Ethiopia Unveils Regulatory Sandbox to Boost Financial Innovation

Ethiopia Unveils Regulatory Sandbox to Boost Financial Innovation
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Ethiopia has officially introduced its Regulatory Sandbox through the Innovative Finance Lab (IFL), a platform co-owned by the National Bank of Ethiopia (NBE) and the Ethiopian Capital Markets Authority (ECMA). The Regulatory Sandbox is designed to enable innovative companies to test their products and services in a controlled environment before a full market launch.

Hosted by the IFL, the Regulatory Sandbox allows for live testing in the market alongside real consumers, with well-defined time constraints and essential consumer safeguards. The initiative serves a dual purpose: aiding regulatory authorities in identifying suitable requirements to foster innovation and assisting companies in understanding regulatory obligations, thereby accelerating their entry into the market.

Tom Ward, a consultant from MPnesa Impact and Development Services, a Switzerland-based consultancy firm assisting the IFL in setting up the Regulatory Sandbox, emphasized the importance of open and widely applicable sandboxes for success. Since the advent of the first regulatory sandboxes in the UK in 2016, over 50 countries have implemented similar fintech sandboxes, marking a global trend in fostering financial technology innovation.

Ethiopia’s Regulatory Sandbox primarily targets existing licensed firms, smaller unlicensed firms proposing new business models or technological innovations, entities supporting financial services activities, and potentially firms assisting regulatory authorities themselves.

The launch of the Regulatory Sandbox comes after instances in Ethiopia where innovative products faced regulatory challenges. For example, the Bank of Abyssinia encountered regulatory scrutiny for its mobile branch service, leading to the suspension of operations. The Sandbox aims to address such issues by providing regulators with insights into emerging technologies and fostering informed, evidence-based regulations.

Endashaw Tesfaye, a Digital Financial Service Expert at UNCDF, highlighted the Sandbox’s role in aligning regulations with private sector innovation and adapting policies to accommodate new products.

Tom emphasized that the Regulatory Sandbox does not provide a “regulation-free” space for firms, nor does it offer direct funding or access to customers. It won’t replicate the functions of accelerators or incubators and doesn’t provide non-regulatory legal assistance.

The Sandbox will be overseen by a Steering Committee comprising representatives from NBE, ECMA, Ministry of Finance, Ministry of Innovation Technology, and UNDP. This committee will decide on pilot firms, selection criteria, and covered areas. Applications for the Sandbox are expected to open around May 2024.

Established in 2022 by UNDP and the National Bank of Ethiopia, the IFL seeks to create a hub for testing and scaling innovative financial instruments catering to the capital needs of Ethiopia’s startups and SMEs. Alongside the Sandbox, the IFL is working on the Enterprise Financing Facility (EFF), a $100 million investment fund aimed at addressing supply constraints and supporting financial innovation.

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