Strengthening Bahrain’s financial system through fintech

• A regulatory sandbox will allow Bahrain's central bank to facilitate the disruption of its local financial services market while maintaining a sound a financial system
• To grow Bahrain’s fintech ecosystem, the Central Bank of Bahrain has allowed non-bank financial service providers to compete with conventional and Islamic banks
• The central bank will also launch new regulations to support the country’s fintech ecosystem

In June, the Central Bank of Bahrain (CBB) issued a regulatory sandbox framework that gives companies nine months to test their technology-based solutions in a virtual space. CBB has opened the sandbox to both firms with CBB licence or without, either local or foreign. As Bahrain’s banking environment becomes ripe for technology-led innovations, CBB recognised the disruptive nature of financial technology (fintech) to business models, making a conscious decision to adopt it.

By introducing a regulatory sandbox, CBB aims to fast track the adoption of fintech products. To do so, Khalid Al Rumaihi, chief executive of the Bahrain Economic Development Board, said Bahrain has been learning from more advanced foreign influences. “We recognise that many of the most innovative new solutions and products may come from companies in different sectors or who are not currently based in Bahrain and we want to enable those businesses to play a role in the sandbox as well," he said.

He mentioned that interests from businesses in Asia were stirred by CBB’s collaboration with Singapore Fintech Consortium launched in March. “The sandbox has only been open to applicants for two weeks, but [we] already received strong interests, including [businesses from] Asia."

Similarly, Al Rumaihi mentioned that Bahrain’s financial industry has reacted positively. “We have seen interests from local firms and investors in the fintech space – both traditional financial services players and others,” he said. To grow Bahrain’s fintech ecosystem, CBB has allowed non-bank financial service providers to compete with conventional and Islamic banks. Market players like technology and telecommunication firms, or banks’ fintech units, local or foreign businesses alike, do not have to get licences from CBB to apply. However, to gain a spot in the sandbox, they must pass CBB’s criteria on innovation, customer benefit, and technical test.

Bahrain’s retail banking would directly benefit from this regulatory sandbox, as competition arises from players of various industries. Currently, the local banking system is composed of 111 institutions, with a rather small share of retail banks at 29, compared to 73 wholesale banks. Meanwhile, only 25 banks offer Shariah-compliant products and services. Although competition is expected to intensify, this regulatory sandbox also encourages more collaboration between bank and non-bank financial service providers.

Even before the implementation of a regulatory sandbox, CBB has allowed non-bank firms to enter the financial services market by introducing payment services and card processing licences in 2014. To date, CBB has issued 14 licences.

A recent collaboration, for example, was announced by mobile operator Batelco, Ithmaar Bank, and electronics payments firm Arab Financial Services in January. This partnership claims to introduce the first near-field communication (NFC)-enabled mobile payment service in the country, which allows users to pay their in-store purchases by just placing one’s mobile phone on a point-of-sale terminal.

Furthermore, according to Al Rumaihi, CBB is set to launch new regulations this year that would support the country’s fintech ecosystem, which include crowdfunding regulations, a national e-wallet, and a venture capital fund-of-funds.

CBB has just started building a globally recognised fintech ecosystem, and the regulatory sandbox increased its momentum to do so. “Bahrain has started gaining recognition as an up-and-coming fintech regional hub as other jurisdictions/companies become more aware of what is happening here. This includes visits by other regulators to Bahrain such as UK’s Innovate Finance,” Al Rumaihi mentioned.

Through this sandbox, fintech businesses around the world could expand and thrive in Gulf Cooperation Council countries, which, CBB hopes, will strengthen Bahrain’s position as a fintech and financial services hub in the region.