If you want to try something new, you need a safe space in which to experiment. That logic underpins the rise of the regulatory sandbox: a framework that allows businesses to test out new ideas in a supportive and enabling environment, softening the risk of missteps. 

Across the Middle East, sandboxes have emerged as a powerful tool for fostering innovation in various sectors and supporting economic diversification as the region seeks to reduce its dependence on oil and gas.

Financial technology (fintech) companies have been prominent beneficiaries: open banking firm Tarabut Gateway and crypto-asset service provider Rain Financial are among the numerous success stories to have graduated from Bahrain’s regulatory sandbox, with many more likely to follow in their path as the approach gains traction in the region. 

A regulatory sandbox is a virtual space set up by a regulator, which lets businesses test innovative products, services, models and delivery mechanisms in a live environment.

It is a powerful tool for collaboration, allowing businesses and governments to co-create regulation in an agile and informed way, striking the right balance between mitigating risks, protecting consumers and rewarding innovation.

This is especially important given the fast-changing and complex nature of the technologies fuelling economic growth in the future, from Big Data to artificial intelligence (AI).

Sandboxes offer tangible benefits to firms. They lower the cost of innovation by allowing businesses to test new products or services without the full weight of regulatory requirements. In addition, they reduce other barriers to entry, allowing startups to experiment without the need for a full licence.

Underpinning all this is their ultimate purpose: by offering a safe space for experimentation, sandboxes encourage businesses to innovate and push the boundaries of what is possible. 

Tool for diversification 

In Bahrain, innovation and economic diversification are well under way. The financial services sector is the largest contributor to the kingdom’s non-oil GDP, accounting for about 18% of economic activity.

Sandboxes play a growing role in driving innovation in this sector. The Central Bank of Bahrain (CBB) has been at the forefront of this approach, launching the first fintech regulatory sandbox in the region in 2017 to enable firms to test out technology-based solutions for up to a year under the supervision of the central bank, with the aim of then scaling up in Bahrain and the broader Gulf region.

Since its launch, the regulatory sandbox has helped over 100 companies to test innovative financial products and solutions, from open banking to insurance aggregation, paving the way for a more robust fintech ecosystem in the country.

Among the region’s fintech success stories is Tarabut Gateway, the first company to graduate from Bahrain’s sandbox in December 2018. A subsidiary of Almoayed Technologies, Tarabut offers open banking services that help customers make data-informed decisions.

Graduating a year later in 2019, Rain Financial, a crypto-asset service provider, now operates across the GCC.

The sandbox phenomenon extends beyond Bahrain. In the UAE, Emirates NBD launched its application programming interface (API) sandbox in 2018, giving developers access to over 5 million simulated customer transactions. The programme has nurtured fintech graduates including blockchain solution Norbloc and Bankbuddy, an AI chatbot for the financial industry. 

Sandboxes are not confined to financial services firms: they are playing a growing role in other sectors, including the information and communication technology (ICT) space.

The UAE launched its ICT regulatory sandbox in 2023, while Bahrain's telecommunications regulator has also launched a sandbox for the sector, further emphasising the country's commitment to fostering innovation.

With a young, tech-savvy population and high internet penetration rates, the GCC is well-positioned to drive growth in this fast-moving field. 

Given the success stories emerging from Bahrain and the UAE, more countries in the Middle East and North Africa region are likely to adopt regulatory sandboxes. These frameworks not only benefit businesses but also position the adopting countries as leaders in innovation.

As its trajectory to economic diversification continues, the region is set to become a global hotspot for technological advancements and innovations.

ABOUT THE AUTHOR

Yasmeen Al-Sharaf, director – fintech and innovation unit, Central Bank of Bahrain