Today, fintech is the heart of innovation and Bahrain is at the forefront.
The rapid changes that have taken place during the Covid-19 pandemic impelled regulators globally to keep up with technological advances, paving the way to enhancements in fintech ecosystems worldwide. Bahrain has experienced a smooth transition and exponential growth in its fintech ecosystem during the pandemic, evidenced by the 292% increase in the volume of electronic funds transfer systems (EFTS) through BenefitPay during 2021.[i] This leap towards digital transformation was possible through the regulatory frameworks of the Central Bank of Bahrain (CBB), the Economic Development Board (EDB) and other institutions which aimed to encourage and support financial technology.
Where digital transformations are present, regulations are revised and issued to ensure all the potential stakeholders are safeguarded throughout this fourth industrial revolution, while simultaneously reaping the benefits and opportunities of innovation. Government entities, corporations, startups, investors and end-users are considered during the consultation and research stages of regulatory development in Bahrain. The CBB established the Fintech and Innovation Unit in 2017 and subsequently issued various fintech-focused regulations such as the Cloud-First Policy, the Fintech Regulatory Sandbox, the Crowdfunding Module, the Open-Banking Module, the Crypto-Assets Module, the Digital Financial Advisor (Robo-Advisory) Module, the Insurance Aggregators Module and other regulations.
This article provides an overview of the fintech regulations in Bahrain over the years, where three regulations will be briefly explained along with the significant provisions that may impact stakeholders.
Bahrain is the first country in the Gulf region to adopt the Cloud-First Policy which was implemented nationwide in 2017. The Cloud-First Policy was issued as per the decision of the Supreme Committee for Information and Communication Technology (SCICT), which aims to encourage the development of advanced technologies to improve quality of life and services in Bahrain.
This shift in computing infrastructure has reduced the time required for technical readiness of projects by 60%[ii], allowing Fintech companies such as ila Bank (a subsidiary of ABC Bank) to become the first fully cloud-based digital mobile bank in the region.[iii] In addition, the significant impact of the Cloud-First Policy led Amazon Web Services (AWS) – a major cloud computing service provider globally – to launch in Bahrain its first data center in the region[iv].
One of the most significant provisions in the Cloud-First Policy concerns Cloud Security Principles. These provisions relate to the enhancement of data security where government agencies are required to comply with international security standards and attain certification such as the International Organization for Standardization (ISO) 27001 and the Service Organization Controls Report (SOC) 1 and 2[v], improving security and resiliency of data in the centralized cloud environment.
Fintech Regulatory Sandbox
The Fintech Regulatory Sandbox is a development that has resulted in a 65% impact in the fintech market since its implementation[vi]. It introduced a safe and measured virtual environment for fintech businesses to test and refine their innovations in Bahrain. The Regulatory Sandbox granted startups and established businesses the right to experiment in a controlled environment where regulatory and financial requirements are partially waived to encourage innovation. This enables the development of regulations in Bahrain before the introduction of novel financial technologies, whereby the CBB may collect insights on fintech business models to ensure effective and smooth integration. Sandbox innovations that aided in shaping the regulations in Bahrain include Open Banking, Crypto-Assets, Robo-Advisory and other financial technologies.
Based on the Regulatory Sandbox Framework, the eligibility criteria for start-ups or established businesses include five requirements briefly explained below[vii]:
The applicant’s product or service must (i) show true innovation that aims to bridge a gap present in the market; or (ii) be sufficiently different from existing products or services in the market; or (iii) enhance the use of existing technologies.
- Customer Benefit
The applicant’s product or service must provide customers with direct or indirect benefits, whereby supporting quantifiable estimations or demonstrations must be submitted.
- Identification of Major Risks
Major risk factors must be identified in relation to the product or service, where the applicant must submit its risk mitigating measures, business continuity and disaster recovery plans.
- Compliance with CDD and AML/CFT Requirements
Customer Due Diligence (CDD) and Anti-Money Laundering/Combating Financial Terrorism (AML/CFT) regulations stipulated under the CBB Rulebook must be adhered to by the applicant.
- Confidentiality Requirements
The ability to maintain confidentiality of customer information is required pursuant to the Central Bank of Bahrain and Financial Institutions Law No. (64) of 2006, as amended, and other applicable laws.
Considering the above, the applicant may be required to conduct market research to evidence the fulfillment of certain requirements.
The second cohort of the Regulatory Sandbox addressed crowdfunding (among other financial technologies). The Crowdfunding Platform Operators (CFP) Module was issued under Type 7 Ancillary Service Providers, Volume 5 Specialized Licensees of the CBB Rulebook. Crowdfunding is a type of alternative lending that is defined under the CFP as “an online portal or electronic media through which people and businesses lend money to other businesses”[viii], i.e., Person to Business (P2B) or Business to Business (B2B) funding. The purpose of crowdfunding is to attain finances from potential investors which would lead to direct financial return through profits or interest payments (financing-based crowdfunding) or indirect financial return through ownership of shares (equity-based crowdfunding).
Within the Bahrain fintech landscape, alternative lending and crowdfunding platforms include Erad, Ryalize, Fastura, Bidayatech, Tamam and Solfeh. Although the Covid-19 pandemic had a negative impact upon many startups, the Bahrain Fintech Ecosystem Report provided that investors expect alternative lending and crowdfunding financial innovations to grow in Bahrain in the coming years[ix].
The licensing requirements to operate a crowdfunding platform are listed within the Ancillary Service Provider section of the CBB Rulebook Volume 5 (which includes various categories such as third-party administrators, card processing services and operating a credit reference bureau). The applicant may operate within or from Bahrain and must apply to the CBB in writing where forms and supporting documents must be populated and submitted. The applicant must adhere to the conditions of licensing and adhere to the restrictions stipulated under the relevant laws and regulations.
As evidenced above, the Bahrain fintech ecosystem demonstrates support to financial innovations through the integration and regulation of financial technologies. The sectors experiencing the highest fintech disruption and adoption in Bahrain are retail banking (68%), telecommunications (41%) and corporate banking (40%) based on the Bahrain Fintech Ecosystem Report of December 2022. The report further outlines that there is a high potential in the market for adoption of Insurance Technology (InsurTech) and Regulatory Technology (RegTech). Similarly, technologies in big data analytics and artificial intelligence are expected to be introduced to the Bahraini market in the coming years.
Fintech is the heart of innovation and Bahrain is at the forefront, encouraging and regulating these financial technologies.
[i] Bahrain Fintech Ecosystem Report of December 2022 by Bahrain Fintech Bay
[ii] Bahrain News Agency article titled “iGA CEO: Bahrain government has successfully adopted Cloud First policy”
[iii] Bahrain Fintech Ecosystem Report of December 2022 by Bahrain Fintech Bay
[iv] Bahrain News Agency article titled “iGA CEO: Bahrain government has successfully adopted Cloud First policy”
Data Center Dynamics article titled “AWS opens first Middle Eastern region in Bahrain”
[v] The Cloud-First Policy of the Information & eGovernment Authority (iGA)
[vi] Bahrain Fintech Ecosystem Report of December 2022 by Bahrain Fintech Bay
[vii] Regulatory Sandbox Framework, the CBB Rulebook
[viii] CFP Module, the CBB Rulebook
[ix] Bahrain Fintech Ecosystem Report of December 2022 by Bahrain Fintech Bay