The Ethiopian Capital Market Authority (ECMA) is to introduce a regulatory sandbox in two weeks, opening the door for financial technologies with disruptive business models. Currently not supported by existing regulations and operating in a controlled environment with temporary licenses, the Authority is expected to allow security brokers, dealers, investment banks, and other capital market service providers to test new technologies and products before full market entry, a development in the nascent capital market.

A sandbox is an isolated testing sphere where users can execute programs without impacting the system they are operating under.

The regulatory sandbox is the realisation of years of work by a small project team initially based at Hibret Bank headquarters. Supported by the Innovative Finance Lab (IFL) under the United Nations Development Programme (UNDP), in partnership with the National Bank of Ethiopia (NBE) and ECMA, the initiative creates a safe space where new ideas can be tested under regulatory oversight. According to Dagmawit Shiferaw, director of the IFL, the sandbox has the potential to help startups challenge traditional financial practices and help established institutions pioneer new technologies.

"The days of blindly saying 'no' are over," Dagmawit told Fortune.

Proponents of the regulatory sandbox believe it provides a time-bound and controlled space where innovative firms can test their products with consumers, ensuring appropriate safeguards are in place. They argue that the environment helps regulators identify the requirements needed to support innovation while assisting firms in understanding their regulatory obligations. Partnerships between financial institutions and technology providers will be facilitated, and temporary licenses will fasten testing.

Dagmawit stated that the sandbox will allow for exploring new regulatory frameworks in practice, supporting business models that do not neatly fit into existing regulations. She believes the approach could help regulators understand the practical impacts of waiving certain rules on a small scale. She cited examples such as testing disclosure rules for online investments or evaluating the risks and benefits of emerging technologies within traditional business frameworks.

"It ensures that regulations don't inhibit innovation," she said.

However, the sandbox is not without its limits. It does not offer direct funding, customer access, or guaranteed large-scale market entry post-testing. Legal and business support, endorsement of specific business models, or risk transfer from the firm to the regulator are also outside its scope.

Regulators believe the sandbox will accelerate innovation by providing a streamlined development process and shielding companies from immediate market pressures. Prime Minister Abiy Ahmed (PhD) recently told senior financial sector executives about the need to identify critical sectors for rapid advancement to international standards.

"Bureaucratic hurdles and regulatory burdens do not align with the reform," he told them while briefing them on the ongoing macroeconomic policy reforms.

The concept of regulatory sandboxes has gained international traction since 2015.

M-Pensa Impact & Development Services, a Swiss-based consulting firm, has played a role in similar projects, putting a team together in several countries. Earlier this year, M-Pensa entered the Ethiopian market, for the NBE and ECMA to design and consult on the regulatory sandbox. Thomas Ward, the team leader from M-Pensa, held multiple discussions to analyse existing regulatory gaps.

According to Ward, unclear regulations and a fast-paced industry that did not match outdated regulations have been major frustrations for stakeholders, which the sandbox plans to address.

"It'll speed up decision-making," he told Fortune.