Regulatory Sandbox – A need of the hour in Pakistan

Jun 9, 2017
Tags :
  • Fintechs,
  • innovation in the financial industry,
  • Policy and Regulation,
  • Financial Technology firms, referred to as ‘FinTechs’ are revolutionizing the financial industry all over the world. According to Financial Technology Partners, an investment bank focused on FinTechs, a total of $36 billion was globally raised by FinTechs in 2016. Out of this, the largest chunk of 38 percent was raised in the category of payments and e-commerce.

    Due to payments and e-commerce increasingly becoming a focus in Pakistan, especially with the recent interest Alibaba has shown, there is an urgent need to promote and invigorate the capacity of FinTechs. Furthermore, there is also a need to encourage incumbent organizations (banks and other formal financial institutions) to innovate. While we at Karandaaz are actively engaging FinTechs in the industry, particularly through our Fintech Disrupt Challenge, it is essential that a push from the regulator provides greater regulatory space for FinTechs to thrive. Given the variety of FinTechs, regulators face the complexity of modifying and/or creating regulation accordingly. For the purpose of promoting innovation in the FinTech space, a number of regulators have leveraged the concept of a regulatory sandbox. This blog explores what a regulatory sandbox is and how this arrangement can help both sides.

    Regulatory Sandbox

    A report prepared for the World Bank by the Russian Electronic Money Association defines a regulatory sandbox as follows: [1]

    ‘Regulatory sandbox is a special set of rules that allows innovators to test their products/business models in live environment without following some or all legal requirements, subject to predefined restrictions:

    • Limitations (on number of clients, risk exposure);
    • Time-limited testing
    • Set of predefined exemptions
    • Testing under regulator’s supervision”

    They should be distinguished from standard general reliefs/exemptions, which exist in some jurisdictions for certain types of business (e.g. small electronic money service providers), because they are typically based on some rigid rules and do not cover innovations and new business models’[2]

    Given that FinTechs will use a test and learn approach to its solution, these solutions can be rejected as unsuccessful or permitted to operate in an easier regulatory environment via the regulatory sandbox approach.

    Impact of a regulatory sandbox:

    Innovation in the financial industry is aimed at improving efficiency, reducing costs, increasing outreach, and efficiently implementing KYC requirements. All these aspects catalyse financial inclusion. Therefore, to allow for the effect of innovation in the financial industry and achieve greater financial inclusion, a regulatory sandbox can help in the following ways:[3]

    Reduction of uncertainty for market players

    Conventional financial institutions and FinTechs alike abstain from extensively innovating and experimenting, to protect themselves from sanctions and punishments by the regulators. Similarly, there is a risk to reputation of the larger organisations for failing to comply with regulation. Given the inherent uncertainty in regulation, which is difficult to comprehend fully, a sandbox provides the leverage of testing products and services without the possibility of being penalized.

    Improvising old rules for new technologies

    A sandbox allows the regulator to observe and learn from the variety of new technologies being introduced. The regulator can also understand their impact and their risk, in a safe space environment. This learning will enable the regulator to modify the old rules to suit better to new technologies.

    Substantial reduction in time for seeking approvals

    Most innovation, by larger organisations especially, has to undergo several stages of examination. In the time that technical teams, regulators and corporate lawyers provide a green light for executing the idea, interest is lost and priorities are shifted. A sandbox, allowing exemption from various regulatory policies, accelerates the process of ideation to implementation.

    Preservation of financial stability

    Furthermore, regulators are allowed to maintain complete oversight of the new technologies and products being introduced Regulatory Sandboxes. This allows the regulator to be protected from cases where technologies are introduced through loopholes in regulation, making it difficult for regulators to respond to regulatory breaches


    Recent scoping by Karandaaz has shown that FinTechs in Pakistan have a strenuous journey ahead for actualizing their ideas. Therefore, we do not say that regulation is impeding the FinTech space. We believe enhanced support from all stakeholders is essential for promoting the FinTech industry of Pakistan. Other countries that have introduced this concept include the United Kingdom, Singapore, United Arab Emirates, Hong Kong, Thailand, Malaysia, Australia . Pakistan should review and study their experience and approach. The country needs to craft their own strategy for introducing a similar arrangement.







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