Bahrain. 

How does the program work?

The framework provides a virtual space for companies to test their technology-based innovative solutions with real (volunteer) customers without incurring the cost of obtaining a regulatory license. It is open to existing Central Bank of Bahrain licensees and other local and foreign firms who have products / services that cannot be offered without regulatory approval. The testing duration is nine months, with a maximum extension of three months. 

The regulatory sandbox allows startups and fintech firms to test and experiment their banking ideas and solutions. The creation of the regulatory sandbox provides an opportunity for fintech businesses around the world to expand and thrive in the Gulf and strengthens Bahrain’s position as a fintech and financial services hub in the GCC. 

The key features include the following: 

  • Virtual space for companies to test their technology based innovative solutions 

  • Open for both existing CBB licensees (financial institutions with FinTech initiatives) and other firms (local + foreign). Local or foreign companies may include financial institutions, technology companies, telecom companies or others 

  • Duration of the regulatory testing is 9 months (with max. 3-month extension) ensuring that products are efficiently refined and ready for deployment 

  • Applicants must demonstrate that their product or service is innovative, offers tangible customer benefits, and provide evidence of technical and regulatory testing readiness 

  • Sandbox solutions must demonstrate technical testing, innovation, customer benefit, and a plan to deploy in Bahrain after the test period 

What is the overall cost?
There is no available information about the running costs of the Bahrain Regulatory Sandbox for Fintech Startups. However, research by the World Bank Group and the Consultative Group to Assist the Poor (CGAP) found the regulatory sandboxes can cost over $1 million to run once human resources and salaries are factored in.  
How was it implemented?

The Bahrain Regulatory Sandbox for Fintech Startups was implemented by the Central Bank of Bahrain (CBB), following other initiatives to support fintech development in the region including FinTech Bay, the Bahrain FinTech Fund, and Advanced Laboratories. The Central Bank of Bahrain's experience has been recognized by the World Bank's CGAP think tank, which consulted with the regulator to help create a best-practice guide for financial authorities interested in setting up sandboxes 

In 2017, the Bahraini Central Bank introduced its FinTech regulatory sandbox, which focused on Know Your Customer (KYC) and Anti-Money Laundering (AML). The second sandbox cohort addressed Open Banking and Innovative Financial Solutions, as well as Crowdfunding regulations. Following the incubation of these companies, the Central Bank facilitated the integration of Fintech startups with banks across the Kingdom. 

In 2021, the framework was updated to enhance the eligibility criteria for participation in the sandbox and also streamline the entire process to ensure a more phased and consistent approach to support testing. 

What impact has been measured?

The 2022 Bahrain FinTech ecosystem report found that as of September 2021:  

  • there were 25 fintech companies in the sandbox 

  • 76% from the Middle East and North Africa, 12% from the Americas and 12% from Europe 

  • 36% of the sandbox graduates are crypto-asset related 

  • 21% of the sandbox graduates are Account Information Service Providers (AISP) and Payment Initiative Service Providers (PSIP) entities 

The CBB can also demonstrate that some of its stated objectives for the Sandbox have been met. Crucially, there is evidence that the FinTech sector has expanded considerably since the introduction of the Sandbox with a 100% increase in FinTech companies in Bahrain since 2018. Likewise, a survey of industry players contained within the report found that 65% of participants believed the regulatory sandbox had resulted in more impact within the FinTech Sector in Bahrain, this was the highest of all policies surveyed 

However, there is currently no available information on the impact the sandbox has had on stimulating innovation and collaboration within the Bahrain economy. Similarly, it is not clear how many international FinTech firms have been persuaded to relocate to Bahrain.   

What lessons can be learned?
The CBB has claimed that the sandbox has had a significant impact on the development of regulatory frameworks within Bahrain with several developments directly resulting from working and studying the sandbox participants that tested their solutions. An example of this is Tarabut Gateway, which was the first graduate of the sandbox. In response to the successful testing of their product in the sandbox, the CBB created a comprehensive set of open banking regulations and designed the Bahrain Open Banking Framework (BOBF). Likewise, the CBB has transformed the regulatory guidelines for crypto-asset and digital financial advice as a result of interactions with companies in the sandbox.  

CURATED BY

Sarolta Borzasi

Director for Government + Investor Engagement
Embassy of Hungary London
United States