Financial regulators have taken a step toward nurturing fintech innovation with the release of a draft directive for a regulatory sandbox.

The initiative forms part of a broader government push toward digitisation and financial inclusion, embedded within the national strategy known as “Digital Ethiopia.” The sandbox targets a well-known malaise in the financial sector of reproducing existing digital solutions with little variation. Banks and insurers have historically lagged in innovation, constrained by bureaucratic inertia and a lack of enabling regulation.

The sandbox seeks to loosen these constraints by allowing companies to test novel financial products in a controlled environment. The directive sets an application fee of 300,000 Br and requires applicants to assemble a project manager and team.

Frezer Ayalew, director of banking supervision at the National Bank of Ethiopia (NBE), disclosed that only products promising substantial improvement or transformation, rather than marginal variations, will be welcomed. In theory, this raises the bar for innovation while addressing structural inefficiencies, high costs, and service delivery gaps.

“If a company presents a product that solves a major problem or has improved a product in the system, it can practice in the sandbox,” Frazer told Fortune. “The main purpose is to promote financial innovation.”

The Director disclosed that products that streamline or transform current processes will also be eligible for testing under the new rule.

The draft directive, open for public comment in the coming month, seeks to use innovation as a lever to drive down costs and expand financial services to more Ethiopians. Central Bank authorities bet that technology can bring meaningful improvements to the sector’s reach and efficiency. Yet, for years, the lack of enabling regulation has forced most financial institutions to stick to well-worn paths, resulting in an endless parade of similar mobile apps for payments, digital micro-lending, and other offerings with only minor differences from one provider to the next.

The directive’s rollout comes as the federal government wraps up its National Financial Inclusion Strategy, which set ambitious targets to be achieved by 2025/2026.

The NBE wants to increase the share of adults with formal financial accounts from 45pc in 2020 to 70pc, while also nearly doubling the use of digital payments to 49pc over the same period. The strategy calls for extending formal insurance coverage to half a million smallholder crop and livestock farmers and boosting financial literacy from 47pc to 75pc among adults. Access to credit for micro, small, and medium enterprises is supposed to rise, with their share of private sector loans doubling from five percent this year.

Industry players, for the most part, are welcoming the draft directive, seeing it as an overdue opportunity to stretch the sector’s creative muscles.

According to Rediet Tsigebirehan, CEO of Arif Pay,  the lack of a legal framework for new products has been a chronic constraint, often leaving innovative ideas in limbo.

“The word ‘no’ will not have a place in the sandbox,” he said.

For his company, crypto-related products are on the wish list for experimentation in the sandbox, as are cross-border payment solutions.

“People currently use many services like Netflix and healthcare in foreign countries, and seamless ways could also be made,” he said.

Insurance technology, too, is high on the agenda for Arif Pay.

But the optimism has its limits. While executives like Rediet are eager to bring crypto products to the table, Frazer was unequivocal. Since cryptocurrency is not permitted in Ethiopia, “the regulatory sandbox will not entertain it until it is allowed by law.”

Yisak Teka, a former senior advisor at NBE and now an independent consultant, saw the decision to exclude cryptocurrencies from testing as “wise and necessary,” given Ethiopia’s vulnerability to capital flight and the risks posed by global volatility. He, however, urged that blockchain technology should be embraced as a tool for secure record-keeping and settlement, especially in areas such as remittances.

“Remittance innovation is critical for the country’s economy, since faster and cheaper cross-border transfers could benefit households and strengthen foreign currency inflows,” he said.

Yisak’s biggest concern remains the financial sector’s chronic lack of innovation, especially in insurance, where he sees a lack of new products as detrimental because it leaves millions uninsured.

The insurance industry, in particular, embodies the magnitude of the challenge. Its penetration remains among the lowest on the continent, at 0.3pc of GDP in 2023, compared to a regional average of 1.57pc and Kenya’s 2.6pc, according to Deloitte’s April 2025 report. Despite its small size relative to the economy, the industry is hobbled by regulatory obstacles, slow innovation, and a stubbornly low rate of uptake.