BANKING AND FINANCE LAW UPDATE: THE BOT ESTABLISHES ITS REGULATORY SANDBOX: A LOOK AT THE BANK OF TANZANIA (FINTECH REGULATORY SANDBOX) REGULATIONS, 2023

• How the Regulations function
• To whom do the Regulations apply and criteria for eligibility
• How to apply to be in the Sandbox and Evaluation of the application
• Assessing the benefits of being in the sandbox
• Protection of IP Rights while incepted in the sandbox. Is it a concern?
• Exploring the timeframe for Fintechs to be placed under the Regulations
• What follows post testing period under the Regulatory Sandbox

1.0. Introduction

In what should be considered a positive stance towards the development of the innovation sector and the Startup ecosystem, the Government of Tanzania has resorted to establishing Regulatory Sandboxes for Innovation startups. The first in the race is the Bank of Tanzania “BOT” which has initiated efforts to facilitate the advancement of innovation and development in the fintech industry by setting up a regulatory sandbox for startups in the fintech industry. This is through the Bank of Tanzania (Fintech Regulatory Sandbox) Regulations, 2023 of which the BOT has recently published its Draft. The upcoming regulations will allow innovators to test technology and innovations through live experiments, with fewer traditional regulatory hurdles.

The timing of this initiative is opportune, following prolonged appeals by fintech innovators for a regulatory environment that encourages innovations, particularly as the neighbouring East African countries (Rwanda, Kenya, and Uganda) have already established similar sandboxes.

Our Corporate Commercial Department at Breakthrough Attorneys has thoroughly examined the Regulations and prepared this Article to outline the crucial aspects of the Regulations, provide advice for innovators, and recommend potential inclusions for the ongoing development of the Regulations.

2.0. What are Fintechs?

The Regulations recognize Fintechs as technological innovation to be utilized in the provision of financial services. Basically, Fintechs are an intersection between software and technology to deliver financial services. They are technical innovations applied in a traditional financial services context or to innovative financial services offerings that disrupt the existing financial services market. The Fintech ecosystem includes innovators that offer payment and transfer services, lending and financing services, retail and banking services, financial management services, insurance services, and markets and exchanges services. Fintechs have continued to prove their usefulness to financial inclusion to the unbanked population. As per the Tanzanian Startup Ecosystem Status,  Fintechs in Tanzania comprise 7.2% of the 673 start-ups recorded in 2022 whereas there is a general increase of 15% in the number of Startups. Additionally, the Report reported an increase of 14.65% of the number of jobs created by Startups in 2022 form 78017 jobs to 89509 jobs in 2022.

3.0. Scope of the Regulatory Sandbox

A regulatory sandbox contemplated by the BOT is meant to provide a flexible regulatory setting to explore innovative projects and affords participants an opportunity for experimentation with actual market data. The Fintech Regulatory Sandbox is intended for innovators in the financial services sector who have already developed their service, product, or business model and are ready to undertake a proof of concept through monitored market testing. The innovators intended by the BOT’s Regulatory Sandbox will be of the following categories as proposed by the Draft Regulations;

1. financial service providers licensed by the BOT,
2. fintech companies intending to offer solutions to financial services regulated by the BOT, and
3. fintech companies collaborating with a licensed Financial service provider.

4.0. Benefits of the Regulatory Sandbox

As aforementioned the most prevalent challenge faced by Fintechs in Tanzania is regulatory uncertainty. Thus, with the Regulations, the following benefits are expected;

1. Exemption from compliance with BOT’s compliance requirements
   The BOT will exempt qualifying Fintechs from specific regulations for the duration of the sandbox, allowing Fintechs to test their innovative financial products and services in a live
   but the limited environment, without being fully subject to all requirements that are normally applicable to Fintechs and financial services providers. It should be noted that currently, Fintechs are required to comply with BOT’s regulations such as financial services providers’ licenses, etc. Therefore the Regulatory Sandbox is expected to enable them to speed up the process of entering the market with no or minimal regulatory requirements.
   
2. The BOT to study Fintechs characteristics and develop friendly regulations
   For the BOT, this will allow them to facilitate financial innovations while still ensuring consumer protection and financial system stability and to develop more appropriate regulatory policies through greater visibility into new innovations.
   

By being in the sandbox, BOT will guide fintech innovators to navigate through the legislative framework which compensates for the regulatory sandbox participants’ lack of expertise. We at Breakthrough Attorneys find this move useful to Fintechs, since even after exiting the sandbox, Fintechs will have established a relationship with the BOT which will make it easier for them to encounter any problems with applying legal rules. Also, under the operation of a sandbox, innovators and the BOT can identify regulatory frameworks that may be a constraint to a specific innovation. The regulatory sandbox further has the potential to reduce the time and cost of complying with Regulators.

5.0. Intellectual Property protection concerns

We understand that with the coming of the Regulatory Sandbox, there may be concerns regarding the safety and protection of the intellectual value innovations in the hands of officers of the BOT responsible for overseeing the Sandbox. To address this, the Regulations dictate that applicants must register their intellectual property with the Business Registration and Licensing Agency before participating in the regulatory sandbox. Additionally, innovators are obligated to withhold the technical specifications of their innovations when applying for inclusion in the regulatory sandbox (Regulation 6).

In the field of fintech, innovators often possess unique codes, designs, brands, and operational procedures that constitute their intellectual property, representing novel ideas that make their products or services distinctive. The requirement for applicants to register their intellectual properties serves as a means of safeguarding their innovations from infringement by external parties. Furthermore, it serves as a way to protect the intellectual property of others from potential infringement by the applicants within the sandbox. This requirement means Fintechs that are at the ideation stage are not eligible to apply for placement in the Regulatory Sandbox.

6.0. Eligibility for applicants

To gain approval for participation in the BOT’s regulatory sandbox, applicants must demonstrate the following as per the Regulations (Regulation 8):

1. registered business i.e. company, firm, or sole proprietorship
2. a financial solution that utilizes new or emerging technology, bridges market gaps, or improves financial service accessibility, functionality, and security.
3. a thorough assessment of the solution’s usefulness,
4. possess the necessary resources to support testing and mitigate risks,
5. have a realistic business plan for post-sandbox deployment,
6. identify significant risks,
7. establish key performance indicators for monitoring progress,
8. exhibit credibility and integrity,
9. devise an acceptable exit and transition strategy, and outline a plan for deploying the solution after successful testing.

We are of the view that the above criteria can be categorized into four main areas: genuine innovation, consumer benefits and safeguards, readiness for testing, and exit planning. This information can guarantee a proper determination of what can be a potential applicant. Further, it is our view that BOT should clearly demonstrate to applicants what exact information or documents is expected expect from the applicants to avoid incomplete or rather under-qualified applications.

7.0. How to apply for enrolment into the Regulatory Sandbox?

The Regulations provide that, the BOT is to issue a call for applications in a particular cohort. Interested and qualified applicants are then required to submit the following to BOT within thirty days the following documents:

1.  An application form that conforms to the Regulation’s requirements.
2. A financial solution risk profile that clearly outlines potential risks, causes, effects, and control measures.
3. Supporting documents to substantiate any additional information provided in the application form.

These documents should showcase the nature and scale of operations, further information about the financial innovation, source of funding, timelines for testing and deployment of the proposed financial solution, and a description of the underlying technologies and infrastructure of the proposed financial solution.
The Regulation has provided a template for the Application Form. It requires the Innovator to explain briefly the timelines for testing and deployment of the proposed innovation, details of the problem to be solved in the financial ecosystem, business plan, exit strategy, and risks.

8.0. Evaluation and notification of results

Once an application is submitted successfully, the BOT will proceed with its assessment. The assessment will consider the completeness, correctness, and suitability of the application based on the eligibility requirements, including:

1. The extent to which the application is complete, correct, and suitable according to the eligibility requirements.
2. Whether the proposed financial solution has the potential to enhance financial deepening and inclusion in the country.
3. The genuineness of the proposed financial solution.
4. The benefits provided to consumers by the proposed financial solution.
5. Measures in place to safeguard customers.
6. Adequacy of controls for managing potential risks, such as money laundering, financing of terrorism, and proliferation financing.
7. Applicant’s readiness for testing.
8. Adequacy of the applicant’s exit plan.
9. Adequacy of resources required to test the proposed financial solution.

Applicants will be notified of the evaluation results within 45 days after the application deadline. If the applicant is accepted, they will receive a letter of acceptance. If the application is not accepted, the BOT will provide the applicant with reasons for the rejection.

9.0. Testing period, conditions, and environment

Upon acceptance of the application, applicants enter the testing phase of the sandbox, where they will be referred to as “Participants.” Participants will be organized into 12 months cohorts. A participant is expected to commence testing within one (1) month from the date of receipt of the letter of acceptance. A participating Fintech is expected to complete testing of its financial solution in the sandbox within a period of nine (9) months from receipt of the letter of acceptance from the BOT which is the timeframe within which a Fintech will be under the Sandbox. The BOT may extend the testing period for the innovations that tested positive and justify that extension of the testing period is necessary to respond to specific issues or risks identified during the testing period (Regulation 6).

During the testing period under the Regulatory Sandbox, the participant is required to guarantee a safeguard for its consumers against losses through the provision of funds, guarantees, insurance, and other mechanisms. Also, they will have to handle financial consumer complaints and protect personal and financial data.

The participant is bound to conduct their operations in line with the conditions provided in the letter of acceptance. These conditions may be adjusted by the BOT when it deems appropriate. Among the conditions are to provide the BOT with interim reports every two months. The report is expected to cover key milestones achieved, fraud incidents observed, risks identified, customer complaints, operational challenges, personal or financial data protection report and report indicating a list of customers participating in the sandbox.

Comparatively, regarding the time frame, Zimbabwe offers participants of their equivalent regulatory sandbox a maximum of 24 months with an extension upon reasonable justifications. As for Nigeria, participants are given 6 months, while Kenya is 9 months. We are of the view that Tanzania’s 9 months may be extended to at least 12 to 16 months time to give enough time for the innovators to launch a product to the market and adequately be monitored by the BOT if it will be viable for consumers after the sandbox. This will ensure the growth of early-stage ideas into stable fintech products.

10.0. Exiting the sandbox

After the testing period concludes, the BOT holds the authority to determine whether the financial solution can be introduced in the market. Following the completion of the testing period, the Participant will exit the sandbox according to the exit plan, ensuring an orderly transition without disruptions to the financial system or harm to customers.

A successful applicant intending to launch the financial solution in the market will undergo evaluation by the BOT, in compliance with the terms and conditions outlined in the Bank and Financial Institutions Act, the National Payment Systems Act, the Microfinance Act, or any other relevant laws. The BOT may prohibit the deployment of the financial solution in the market after testing if there are reasons such as (a) unsuccessful testing based on agreed-upon measures; (b) unintended negative consequences for the public; or (c) potential threats to the stability of the financial system.

The approval to participate may also be revoked by the BOT before the end of the testing period if a participant fails to carry out the safeguards, submits misleading or inaccurate information, contravenes laws administered by the BOT, breaches data security and confidential requirements and if a company goes into liquidation (Regulation20).

11.0. Conclusion

Generally, with the Regulatory sandbox Innovators will save their valuable time and expenses by circumventing regulatory requirements while at the same time carefully being monitored that they provide their products and services to consumers of quality standards. At the same time, the sandbox will be an opportunity for the BOT to set up convenient regulations to the dynamic fintech sector.

We are of the view that the Regulatory Sandbox will incite an innovative culture and encourage innovation without hesitations of constraints of Regulators. Indeed, it will be a long-sought innovation hub that will not only create a conducive environment for innovation in the finance sector but rather a gateway towards regulatory sandboxes in other sectors that Startups mainly operate such as the health, insurance, and agriculture sector.

We are further of the view that as the government of Tanzania takes this important step in facilitating innovation in the country, the following should be done;

1. We call for a multisectoral Regulatory Sandbox considering the nature of many startups of cutting across multiple sectors i.e. fintech and insurance. This will help all regulators study them and come with harmonized compliance requirements.
2. Consider other initiatives that facilitate startups and early-stage innovations such as tax incentives that clearly miss from the current Regulations. This is important because apart from Regulatory hurdles, tax is yet another item that has to come in the same package as the Regulatory Sandbox.

Breakthrough Attorneys is dedicated to assisting the Startups ecosystem, and we call upon all Startups to air out their practical views regarding the Regulatory Sandbox before it becomes effective as well as call for other government initiatives around Fintechs and Startups.

For clarification and guidance regarding the investment process reach out to us via info@breakthroughattorneys.com.

 

Important Notice:

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys and Advisory Services, its members, employees, and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.