A number of innovations have supported the efforts of the Central Bank of Bahrain (CBB) to transform the country into a leading regional centre for financial technology (fintech). These include several sharia-compliant solutions that could offer significant benefits to Bahrain’s growing Islamic financial services sector. Following the creation of a regulatory sandbox, a new open-banking interoperable platform is set to connect customers to both Islamic and conventional banks, with the potential to boost financial inclusion. The launch of an online trading platform that is interoperable with online banking should further support fintech growth, while bolstering the number of retail investors participating in equities trading. Perhaps most importantly, however, is that the first cryptocurrency exchange to be licensed in Bahrain – which is also sharia-compliant – offers growth opportunities for banks to develop blockchain-supported Islamic fintech products.
Growth Prospects
The growth potential in Islamic fintech is significant. According to the “Islamic Fintech Report 2018” by the Dubai Islamic Economy Development Centre and Dinar Standard, the global financial services industry has been disrupted by automation, disintermediation and decentralisation, with young, digitally native stakeholders driving change. The report found there to be over 12,000 fintech start-ups around the world, and fintech investments were valued at $57.9bn during the first half of 2018. An estimated 74% of financial institutions are investing in data analytics and 34% in artificial intelligence, while 77% are expected to adopt blockchain by 2020. What is more, it is projected that total Islamic finance assets will reach $3.9trn by 2023.
“Islamic fintech is at the very beginning of an exciting, transformative journey for the industry, one still dominated by largely domestic and Organisation of Islamic Cooperation-based financial institutions”, the report noted. As is the case with conventional finance, growth in the Islamic fintech segment is set to be supported by young adults.
Regulatory Sandbox
The CBB has been making a concerted effort to expand both conventional and Islamic fintech development and adoption since the establishment of a dedicated fintech unit in October 2016. In June 2017 the bank launched a regulatory sandbox programme, under which local and international fintech companies, as well as existing financial services players, can experiment and pilot new fintech products and services.
Licensed financial services companies in the sandbox programme are given nine months to test new fintech protocols, with a three-month extension period available if necessary. The admissions criteria emphasises innovation, customer benefit and technical testing. The sandbox has been a success thus far, with the CBB reporting in November 2019 that 36 companies had been approved to participate. These companies tested solutions such as digital banks, cryptocurrency platforms, ATMs, open banking and payment-service mediums.
By the Bay
Part of the overall plan to expand Islamic and conventional fintech is FinTech Bay, a dedicated co-working space mandated to attract and develop fintech companies. Specific to the Islamic segment, FinTech Bay opened in June 2018 and works with Islamic fintech firms in partnership with leading Islamic finance institutions that operate in Bahrain and across the GCC. FinTech Bay is also home to the Global Islamic and Sustainable Fintech Centre, which focuses on Islamic and sustainable fintech development in Bahrain and throughout the wider MENA region. The platform offers opportunities for local, regional and global entrepreneurs to collaborate with industry and standard-setting agencies to support the creation of new Islamic fintech products.
Open Banking
Fintech platforms are already making inroads in both conventional and Islamic financial services. One tool that has proven to be particularly successful is open banking, allowing account holders to share account information and payment history with other banks and licensed third parties. This allows users to link their accounts at different banks and view all of their financial assets and liabilities using a single mobile application or online banking service. Open banking users can also link their accounts to verified independent applications such as those offering ride sharing and food delivery, enabling a broader range of services and functionality.
The CBB has been keen to encourage such services, announcing in November 2018 that all banks must adopt open-banking platforms by June 2019. In hand with the directive, a graduate of Bahrain’s regulatory sandbox received a licence in December 2018 for open-banking services. The company, Almoayed Technologies, had been working with Token.io, a San Francisco-based open-banking company, since April 2018 to develop a proprietary open-banking interface that connected 11 banks to a single online platform during the test period. Almoayed’s open-banking platform, Tarabut Gateway, allows customers of one bank to connect their account to any other bank in Bahrain and access services for a bank through a different bank. Users can also create a consolidated view of their finances using any of their banks’ online and mobile banking applications.
“Open banking in the kingdom of Bahrain will enable new revenue streams for banks, increase customer engagement in financial services and expand financial literacy among the population,” Abdulla Almoayed, CEO of Almoayed Technologies, said in a press release in December 2018. The platform moved beyond the pilot phase in May 2019 when the National Bank of Bahrain (NBB) become the first bank in the kingdom to adopt the Tarabut Gateway.
Online Trading
Bahraini officials have also been promoting greater participation in the capital markets, turning to fintech solutions to facilitate this. In May 2019 Al Watani TRADE, an initiative led by the NBB that enables users to trade equities and other securities directly on the Bahrain Bourse via their mobile phones or online, went live. The platform is expected to benefit investors and capital markets development by offering minimum upfront costs and streamlined, efficient market access for customers in Bahrain and abroad. Key features of Al Watani TRADE include customised stock alerts and smart grid watch lists, buying power information, consolidated portfolio review and evaluation, a historical transaction record, investment analysis tools and resources, and real-time notifications for potential investment opportunities. It will also host a global market overview to help monitor prices and track key international indices, commodities and currencies. Customers can receive trade notifications and alerts via SMS and email. By October 2019 sharia-compliant Khaleeji Commercial Bank had deployed the trading system, while Bank of Bahrain and Kuwait is expected to by early 2020. Al Watani TRADE follows the December 2018 launch of an electronic initial public offering (IPO) platform that enables online subscriptions to IPOs (see Capital Markets chapter).
Cryptocurrency Exchange
Perhaps most significant for Islamic fintech development was the August 2019 announcement by the CBB that it had granted its first crypto-asset module licence to Rain, a sharia-compliant cryptocurrency exchange and graduate of the regulatory sandbox. The announcement came just days after the company closed a round of venture capital funding backed by global cryptocurrency exchange BitMEX that yielded $2.5m.
Rain, which was certified as sharia-compliant in February 2019 by the Sharia Review Bureau, is the first cryptocurrency exchange to earn such a licence in the Middle East. The certification covers three cryptocurrencies: Bitcoin, Ethereum and Litecoin.
However, questions remain regarding the full extent of benefits of cryptocurrency trading, and some stakeholders feel officials are adopting a waitand-see approach to emerging technologies and products, including smart contracts that are carried out on blockchain – the technology that underpins cryptocurrencies. Nevertheless, the technology has the potential to revolutionise Islamic finance, specifically the issuance of sukuk (Islamic bonds).
“Sukuk can be made more efficient via blockchain’s smart contracts,” Ijlal Ahmed Alvi, CEO of the Islamic International Financial Market, told OBG. “There is tremendous potential in blockchain, but regulators are still assessing the situation. While a few sukuk offerings have used some part of blockchain technology, there is still a lot of work to be done to ensure the segment enjoys the full benefits of fintech.”
Bahrain’s proactive regulatory approach and concerted efforts to expand the use of Islamic fintech are supporting the kingdom’s bid to become a leader in emerging markets, paving the way for sustainable and innovative growth in the medium to long term.
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