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In the last five years the Kingdom of Bahrain made a decision to invest in the emerging trend of fintech (a portmanteau of "Financial" and "Technology") in an effort to boost investment and growth.

This effort is clearly paying off with the Kingdom's ecosystem having climbed 20 places in a global ranking , as well as being classified second globally in terms of Islamic finance regulation and fifth globally as a high-growth ecosystem within the 'activation' phase  in the past 12 months. The main planks of a successful fintech ecosystem are commonly described as the following:

1. protection of existing financial sector whilst permitting innovation;

2. encouraging entrepreneurial behaviour; and

3. boosting investment into fintech / start-ups.

The Kingdom's success is down to the interplay of actions taken by Bahrain's financial regulator, the Central Bank of Bahrain (CBB), other governmental and quasi-governmental bodies and the banking / financial industry in Bahrain in order to achieve the three objectives set out above.

The CBB's Fintech & Innovation Unit is responsible for the regulation of the CBB's Regulatory Sandbox, as well as the approval and licensing of entities into such. The Regulatory Sandbox was set up in June 2017 to allow businesses (both start-ups and existing CBB licensees) to test, formulate and develop fintech products in a protected environment, for example products developed within such are limited to 100 customers. The Regulatory Sandbox currently contains over thirty firms from over fifteen jurisdictions involved in a variety of fintech solutions, including tokenisation, artificial intelligence, microfinance, crypto-assets and robo-advisory products. In addition, the CBB has introduced a number of regulations and laws in the past few years that have helped to propel Bahrain up the fintech rankings such as:

• open banking regulations which became a requirement on 30 June 2019

• personal data protection law which came into effect on 1 August 2019

• investment limited partnership law which came into effect on 4 August 2016

• crowdfunding regulations in relation equity-based, debt-based and Shari'ah-based financing issued in August 2017 and as revised November 2018

• crypto-assets regulations introduced in December 2018 and finalised in February 2019

• a modern bankruptcy and restructuring law which came into effect on 8 December 2018

• robo-advisory regulations introduced in January 2019

As a result of the above, high-profile fintech businesses have begun to offer their services from Bahrain, including Rain, the first licensed crypto-currency exchange in the Middle East and one of the first graduates of the Regulatory Sandbox. In addition, the publication of new regulations and policies by the CBB has ensured that more traditional CBB licensees keep up with the latest developments in fintech, this included requiring the adoption of the open banking regulations by all banking licensees in Bahrain by 30 June 2019. These regulations make customer information accessible to third party applications at the request of the customer in order to allow for applications in respect of budgeting, financial planning and enabling payment transactions via a single interface.

The CBB has shown no signs of slowing down in respect of bringing forth innovative proposals and has plans to implement regulations in relation to electronic cheques and the tokenisation of debit cards in order to expand contactless transactions.

Another initiative within Bahrain to encourage innovation within the fintech ecosystem is the collaboration between the Bahrain Economic Development Board and Fintech Consortium, an international fintech ecosystem builder, known as Bahrain Fintech Bay, which was established in February 2018. Bahrain Fintech Bay provides a physical co-working space for entities within the fintech / start-up ecosystem, as well as educational resources to its cohort, including a fintech course operated in conjunction with Georgetown University, and regular free webinars.

In order to create a sustainable venture capital culture that supports the fintech / start-up ecosystem, Bahrain Development Bank established the Al Waha Fund of Funds in 2018, with the purpose of investing in and attracting other venture capital funds particularly focusing on innovative and technology-driven start-ups in Bahrain and the MENA region, and has invested significantly in improving the start-up ecosystem in Bahrain. The Al Waha Fund of Funds, following an initial fundraising round of US$100m, has already made a number of high-profile investments such as its substantial investment in US-based Lumia Capital, as well as investments in Dubai's BECO Capital, China-based MSA Capital, Dubai's Middle East Venture Partners and Amsterdam-based VC Finch Capital. In a show of commitment to building the fintech ecosystem in Bahrain and the wider region, the limited partners of the Al Waha Fund of Funds are prominent Bahraini entities including, the National Bank of Bahrain, Batelco, Tamkeen (a quasi-government entity established to provide assistance and training to Bahrain's private sector) and Bahrain's sovereign wealth fund, Mumatalakat. In addition to this, in late 2019 Al Salam Bank – Bahrain announced the launch of the first investment limited partnership in Bahrain, MEC Ventures, a US$50m venture capital fund in partnership with MSA Capital, which would focus on investing in Chinese technologies and business models within the MENA regions. As well as those above, there are a number of other incubators, accelerators, seed investors and supporting organisations in Bahrain, including  Flat6Labs, Brinc, C5 Accelerator and the Rowad programme operated by Bahrain Development Bank.

The above initiatives and developments have shown how seriously Bahrain is taking the challenge of bringing its financial ecosystem into line with other fintech hubs around the world, by:

1. ensuring the protection of the financial system by introducing a Regulatory Sandbox for  products to be tested in a manner that is safe and ensuring that innovative products can  be tested competently, as well as following this up with laws, regulations and policies  tailored to the relevant product;

2. encouraging entrepreneurial behaviour by updating and revamping the bankruptcy law for  businesses that are either not to be licensed by the CBB (i.e. non-fintech) or those that  have not yet been licensed by the CBB, as well as providing education, training and  mentorships via Bahrain Fintech Bay, or the other numerous incubator or accelerator  programmes present in Bahrain; and

3. boosting investment in fintech / start-up businesses by establishing a number of funds  based in Bahrain for the purpose of investing in technologically-innovative businesses, as  well as bringing in investment from outside of the region into businesses in Bahrain and  the MENA region such as the Al Waha Fund of Funds and MEC Ventures.

This strategy is clearly bearing fruit as, in addition to Bahrain rising in the rankings, in July 2019 the Kingdom was selected as the hub for Amazon Web Services' Middle East (Bahrain) Region. This development highlights Bahrain's attractiveness within the region to digital and technological businesses, and will further spur innovation by offering data centres located in Bahrain leading to faster connections and large workloads. As a result, in the period from 2016 to 2019, Bahrain-based start-ups have secured over US$63m in capital, which complements the wider picture within the MENA region, as 564 venture capital deals completed during 2019, valued at approximately US$704m, which is nearly double the value of the deals that completed just five years ago.

With increased globalisation across the MENA region, there has been a push by countries to become the hub in the region for fintech start-ups, notably the regulatory sandboxes in Abu Dhabi's ADGM and Dubai's DIFC, and despite such competition Bahrain has succeeded in activating a thriving fintech / start-up system over the last few years. This investment has become an important part of the Kingdom's push to diversify its economy away from its past reliance upon oil, in the past two and a half years the ecosystem has had a wider economic impact of USD$164m.  In light of the downward pressure placed upon the Bahrain economy by the continued low oil price and as the fallout of the Covid-19 pandemic becomes evident, this diversification will become even more important.

Trowers & Hamlins has extensive experience in advising in areas of banking and financial technology and has advised many of the entities mentioned in this article above.