Exclusive: Ethiopia Launches Regulatory Sandbox to Accelerate Financial Innovation

The Innovative Finance Lab (IFL) has officially launched Ethiopia’s Regulatory Sandbox, which will allow innovative firms to test their products and services in a controlled environment before market launch.

Hosted by the IFL and co-owned by the National Bank of Ethiopia (NBE) and the Ethiopian Capital Markets Authority (ECMA), the Sandbox facilitates testing within the live market alongside real consumers, under time-bound conditions, while ensuring appropriate consumer safeguards are in place.

The Sandbox aims to serve a dual purpose: aid regulatory authorities in identifying suitable regulatory requirements to foster innovation and assist firms in understanding regulatory obligations, thus accelerating their market entry process.

“Most successful sandboxes are open and cater to wide applications,” said Tom Ward, a consultant from MPnesa Impact and Development Services, a Switzerland-based consultancy firm assisting the IFL in setting up the Regulatory Sandbox.

The first regulatory sandboxes emerged in the UK in 2016, marking a turning point in fintech innovation. Since then, more than 50 countries have established similar fintech sandboxes.

The scope of Ethiopia’s sandbox primarily targets existing licensed firms, smaller unlicensed firms proposing business models or technological innovations, firms seeking to support those conducting financial services activities, and potentially firms aiming to assist regulatory authorities themselves.

In Ethiopia, there have been instances where innovative products have encountered regulatory challenges. For instance, the Bank of Abyssinia faced regulatory scrutiny twice. In early 2023, the bank introduced its mobile branch service—a makeshift truck designed to serve as a mobile branch, offering regular branch services and an ATM withdrawal alternative.

The National Bank of Ethiopia expressed its unreadiness to regulate such services, leading to the suspension of the truck’s operations. Around the same time, regulators at the central bank thwarted the scheduled launch of Apollo, an end-to-end digital banking service developed by the bank.

The specific self-registration feature for loan applications within the Apollo platform required authorization from the central bank. Although legislation governing electronic registration and authentication is yet to be established, Ethio Telecom obtained permits from the central bank to provide microcredit to clients registered online.

While Bank of Abyssinia was permitted to roll out its services, the launch never happened.

According to Endashaw Tesfaye, a Digital Financial Service Expert at UNCDF, these are the types of problems that the Sandbox could address.

“It opens the door for regulators to gain insights on new and emerging technologies and not be alarmed by them. It will also allow them to make informed, evidence-based regulations,” said Endashaw.

“Quite often, the private sector innovation is ahead of regulators. The sandbox also paves the way for policies to adapt to innovation when products that are not currently governed by existing regulations are developed,” he told Shega.

What will the controlled environment look like?

“There needs to be a clear understanding of what a sandbox does and what it does not,” said Tom.

According to Tom, the Regulatory sandboxes will not offer a “regulation-free” space for firms or provide direct funding from regulatory authorities.

It will neither grant firms direct access to customers nor replicate the functions of accelerators or incubators in supporting startups. Additionally, they do not offer business or non-regulatory legal assistance.

The Sandbox will be led by a Steering Committee made up of NBE, ECMA, Ministry of Finance, Ministry of Innovation Technology, and UNDP. This committee will decide on issues such as how many firms to pilot, how they will be selected, and what areas to cover.

IFL is planning to open the call for applications around May 2024.

Launched in 2022, by UNDP and the National Bank of Ethiopia, the IFL aims to establish a hub for piloting and scaling up flexible and innovative financial instruments that cater to the capital needs of Ethiopia’s startups and SMEs.

Besides the Sandbox, it’s working on mobilizing capital to address the supply constraints through the Enterprise Financing Facility (EFF) – a 100 million-dollar investment fund.