The Bank of Ghana has announced its official launch of the Regulatory and Innovation Sandbox, a partnership between the central bank of Ghana under the Fintech and Innovation Office and EMTECH Africa, a regtech helping to modernise central banks in developed and emerging markets. This forms part of the central bank’s effort to foster a conducive regulatory environment for fintech innovations to thrive.
Over the past few years, financial services have evolved rapidly from cash-driven economies to cashless economies. This has led to the emergence of fintechs developing innovative solutions to enhance financial service delivery while championing financial inclusion. The emergence of these technologies has increased the importance of global central banks tightening their regulatory oversight of financial service delivery. The goal was to mitigate the risks associated with these evolutions in finance-backed technology.
The financial sector is one of the fast-growing industries globally, and Ghana’s ecosystem is at the forefront of these developments in the sub-region. The investment bias toward fintech solutions reflects the growth of fintech solutions. Fintechs in Africa received US$2.88billion in capital last year, accounting for 62 percent of the total funding received. This expansion is usually accompanied by specific loopholes and risks which must be monitored and mitigated in order to minimise the impact of any issues that may arise.
The Regulatory and Innovation Sandbox is an effective method of reducing the risks associated with financial innovation while allowing for the growth of innovation in an emerging technology ecosystem. The regulatory sandbox is a haven where most financial innovations will be explored, tested and deployed at scale.
Technology is advancing faster than regulation, and central banks are using the regulatory and innovation sandbox to better understand prospective breakthroughs and approaches to establish effective regulatory frameworks to assure financial service delivery and inclusion in general. It also allows fintechs to test their innovations in real-time before scaling them up.
How does this impact Fintechs and other Financial Service Providers (FSPs)?
Regulations and compliance are required for an industry to exist and grow on a large scale. This aims to protect fintechs from possible dangers that may arise internally and externally while also protecting consumers, as finance is a very delicate industry. Given the rate at which technology is evolving, anything could go wrong.
Furthermore, one of the most significant roadblocks for any fintech is the difficulty of obtaining a licence to operate. Acquiring some of these licences is too expensive for most financial businesses, and the process may take longer than planned – delaying these startups’ go-to-market deadlines.
The evolution in technology has given rise to artificial intelligence, blockchain and other emerging technologies being used to enhance financial service delivery. These emerging technologies are not captured in the current regulatory framework, as technology has moved fast past existing regulations.
Regulators struggle to define categories to fit some fintechs – especially those in digital banking, digital investments and blockchain among others. This delays the progress of fintechs, as they are required to wait for the necessary regulatory frameworks to be tailored toward their specific sectors.
The regulatory sandbox presents an opportunity for fintechs/financial service providers who meet the sandbox requirements to be enrolled. This means that fintechs that are not captured under the current regulatory framework can operate without a licence provided they are accepted into the sandbox after meeting initial requirements to enter the sandbox. Below are the requirements to be enrolled in the programme:
- New digital business models are not covered explicitly or implicitly under any current regulation
- New and immature digital financial service technology
- Innovative and disruptive digital financial service products that have the potential of addressing a persistent financial inclusion challenge
Finally, continuing collaborations between central banks and relevant industry participants can fully realise financial innovation and inclusion. The regulatory and innovation sandbox is a positive step toward a more financially inclusive economy.
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