Regulatory Sandbox: What it Could Mean for Kenya

CMA Kenya in talks with stakeholders as it comes up with the Fintech Regulatory Sandbox

Kenya’s Capital Markets Authority (CMA) is currently working on a regulatory sandbox in collaboration with the relevant stakeholders, according to its latest soundness reports. This comes at a time when the country is experiencing a growth in mobile lending, cryptocurrency use, and recommendations to apply blockchain technology in various sectors.

The Consultative Group to Assist the Poor (CGAP) defines a regulatory sandbox as “a framework set up by a regulator that allows fintech startups and other innovators to conduct live experiments in a controlled environment under a regulator’s supervision.” This means that entrepreneurs will have a chance to innovate while regulators ensure that consumers remain protected.

CMA is already in talks with some local players that includes BitPesa, Nailab, Point 50 Capital, and MyCenti among others.


Proposed Regulatory Sandbox Draft Rules

According to Bankelele, CMA has proposed draft rules for a regulatory sandbox which will offer guidelines to financial products like “peer-to-peer finance (crowdfunding), cryptocurrencies, distributed ledger technology (blockchain technology), algorithmic trading, big-data, RegTech credit rating, online lending, and online banking.”

The proposed draft rules, which are based on benchmarks from sandbox rules implemented in countries like Australia and Malaysia, will allow companies to test their products within a defined time period which will then be followed with a review from peer groups working with the CMA. The regulator also proposed an annual fintech day featuring sandbox participants and submission of outcomes by fintechs of the results from their experiments.


What a Regulatory Sandbox Could Mean for Kenya

A G20 report on digital financial inclusion in emerging economies says that regulatory sandboxes are a means of balancing innovation and risk in favour of financial inclusion.

“Regulatory sandboxes [could] enable innovations that are likely to benefit excluded customers, regardless of whether inclusion is a key objective. FinTech innovations can lead to more affordable products and services, new distribution channels that reach excluded groups, operational efficiencies that make it possible to serve low-margin customers profitably and compliance and risk-management approaches,” CGAP states.

That means that if implemented, a regulatory sandbox in Kenya could increase financial inclusion, lead to more affordable financial products, and safeguard consumers from risk.

Other benefits a regulatory sandbox could bring include driving innovation, providing increased job opportunities, enhancing cybersecurity, boosting internet usage, attracting foreign investors, alleviating poverty, and accelerating the achievement of the Big Four agenda. However, CGAP observes that regulatory sandboxes are still new and the evidence for their effectiveness is still weak.

The Group, therefore, recommends policymakers to carefully consider sandbox designs and “pro-innovation approaches that have been used successfully.”

That said, a regulatory sandbox could have a major positive impact in Kenya. The Regulatory Sandbox License in Mauritius, for example, has played a role in making the country one of the most innovative nations on the continent. That could be an indication that by creating an innovation-friendly environment, Kenya has a lot to gain.

So far, Kenya has made the right steps through the establishment of the Nairobi International Financial Center Authority (NIFCA) and the AI and blockchain taskforce.