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23 August 2017

FinTech on the Agenda

There is an expectation that financial technology or ‘FinTech’, as it’s more commonly known, will be as disruptive to the financial sector as the internet has been to the media and telecommunications industries. As part of its ongoing drive to be at the forefront of innovation within the financial sector, the Kingdom of Bahrain has instituted a number of measures to encourage innovation in FinTech within the Kingdom and to ensure Bahrain becomes a global player alongside other FinTech hubs such as London, Silicon Valley and Singapore.

Bahrain is well-established as a financial centre within the Middle East, with a mature banking sector comprised of over 400 financial institutions, which contributes 17.5% to its GDP. Bahrain aims to keep at the forefront of the world’s financial centres by encouraging innovation through FinTech, which it hopes will build upon the Kingdom’s reputation as an Islamic Finance hub.

A cornerstone of Bahrain’s strategy to encourage FinTech enterprises is the introduction of a regulatory sandbox, formulated by the Central Bank of Bahrain (“CBB”) and building upon similar initiatives in countries like Singapore. This will permit CBB-licensed and non-licensed businesses to test new technologies, innovative products, services and business models in a live environment with reduced regulatory, legal and licensing requirements. The regulatory sandbox will set out defined participant criteria, which may include limiting the number of clients or the time in which such products may be offered, thereby reducing risk to the financial system and protecting consumers. The CBB is now accepting applications from local and foreign companies to participate in the regulatory sandbox.

The second element of the Kingdom’s strategy is the introduction of a FinTech incubator, a physical hub for entrepreneurs to develop new products and ideas, as well as a FinTech-focused accelerator programme, which will include a mentorship programme. The Bahrain Economic Development Board in collaboration with the private sector is responsible for this.

The third part of Bahrain’s FinTech strategy is a venture capital fund aimed at providing finance to local and international entrepreneurs during their projects’ initial stages. The fund will be managed by a third-party investment manager, is seen as key to developing an innovative environment in Bahrain and will be launched later this year.

As further evidence of the CBB’s commitment to the continuing development of the financial sector, various draft rules were recently sent out for consultation. The draft rules are in respect of crowdfunding platforms for conventional (debt and equity) and Shari’a compliant services and propose the criteria for individuals lending to small businesses within Bahrain. The consultation on the draft rules closed at the end of May and its outcome is awaited together with an implementation date.

Such proposals to grow the Kingdom’s burgeoning FinTech sector build upon recent developments in Bahrain, such as the introduction of the Bahrain Investment Market and legislation in respect of trusts, Protected Cell Companies and Investment Limited Partnerships, all of which highlight the Kingdom’s ambitions to be a centre for financial innovation regionally and globally.

This article was first published in the LexisNexis MENA Business Law Review in the 2nd quarter of 2017.

This article was written by Benjamin O'Brien-McQueenie. For more information please contact Benjamin on +973 1713 3207 or at benjamin.o'