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 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.