1 Legal and enforcement framework

1.1 In broad terms, which legislative and regulatory provisions govern the fintech space in your jurisdiction?

Generally, the Central Bank of Bahrain ("CBB") is the legislative/regulatory body within the world of Financial Technology in the Kingdom of Bahrain.

The laws & legislations of such are found within the CBB Rulebooks , encompassing seven (7) volumes, which govern the following subsectors of the financial industry:

  • Volume 1 – Conventional Banks
  • Volume 2 – Islamic Banks
  • Volume 3 – Insurance
  • Volume 4 – Investment Business
  • Volume 5 – Specialized Licensees
  • Volume 6 – Capital Markets
  • Volume 7 – Collective Investment

1.2 Do any special regimes apply to specific areas of the fintech space?

As previously mentioned, the CBB Rulebooks are the specific regimes that detail the regulations of the Financial Technologies sector. Each of the volumes provides in-depth, tailor-made guidance to companies operating under each of the respective sub-sectors.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The CBB is the sole governing body enforcing the laws and regulations of the Fintech sector, superseding the previous entity known as the Bahrain Monetary Agency (the "BMA"). Promulgated under Decree Law No. (64) of 2006, The Central Bank of Bahrain and Financial Institutions Law (the "CBB Law"), repealed the BMA Law of 1987, defining the CBB's purpose, governance, and authority within the Bahraini Banking Sector.

The CBB Law strengthened the CBB's operational autonomy, whilst simultaneously bolstering its legal authority. Additional features of the CBB Law provide a broader range of powers for the regulation of financial systems within the Kingdom, in addition to the powers relative to the development of legislative offences for fraudulent activity and market manipulation.

1.4 What is the regulators' general approach to fintech?

Bahrain is in the process of repositioning itself to be a Fintech hub within the Middle East and North Africa (MENA) region, through the combination of conventional and Shariah compliant Fintech solutions. As such, the CBB's approach to Fintech is a positive and forward-thinking one; there is a clear overarching strategy to incorporate fintech initiatives as part of the overall digital transformation strategy to facilitate more efficient provisions of financial services to the Kingdom. Through the support of the CBB's business-empowering regulations introduced in recent years, Bahrain has developed an ideal environment for the fintech ecosystem to operate in s streamlined manner.

1.5 Are there any trade associations for the fintech sector?

No... a trade association currently does not exist within the companies sector for fintech, however, there are plans to implement such an association in due course.

2 Fintech market

2.1 Which sub-sectors of the fintech industry have become most embedded in your jurisdiction?

Following the recent uptake in the implementation of fintech, within the Bahraini financial sector, the number of fintech start-ups has increased by 100% since 2018. Important breakthroughs have been made through the implementation of Open Banking, as well as an exponentially rising demand for better Business to Consumer services ("B2C"). In recent years, Payment, Transfers, and Remittances have become the most embedded within the Bahraini fintech industry, with the sub-sector gaining traction with both businesses and consumers. The impact of the COVID-19 pandemic, although causing a hiatus in the development of the fintech industry, led to the necessity of contactless payments, regionally and on a global scale. Bahrain's fintech sector has not shied away from this necessity, and consequently the fintech sector provided a solution to the markets problem, through the development of Electronic Funds Transfer Systems ("EFTS"). The frontrunner, in this regard, has by and large been the BENEFIT company, whom through their 'BenefitPay' app, have reported a 292% increase in the volume of EFTS (totalling 50,609,425 transactions in 2021).

2.2 What products and services are offered?

The products and services offered by fintech start-ups in Bahrain, are diverse in nature and encompass both B2C and Business-to-Business ("B2B") services, particularly:

  • Digital Banks, and Banking Platforms
  • Securities Tokenisation
  • Banking Solutions
  • Cybersecurity and RegTech
  • Payments, Transfers, and Remittances
  • Open Banking
  • Trade Finance
  • Alternative Lending, and Crowdfunding
  • Big Data Analytics and Intelligence
  • Islamic Financial Services
  • Blockchain and Cryptocurrency Assets
  • Wealth Management

2.3 How are fintech players generally structured?

Depending on the sub-sector of fintech, companies are generally structured under either 'Bahrain Shareholding Companies (closed)' or 'Limited Liability Companies. Nonetheless, under Decree No. (21) of 2001, the Commercial Companies Law (the "CCL"), companies set up in Bahrain, are permitted to take one of the following forms:

  • General Partnership Company
  • Limited Partnership Company
  • Association in Participation (Joint Venture)
  • Shareholding Company
  • Limited Partnership by Shares
  • Limited Liability Company
  • Single-Person Company
  • Holding Company

2.4 How are they generally financed?

Fintech start-up financing in Bahrain generally stems from Venture Capital ("VC") funding, banks /asset management firms, and angel investors.

2.5 How are they positioned within the broader financial services landscape?

Fintech start-ups make up a small share of the financial market in Bahrain, however, the Kingdom's fintech space is growing and evolving at an exponential rate.

2.6 Do start-ups generally outsource back office functions and is there a developed market for them to access? What are the legal implications of outsourcing?

Although outsourcing is not a prevalent business practice in Bahrain, due to the relatively young age of the Fintech sector in the Kingdom, outsourcing is yet to become commonplace amongst fintech stet-ups. Generally, start-ups tend to favour the employment of both local and foreign talent. However, as Bahraini start-ups expand, there is a possibility that a transition of some roles, particularly in the private sector, will be outsourced.

3 Technologies

3.1 How are the following key technologies in the fintech space regulated and what specific legal issues are associated with each? (a) Internet (e-commerce); (b) Mobile (m-commerce); (c) Big data (mining); (d) Cloud computing; (e) Artificial intelligence; and (f) Distributed ledger technology (Blockchain, cryptocurrencies)

(a) Internet (e-commerce)

The Electronic Communications and Transactions Law (Legislative Decree 54/2018) – in line with the United Nations Convention on the Use of Electronic Communications in International Contracts – expressly applies to all transactions and document types (E-Contracts) and generally recognises electronic signatures as valid and binding (subject to certain conditions). As such, contractual parties to a transaction must expressly consent to use and accept electronic signatures and electronic records for electronic documents to: (i) benefit from the presumption of authenticity; and (ii) to be considered legally enforceable as handwritten signatures. As of 2021, the Telecommunications Regulatory Authority has been appointed as the competent authority to oversee the implementation and certification of electronic communications.

More specifically, the Virtual Commercial Register (commonly known as Sijili) introduced following Decision No. 152/2016 allowing Bahraini nationals to practice 39 distinct business activities without a registered address further facilitating the e-commerce market. The business activity it encompasses include professional, information and communication, educational, recreational, scientific and technical, art and leisure activities, simple manufacturing, administrative and support service activities.

Notwithstanding the above, Bahrain's regulatory framework affords some protection to consumers online addressing the issue of product standards in the e-commerce market. The Standards and Metrology Law (Legislative Decree 9/2016) requires products sold online meet the following: (i) obtain the approval of technical regulations; (ii) produce products in line with healthy and safety protocols protecting the consumer and the environment; (iii) manufacture products for their intended purposes; and (iv) indicate the true country of origin of the product. Products which fail to meet the above requirements may be prohibited from being manufactured, imported, or traded.

(b) Mobile (m-commerce)

The regulations applicable to E-Commerce also govern mobile applications that facilitate the purchase of goods or services.

(c) Big data (mining)

The Personal Data Protection Law (Legislative Decree 30/2018) indirectly deals with data mining, or the automated large-scale collection and analysis of data. However, Data monetisation for customer intelligence may have the potential for growth in Bahrain, and regulations may be introduced accordingly.

(d) Cloud computing

The Cloud Computing Services Law (Legislative Decree 56/2018) provides a legal framework that encourages Foreign Parties use of an investment in Cloud Computing Services within Data Centres. This is beneficial to the banking, and financial industries as there is heavy dependence on the outsourcing of various operational cloud computing services (eg. Amazon Warehouse Solutions). Since the FinTech and Innovation Unit launch in October 2017 by the CBB, several fintech developments have occurred. The unit is dedicated to supporting the development of digitized financial services and providing best practices for services that individuals and corporate customers can access in the financial services industry, where in April 2017 it introduced its Cloud First policy.

(e) Artificial intelligence

Emerging technologies such as artificial intelligence and blockchain are changing the face of banking services as we know them today. In Bahrain the legislation governing artificial intelligence systems is underdeveloped in the scope of electronic registration of companies and licensing.

(f) Distributed ledger technology (Blockchain, cryptocurrencies)

The Central Bank of Bahrain governs "crypto-assets" in the CBB's Directive which covers the licensing requirements, including the conditions for the issuance and holding of the CBB license, the minimum capital requirements, and measures to safeguard clients and their customer's interest and maintain technology standards. Under this Directive, a person undertaking business activity companies of regulated crypto-asset services must obtain a license from the CBB.

The regulated crypto-asset services are defined under this Directive to include the conduct of any combination of the following activities:

  • Reception and Transmission of order: The reception from a client of an order to buy and/or sell one or more accepted crypto-assets and the transmission of that order to a third party for execution.
  • Execution of orders on behalf of clients: Acting to conclude agreements to buy and/or sell for one or more accepted crypto- assets on behalf of the clients.
  • Dealing on own account: Trading against proprietary capital resulting in conclusion of transactions in one or more accepted crypto-assets.
  • Portfolio Management: Managing or agreeing to manage accepted crypto-assets belonging to a client and the arrangement for their management are such that the licensee managing or agreeing to manage those accepted crypto-assets has a discretion to invest in one or more accepted crypto-assets.
  • Crypto-asset Custodian: safeguarding, storing, holding, maintaining custody of or arranging on behalf of clients for accepted crypto-assets. Investment Advice: Giving, offering or agreeing to give, to persons in their capacity as investors or potential investors or as agent for an investors or potential investor, a personal recommendation in respect of one or more transactions relating to one or more accepted crypto-assets.

4 Activities

4.1 How are the following key activities in the fintech space regulated and what specific legal issues are associated with each? (a) Crowdfunding, peer-to-peer lending; (b) Online lending and other forms of alternative finance; (c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb); (d) Forex; (e) Trading; (f) Investment and asset management; (g) Risk management; (h) Roboadvice; and (i) Insurtech.

(a) Crowdfunding, peer-to-peer lending

Crowdfunding regulations were first issued in 2017 and are covered under Crowdfunding Platform Operators Module (Module CFP) in Volume 5: Type 7 of the CBB Rulebook. The regulations in place are conventional and Sharia-compliant and aim to assist small-medium-sized enterprises and start-ups in getting access to alternative forms of funding when traditional forms are not available.

(b) Online lending and other forms of alternative finance

Online lending falls within the remit of Volume 1 of the CBB Rulebook which outlines regulations for Conventional Banks, and under Operational Management 3.1 which covers Internet Banking.

(c) Payment services (including marketplaces that route payments from customers to suppliers (e.g., Uber and Airbnb)

Decree-Law No. 7/1987 On the Issuance of the Law of Commerce governs any commercial transaction that takes place within the Kingdom of Bahrain, whether P.O.S or electronically. More recently, the CBB has authorised specialised licensees who serve as Payment Service Providers "PSP's", under Volume 5 of the CBB Rulebook, to provide services under Electronic Funds Transfer Systems (EFTS), a national electronic system that integrates all financial institutions in Bahrain, with the goal of improving the efficiency of cash transfers and bill payments; allowing banks, customers, corporations, and governmental agencies to participate under this framework through the BENEFIT mobile application.

(d) Forex

Entities that offer foreign exchange trading, as a service or a trading platform, will be regulated under Volume 1 and 2 of the CBB Rulebook, depending on whether the entities are governed by conventional or Islamic Sharia banking practices.

(e) Trading

Trading in Bahrain is governed by three (3) distinct laws:

  1. Resolution No. (6) of 2001, in respect of provision of remote trading at the Bahrain Stock Exchange.
  2. Resolution No (4) of 1999, on the rules and procedures of automated trading at the Bahrain Stock Exchange.
  3. Resolution No. (2) of 1990, in respect of certain conditions relating securities trading.

(f) Investment and asset management

Volume 4 of the CBB Rulebook covers the investment/asset management business sector. The regulations in place aim to uphold the standards set by the International Organisation of Securities Commissions.

(g) Risk management

Module HC "High-Level Controls", found in Volume 1 of the Rulebook outlines Bahrain's bank-wide management framework. The well-developed framework imposes upon active banking entities in Bahrain to "establish a sound risk management framework commensurate with the bank's size, complexity and risk profile".

(h) Roboadvice

Digital Financial Advice, commonly known as Roboadvice or automated advice, falls within the remit of Volume 2 of the Central Bank of Bahrain's rulebook and is a regulated financial activity. As a result of the algorithmic-based financial modelling techniques utilised by robo-advice, the CBB has ensured that it is subject to a comprehensive governance and control framework. Moreover, there are further issues surrounding confidentiality and data privacy implications of digital financial advice, which can be mainly attributed to their dependence on the cloud for data analytics. The CBB rules attempt to circumvent such concern through the implementation of safeguards to avoid non-compliance with applicable Law No. 30 of 2018 with respect to Personal Data Protection.

(i) Insurtech

There are currently no regulations in place specifically tailored toward Insurtech, rather Insurtech comes under the remit of Volume 3 of the CBB Rulebook which governs all Insurance related entities in the Kingdom of Bahrain. In comparison to other financial industries, insurance technology implementation has been gradual; mainly attributable to the Bahraini insurance sector's lack of implementation of integrated consumer services seen in more advanced economies, due to its relatively small market.

5 Data security and cybersecurity

5.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for fintech companies?

The Personal Data Protection Law (Legislative Decree 30/2018) provides protection to the rights and freedoms of individuals and their personal data as it establishes a legal framework that regulates the methods of processing data handled by companies and organizations in a secure manner.

The Kingdom's Ministry of Justice, Islamic Affairs and Waqf issued ten ministerial resolutions supplementing the Personal Data Protection Law to align it with the international standards set by the European General Data Protection Law (GDPR). These resolutions focus on the following areas:

  • Transfer of personal data outside Bahrain;
  • Technical and organizational measures to protect personal data;
  • Notification procedures;
  • Sensitive personal data processing;
  • Complaints by individual;
  • Data relating to criminal claims; and
  • Conditions for publicly available registers.

5.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for fintech companies?

The national cybersecurity framework is governed by the General Directorate of Anti-Corruption and Economic and Electronic Security at the Ministry of Interior (MOI) for cybersecurity in different sectors such as energy, finance, education, health, and other sectors. Bahrain has created the National Cybersecurity Strategy to address the current and rising cyber-threats and reduce the associated risks, with a vision of establishing a secure cyber-space to safeguard national interests and protect Bahrain against cyber-threats.

There are no fintech-specific laws, but the fintech industry regularly operates with sensitive data, as such must adhere to data protection laws and provide the required security measures. The government of Bahrain issued the following several laws and legislations related to Cyber Security:

  • Law No. 30 of 2018 regarding Issuing the Protecting Personal Data law
  • Law No. 16 of 2014 regarding the Protection of Information and State Documents
  • Law No. 2 of 2017 for Ratifying the Arab Agreement on Combating IT Crimes
  • Law No. 60 of 2014 regarding IT Crimes

6 Financial crime

6.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for fintech companies?

The Prohibition of and Combating Money Laundering Law (Legislative Decree 4/2001) governs money laundering and other financial crimes in Bahrain. The Central Bank of Bahrain requires all payment services providers (including FinTech companies) to comply with the applicable laws, and regulations and must implement programs against Money Laundering and Terrorist Financing by establishing systems to prevent crime. As such, FinTech Companies should identify the risks involved and ensure compliance with the relevant provisions by providing suitable internal governance.

7 Competition

7.1 Does the fintech sector present any specific challenges or concerns from a competition perspective? Are there any pro-competition measures that are targeted specifically at fintech companies?

Generally, the fintech sector does not provide any competitive discrepancies when compared to other sectors operating within the Bahraini economy/market. Hence, there does not currently exist any legislation in place to specifically combat anti-competition under the fintech umbrella. However, in 2018, the Bahraini legislative introduced Law No. 31/2018 On the Issuance of the Competition Promotion and Protection; a general competition law, designed to implement provisions which aim to prevent anti-competitive practices from taking place, and encourages long-term competition amongst enterprises of all sizes. A particular aspect of the law that can be viewed as being beneficial to fintech start-ups is the amendment to the competition law via Resolution No. 71/2019, on the Controls for Excluding Micro and Small Enterprises from Anti-competition arrangements. This resolution, in line with the Bahraini judiciary seeking to encourage a sustainable and competitive market, excludes Micro & Small enterprises from being subject to the law under a three-year exemption:

Micro-entities feature up to five (5) employees, grossing an annual revenue of up to BHD 50,000.

Small-entities features between six (6) to fifty (50) employees, grossing an annual revenue of between BHD 50,001 to BHD 1,000,000.

8 Innovation

8.1 How is innovation in the fintech space protected in your jurisdiction?

Innovation, in the context of intellectual property, copyright and trademark, is protected in Bahrain by a number of different laws, as opposed to one general law to cover all topics. In Bahrain, copyright protection is governed by the Bahrain Law No. 22/2006 with respect to the Protection of Copyright and Neighbouring Rights (the "Copyright Law"). Article 2 of the Copyright Law details the lists of works protected under the law, which includes "computer software whether written in a source language or machine language". Trademarks are governed under the Gulf Cooperation Council Trademark Law (the "GCC Trademark Law"), which is a unified law that tackles the protection, enforcement, and commercialisation of trademarks across each of the GCC member states (Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, and the UAE).

8.2 How is innovation in the fintech space incentivised in your jurisdiction?

The numerous laws protecting innovation in the Kingdom are a good foundation for promoting and incentivising innovation. Furthermore, the CBB's use of the regulatory sandbox allows new fintech entrants to explore and develop their innovations in a responsible way. The CBB has also established its virtual innovation platform, 'FinHub973,' in the fintech ecosystem, which integrates and fosters partnership between financial institutions and fintech start-ups under the regulation of the CBB.

9 Talent acquisition

9.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have for fintech companies?

The Bahraini Labour Law (Legislative Decree 36/2012) offers protection to every natural person employed under the supervision or management of an employer in return for a wage, protecting all types of employees irrespective of their status as part-time, full-time, local, or an expatriate. This is particularly beneficial to the FinTech industry allowing flexibility in recruiting specialised talent.

In Bahrain, the government recognizes the lack of technical specialization in the job market and to address this issue introduced initiatives that support Bahraini nationals with acquiring the necessary skills to succeed in the FinTech industry. It has provided vocational training and educational opportunities through its Labour Fund initiative commonly known as Tamkeen. As new solutions are introduced, Bahrain is leading in innovation within the financial sector, and hiring blockchain coders, data analysts, software engineers, and experts in fields such as artificial intelligence.

9.2 How can fintech companies attract specialist talent from overseas where necessary?

Bahrain FinTech Bay is one of the leading fintech hubs in the MENA region, as it incubates scalable initiatives through the introduction of innovation labs, acceleration programs, curated activities and educational opportunities. Partnering with governmental and financial institutions, and fintech start-ups to create a collaborative platform that further develops the fintech ecosystem in Bahrain.

The Bahrain lifestyle attracts a great deal of talent from overseas becoming an increasingly popular destination for expatriates, as it provides an ideal work/life balance, non-taxable income, and English is a primary language within the country.

10 Trends and predictions

10.1 How would you describe the current fintech landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

From a regulatory perspective, the CBB has been seen to take an approach to fintech which enables innovation within the region; notably being the first authority in the Gulf to impose full cooperation of all banking entities within Bahrain to comply with open banking standards. the introduction of the regulatory sandbox has also been of great benefit to the fintech landscape, attracting numerous new entrants into the local market, due to the regulations set in place by the regulator. It is clear that the synergy between the CBB and private entities has thus far served to produce a relatively well-developed fintech landscape, comparing to the regional standard.

Although regulation has been proactive in recent years within Bahrain, regional competition is increasing at an exponential rate, with more jurisdictions adopting a forward-thinking approach to fintech. Bahrain's seamless adoption of Cryptocurrency, through both regulatory measures and market absorption, has allowed Bahrain to excel in this sub-sector of fintech.

Within the next year, Sustainable Finance is projected to take a leap forward in the Bahraini fintech sub-sector, with the CBB announcing that it will issue its Environmental, social, and corporate governance ("ESG") guidelines within the new year; supplementing and developing on the compulsory ESG guidelines for companies listed under Bahrain Bourse (the stock exchange of Bahrain).

11 Tips and traps

11.1 What are your top tips for fintech players seeking to enter your jurisdiction and what potential sticking points would you highlight?

Knowledge of the Regulator (CBB) and their regulations is the best way for new entrants to experience a smooth transition into the Bahraini fintech market. Ensuring that new entrants have a good understanding of the relevant administrative tasks (licensing applications etc.) that are associated with setting up a new fintech entity is a beneficially proactive approach for new entities. Bahrain, local fintech and ministerial entities, implement a 'team' based approach when it comes to the integration of new entities into the fintech market. Although, Bahrain is a relatively small-market, one of the overarching benefits of such is that entities can easily facilitate a full transition into the market. Enhanced by the country's business-friendly mindset, the system is set up in a way that aims to nullify the tedious nature of bureaucracy that can be experienced in larger markets.

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