Regulatory sandbox in Bangladesh for financial inclusion

 
Rashed-Al-Hasan, Manager, Policy Component, BFP-B

Rashed-Al-Hasan, Manager, Policy Component, BFP-B

Over the past few years, there has been a rise in the number of fintech companies in Bangladesh. But government regulations hinder the growth of fintech. Company sustainability and consumer protection are also uncertain and prove to be challenge for regulators and investors. To overcome these challenges, a regulatory sandbox is a well-balanced solution that can be undertaken by regulators.

In this blog post, Rashed-Al-Hasan, Manager, Policy Component, BFP-B delves deeper into this topic.

 

fintech investment scenario in BANGLADESH

A vast majority of the population in Bangladesh remains financially excluded. This can be attributed mainly to higher transaction costs, poor infrastructure and lack of education. Enter a number of fintech companies, all of whom are exploring technology-assisted ideas to attempt to bring the population into the formal financial system.

Bangladesh has seen an increase in fintech investment over the past few years. Companies are coming up with innovations which are catalysing transformation in the financial sector.

There are two types of innovation happening in Bangladesh today: 1) innovation that is already prevalent abroad, but new here, and 2) completely new and home-grown ideas that have not been prototyped or implemented anywhere across the globe. Both are meant to propel growth.

It is important to come up with effective solutions and a set of rules that promote fintech innovation without compromising consumer well-being.

Challenges Fintech companies face

Government regulations currently are a hindrance to progress on these fronts. Some fintechs are not even able to enter the industry, and even if they do, may not last long.

Additionally, we have seen the sustainability of these companies being questioned because of the existing socio-economic circumstances.

Also many new products may not make it to the market if they are deemed to be a risk to consumers.

Though fintech innovations are aimed at making lives easier, the technologies used are still new and also complex, possibly risky.

With these concerns in mind, it is important to come up with effective solutions and a set of rules that promote fintech innovation without compromising consumer well-being.

Introducing a regulatory sandbox is just one of the many solutions that regulators can undertake.

According to a report by CGAP, “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 (operating under a special exemption, allowance, or other limited, time-bound exception) under the regulator’s supervision.”

In other words, coming up with a platform that relaxes certain regulations for innovative technology-based projects and allowing companies to grow under these circumstances.

The sandbox plays a crucial role in attracting investments for fintech firms from venture capitalists and private equity funds who previously hesitate to invest due to heavy regulations.

role of regulatory sandbox

A sandbox allows regulators to test the scope of any innovative solutions. Regulators have the difficult task of judging which innovations will cause harm to consumers and which won't. At the moment, they have to make a decision that is pretty much black and white—either something is allowed, or it isn't. The sandbox changes that dynamic, providing regulators with the institutional tools to see how new ideas/innovations work in the local context before making the final decision. Also, a sandbox allows a provider to test new business solutions in a specific geographical area or in consultation with regulators a restricted version of a product could be released to limit the risk to consumers.

The regulatory sandbox approach is being followed in UK, Singapore, Australia, Hong Kong, Canada, and other countries. From the examples of these countries, we have observed that the platform improves the interaction between the regulators and innovators by aligning compliance with the rapidly growing fintech sector.

The sandbox plays a crucial role in attracting investments for fintech firms from venture capitalists and private equity funds who previously hesitate to invest due to heavy regulations.

Finally, consumers are more confident in using the products of these firms because they understand that these firms are working under compliance. They feel more secure in relying on these innovations because of more focused policies which are specific to the company.

future of regulatory sandbox in bangladesh

In Bangladesh, there are several areas where a regulatory sandbox could help to pilot innovations and accelerate progress in a risk-controlled environment.

These areas include mobile financial services, digital financial services, fintechs, alternative investment, crowdfunding, insurance, microfinance, and agent banking,

The sandbox approach helps to break away from a tradition that otherwise hinders the growth of the economy as a whole and facilitates the development of the country.