Fintech’s Findings for Bahrain

Fintech’s report from this month highlights key trends and developments in financial technology across 10 different MENA jurisdictions. The report contains some important findings for Bahrain.

As an actively developing fintech industry, Bahrain’s central bank (CBB) has entered into MoUs with the Monetary Authority of Singapore and the ADGM. The aim of the MoUs is to facilitate cooperation on innovation projects and regulatory initiatives across jurisdictions. To test these innovations, the CBB launched a regulatory sandbox so local players can work on developing innovative retail payment systems.

Bahrain’s Economic Development Board (EDB) is focusing on attracting foreign investments in this sector and, in collaboration with the CBB and many other stakeholders, the EDB has established the Bahrain Fintech Bay. With 28 diversely experienced partners, the Fintech Bay is intended to provide support to start-ups by facilitating cooperation, accelerator programmes and funding. In fact, the Bahrain Development Bank (BDB) and EDB each announced funds of USD100m to invest in tech start-ups.

The Fintech Bay also recently announced the launch of the Global Islamic & Sustainable Fintech Center (GISFC) to encourage “sustainable, social and responsible innovation” within the Fintech and Islamic finance sectors.

Regulatory Sandbox

Launched in mid 2017 and amended in August that year, the CBB’s regulatory sandbox enables both CBB licensed financial institutions and other firms to test their products and services.

The application process is open to existing CBB licensees (financial institutions with technologically innovative initiatives) and other companies, whether Bahraini or foreign. Other companies may include ones in the financial, technology, professional service, or telecom’s industries.

Cryptocurrency

Supporting the launch of the regulatory sandbox, the CBB granted a license to several firms operating crypto-currency exchanges (seeking to be the first licensed cryptocurrency exchanges in the Middle East). In May 2018, Stellar, which has developed a cryptocurrency called Stellar Lumens (XLM), received a Sharia compliance certificate from a CBB licensed Sharia board – a global first.

Data Protection

In recognising the growing trend of digital payments and, with it, an increase in electronic personal data processing and storage – Bahrain announced a new data protection law in July 2018. Under the new compliance regime, due to be active on 1 August 2019, certain actions, such as failing to properly process or protect personal data, may incur criminal liability.

E-wallet initiative

The Benefit Company, a Bahraini provider of payment settlement services, has launched the National Mobile Electronic Wallet (BenefitPay), in a joint initiative with the CBB. This allows customers to use their smartphones to make or receive payments without the use of credit/debit cards or cash. Though in its early stages, it intends to be integrated with other retail payment infrastructures in Bahrain.

Crowdfunding

Bahrain adopted an ad hoc regulatory framework for crowdfunding for conventional and Sharia-compliant markets. Requirements include:

  • The operator of the crowdfunding platform must have minimum capital of BD50,000.
  • Only small and medium-sized businesses with paid-up capital not exceeding BD250,000 can raise funds through the platform.
  • Only expert & accredited investors are allowed to provide financing through this platform. It is unavailable to retail investors, in light of higher implicit risks.
  • Quantitative limitations are also in place for, amongst other things, the maximum amount which can be borrowed by each borrower and the maximum exposure each lender might have in relation to a single borrower. In September 2017, the CBB also modified the Markets and Exchanges Module introducing regulations for equity-based crowdfunding. In particular, the operation of an equity crowdfunding platform is now subject to a CBB license and several obligations including, amongst others, the following:
  • To carry out a ‘due-diligence’ exercise on prospective equity crowdfunding issuers planning to use its platform;
  • To monitor and ensure compliance of its rules;
  • To carry out investor education programmes;
  • Ensuring the equity crowdfunding offering generally contemplated in the securities regulations statement lodged with the crowdfunding platform operator is verified for accuracy and made accessible to investors through the platform;
  • Ensuring the fundraising limit imposed on an equity crowdfunding issuer is not breached;
  • Appointing a Money Laundering Reporting Officer (MLRO) while complying with the requirements of Module FC of the CBB Rulebook Volume 5 in respect of Anti-Money Laundering and Combating Financial Crime requirements.

An equity crowdfunding issuer must be a duly incorporated entity under the law of the Kingdom of Bahrain, or in case of an overseas equity crowdfunding issuer, under the law of its place of incorporation (though certain identified entities are prohibited from raising funds through a crowdfunding platform operator.)

The following limits apply to an equity crowdfunding issuer being hosted on a crowdfunding platform:

(a) an equity crowdfunding issuer, excluding entities engaged in real estate projects, can raise up to BD 250,000 or its equivalent amount in other currencies within a 12-month period (irrespective of the number of projects an equity crowdfunding issuer may seek funding for during that 12-month period).

(b) an equity crowdfunding issuer which qualifies as an entity engaged in real estate projects can raise up to BD500,000 or equivalent amount in other currency within a 12-month period, irrespective of the number of projects an equity crowdfunding issuer may seek funding for during that 12-month period. Only accredited investors and expert investors are eligible to register with a crowdfunding platform operator and participate in an equity crowdfunding offer.

In conclusion, Bahrain is going through major changes that demand professional experience to adapt to effectively.

For bespoke guidance, choose ASAR – Al Ruwayeh & Partners.

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