The Fintech Landscape in Bahrain

1. The Fintech Landscape

1.1 Types of Fintech Businesses

Bahrain’s fintech ecosystem is a dynamic and diverse sector, characterized by a range of businesses that leverage technology to enhance financial services. The Central Bank of Bahrain (CBB) has established a proactive regulatory framework to support this innovation, ensuring financial stability and consumer protection.

Key Types of Fintech Businesses:

• Open Banking Platforms: These platforms facilitate secure sharing of financial data between banks and third-party providers, enhancing customer experiences and fostering innovation.

• Digital Payments and Remittances: Companies in this space offer efficient solutions for digital transactions, both locally and internationally, catering to the growing demand for contactless payments.

• Peer-to-Peer Lending and Crowdfunding: These platforms connect borrowers directly with lenders, democratizing access to finance and enabling individuals to invest in startups.

• Digital Asset Management and Robo-Advisory Services: Utilizing algorithms and AI, these services provide personalized investment advice and management, making financial planning more accessible.

• Insurtech: This sector leverages technology to streamline insurance processes, from policy issuance to claims management.

• Blockchain and Crypto-Assets: Businesses in this area develop solutions for digital currencies and smart contracts, enhancing transaction security and transparency.

State of Market Development

The fintech market in Bahrain has experienced significant growth, driven by initiatives from the CBB, such as the regulatory sandbox and open banking framework. These efforts have positioned Bahrain as a leading fintech hub in the MENA region, attracting both local and international startups.

COVID-19 Pandemic Response

The COVID-19 pandemic accelerated the adoption of fintech solutions, highlighting the sector’s resilience. The demand for digital financial services surged as consumers sought safer ways to manage their finances during lockdowns.

ESG Objectives

Bahrain’s fintech sector is increasingly aligning with Environmental, Social, and Governance (ESG) objectives. In November 2023, the CBB introduced ESG reporting requirements for financial institutions, emphasizing the importance of sustainability in financial practices.

Notable Innovation Trends

Recent trends in Bahrain’s fintech sector include:

• Open Banking: Bahrain is leading the region in promoting open banking, enhancing competition and innovation.

• Blockchain Technology: The regulatory framework for crypto-assets has spurred innovations in digital currencies and secure transactions.

• Digital Financial Advice: New regulations for robo-advisory services reflect a commitment to leveraging technology in financial planning.

2. Funding for Fintech

2.1 Types of Funding Available

Bahrain offers a variety of funding options for new and growing businesses, particularly in the fintech sector:

• Venture Capital (VC): Local and regional VC firms are increasingly investing in high-potential fintech startups.

• Angel Investors: A growing network of high-net-worth individuals is providing capital to innovative fintech solutions.

• Bank Financing: Traditional loans are available, although typically more accessible to established businesses.

• Government Grants and Support Programs: Initiatives from the Bahrain Economic Development Board (EDB) and Tamkeen offer financial support to startups.

• Crowdfunding: Both conventional and Sharia-compliant crowdfunding platforms are regulated to facilitate access to finance.

2.2 Incentive Schemes for Investment

Bahrain has implemented several incentive schemes to promote investment in tech and fintech sectors:

• Regulatory Sandbox: This allows fintech firms to test solutions in a controlled environment, showcasing their viability to potential investors.

• Dedicated Funds: The Bahrain Development Bank (BDB) and EDB provide funds specifically for tech startups.

• Tax Incentives: While Bahrain does not levy corporate or income taxes, it offers other financial incentives, such as unrestricted capital repatriation.

2.3 Conditions for IPO

To conduct an Initial Public Offering (IPO) in Bahrain, businesses must meet several conditions set by the Bahrain Bourse and the CBB:

• Financial Health: Companies must demonstrate net profits over the last three years or meet specific profit thresholds.

• Corporate Governance: Adherence to stringent corporate governance standards is required.

• Transparency and Reporting: Commitment to accurate financial reporting is essential.

• Minimum Capital Requirements: The paid-up capital must not be less than BHD 1,000,000.

• Minimum Number of Shareholders: A minimum of 100 non-employee shareholders is required.

2.4 Notable Exits

As of now, there have been no notable exits, such as sales or IPOs, by fintech founders in Bahrain.

3. Fintech Regulation

3.1 Regulatory Framework

Bahrain’s regulatory framework for fintech, established by the CBB in 2017, aims to foster innovation while ensuring financial stability and consumer protection:

• Regulatory Sandbox: Launched in 2017, this allows fintech firms to test solutions in a controlled environment.

• Crypto-Asset Regulations: The CBB introduced a framework for crypto-assets in 2019, covering licensing and AML measures.

• Open Banking Regulations: Implemented in 2019, these regulations promote competition by allowing third-party access to banking data.

• Digital Financial Advice: Guidelines for robo-advisory services were issued in 2018, setting operational and regulatory standards.

• Crowdfunding Regulations: Introduced in 2017, these frameworks facilitate access to finance for startups.

3.2 Cryptocurrency Regulations

Bahrain has specific regulations for cryptocurrencies, making it a pioneer in the Middle East. The CBB’s CRA Module outlines licensing requirements and AML measures for crypto-asset services.

3.3 Receptiveness to Innovation

Bahrain’s regulators are receptive to fintech innovation, as evidenced by the establishment of the Fintech & Innovation Unit and initiatives like FinHub 973, a digital innovation platform that connects fintechs with financial institutions.

3.4 Regulatory Hurdles for Foreign Firms

Foreign fintech businesses must navigate several regulatory requirements to access the Bahraini market:

• Licensing and Registration: Obtaining local licenses from the CBB is essential.

• Compliance with Local Regulations: Adherence to AML, consumer protection, and data privacy laws is mandatory.

• Market Entry Strategy: Establishing a local presence and forming partnerships with local financial institutions can facilitate market entry.

4. Other Regulatory Regimes / Non-Financial Regulation

4.1 Data Protection Regulations

Bahrain regulates the collection and use of personal data under the Personal Data Protection Law (PDPL), which aligns with GDPR principles. Companies must ensure compliance when processing customer data.

4.2 Applicability to Foreign Organizations

The PDPL applies to foreign organizations processing data using means available in Bahrain, requiring them to appoint a local representative.

4.3 Sanctions for Non-Compliance

Violations of the PDPL can result in fines, penalties, and corrective orders from the Personal Data Protection Authority.

4.4 Cybersecurity Regulations

Fintech businesses must adhere to cybersecurity regulations relevant to their operations, particularly in payment services and crypto-asset activities.

4.5 AML and Financial Crime Requirements

Fintech companies must comply with stringent AML regulations, including appointing a Money Laundering Reporting Officer (MLRO) and adhering to the Financial Crimes Module of the CBB Rulebook.

4.6 Other Regulatory Regimes

While there is no specific AI regulation, fintech businesses using AI should align with global best practices. Additionally, IP protection laws apply to innovations in fintech.

5. Accessing Talent

5.1 Hiring and Dismissal Framework

Bahrain’s Labour Law outlines the framework for hiring and dismissal, covering contracts, working hours, and termination processes. While there are no onerous requirements, changes to employment terms can be challenging.

5.2 Mandatory Employment Benefits

Employees are entitled to various benefits, including:

• Annual Leave: A minimum of 30 days after one year of service.

• Sick Leave: Up to 55 days, with varying pay.

• Maternity Leave: 60 days with full pay.

5.3 Hiring Foreign Employees

To hire foreign employees, businesses must secure work permits and comply with the Labour Market Regulatory Authority’s requirements. While there is no specific route for fintech, all employers must follow standard processes.

6. Technology

6.1 Protection of Innovations

Innovations in Bahrain are protected under various laws, including the Patent Law, Trademarks Law, and Copyright Law, ensuring that intellectual property rights are upheld.

6.2 Ownership of IP

IP ownership is typically attributed to the registered owner, with copyright automatically granted to the author.

6.3 Enforcement of IP Rights

To enforce IP rights in Bahrain, local registration is necessary. Bahrain’s membership in international treaties facilitates broader protection.

6.4 Monetization of IP

IP can be monetized through licensing, sale, or commercialization, with specific provisions governing these activities to prevent anti-competitive practices.