When Kenya’s Capital Markets Authority announced it will launch its regulations for a sandbox, industry players knew the regulator was going into uncharted waters, at least on the continent. Though this kind of concept has been tested and approved in other global markets, Kenya was taking the mantle in leading the continent in helping fintechs experiment and innovate in a controlled environment.
Fintechs have played a great role in providing access to finance for Africa but they have been hindered by lack of certainty with some failing to make it to the next year. However, they remain key to financial inclusivity in the continent that has long been left behind n this realm.
A regulatory sandbox is a framework set up by a financial sector regulator to allow small scale, live testing of innovations by private firms in a controlled environment under the regulator’s supervision. The concept, which was developed in a time of rapid technological innovation in financial markets, is an attempt to address the frictions between regulators’ desire to encourage and enable innovation and the emphasis on regulation following the financial crisis of 2007–2008.
The first sandbox-like framework was set up by the U.S. Consumer Financial Protection Bureau (CFPB) in 2012 under the name Project Catalyst (CFPB 2016). In 2015, the U.K. Financial Conduct Authority (FCA) coined the term “regulatory sandbox” (FCA 2015). Since then, the concept has spread across more than 20 countries from Abu Dhabi to Sierra Leone.
Kenya has taken a bold step. The Board of the Capital Markets Authority (CMA) has approved the Regulatory Sandbox Policy Guidance Note setting the stage for CMA to begin accepting applications for admission of fintech firms to its Regulatory Sandbox.
“We welcome fintech firms and innovators to apply for admission to the Regulatory Sandbox. Where they are successful, they will have a 12-month period to deploy and conduct live-tests of their innovative products, solutions, and services”, CMA Chief Executive Paul Muthaura said. The Sandbox is expected to also accelerate CMA’s understanding of emerging technologies, support adoption of an evidence-based approach to regulation and facilitate deepening and broadening of Kenya’s capital markets.
Mr. Wycliffe Shamiah, Director of Market Operations and Head of the Authority’s Sandbox Review Committee noted that “at minimum, Sandbox applicants need to be companies incorporated in Kenya, including existing licensees of the Authority. For foreign applicants, they will be required to already be licensed by an equivalent capital markets regulator.” Fintech firms will be considered for admission based on their documented plans to offer innovative products, solutions or services with the potential to deepen Kenya’s capital markets following successful exit from the Sandbox.
“The Sandbox is however not an incubation centre and will not be able to receive applications based on ideas that have not been developed to the level of operational testing.” The Authority is nonetheless working with existing incubation centers who are in a position to support innovators to develop capital markets-related innovative ideas to a level of maturity at which they can then be admitted into the Sandbox. “The Sandbox will therefore not be considering for admission of purely conceptual proposed products, services or business models” Mr. Muthaura explained.
The Authority will treat all non-public information received in connection with a Sandbox application or test as confidential and proprietary to the concerned firms. However, Fintech firms will be responsible for taking applicable measures to protect their intellectual property.
The Sierra Leone FinTech Initiative, is led by the Bank of Sierra Leone in partnership with United Nations Capital Development Fund (UNCDF) and Financial Sector Deepening Africa (FSDA). It is a unique programme that encourages and catalyzes the development of FinTech solutions that are useful and highly relevant to the people and businesses of Sierra Leone.
The aim is to foster collaboration between regulators, non-traditional market players, licensed financial institutions and other partners to pilot innovative products, services or solutions in a fragile state context.
According to Consultative Group to Assist the Poor (CGAP), about 30 percent of sandbox projects involve payments (including remittance or digital transaction accounts) and nearly 30 percent involve market infrastructure (exchanges, clearing and settlement, escrow services) and wholesale financial services.
CGAP also notes that despite the attention they get from experts and the wider public, regulatory sandboxes attract fewer firms than complementary innovation facilitators, such as innovation hubs and accelerators. With this kind of reservations, Kenya and Sierra Leone are keen on this concept to grow their fintech industries.