How a regulatory sandbox can transform Bangladesh's startup scene

Bangladesh has emerged as a promising hub for startups in South Asia, with over 1,200 new ventures established annually. The country boasts a large, young population, with 62% under the age of 35 and a high population density.

The expanding middle class and rapidly increasing digital penetration further enhance its potential. The combination of a young, tech-savvy population, growing digital adoption and government support has created a conducive environment for innovation and entrepreneurship.

Startup Bangladesh Limited, a government-backed venture capital firm, plans to invest Tk100 crore in selected startups. Additionally, the Bangladesh Securities and Exchange Commission (BSEC) has approved small-cap stock exchange guidelines, providing a pathway for investors to exit startup investments.

The establishment of over 28 hi-tech parks across the country offers infrastructure support to tech startups, including dedicated spaces, free internet, and other benefits. In Q3 2024, startup funding grew by 124% compared to the previous quarter, demonstrating strong investor confidence in the potential of Bangladeshi startups.

However, the ecosystem still faces challenges such as limited access to funding, regulatory hurdles, and inadequate supportive infrastructure. To address these challenges and foster a thriving startup environment, the government should consider implementing a regulatory sandbox policy.

What is a regulatory sandbox?

A regulatory sandbox is a controlled environment where businesses can test innovative products, services, or business models with or without real customers under the supervision of a regulator for a limited period. It allows startups to experiment with new ideas and technologies without immediately facing the full burden of regulatory compliance.

This approach enables regulators to gain insights into emerging technologies and business models, informing future regulations that strike a balance between supporting innovation and safeguarding consumers. Under this policy, the government issues a sandbox licence to applicant startups for a specified period, allowing them to test and experiment with new ideas and technologies without regulatory constraints.

The concept of a sandbox originated in software development, where it referred to a testing environment that allowed developers to experiment without risking the live system. This concept has since been adopted in various sectors, including finance, technology, cybersecurity, and healthcare.

Different types of sandboxes cater to the specific needs and regulations of each sector. For example, a fintech sandbox may focus on testing new payment systems or digital lending platforms, while a healthcare sandbox may facilitate the development of innovative medical devices or telemedicine services.

Global regulatory sandbox initiatives

Many countries have established regulatory sandboxes to foster innovation in various sectors.

Examples include the UK's Financial Conduct Authority (FCA) sandbox, the Monetary Authority of Singapore (MAS) sandbox, the Australian Securities and Investments Commission (ASIC) sandbox, the Reserve Bank of India (RBI) sandbox, the Dubai International Financial Centre (DIFC) sandbox, the Bank Negara Malaysia (BNM) sandbox, the European banking authority (eba) sandbox, the intergovernmental fintech working group (IWFG) sandbox, and the financial services agency (FSA) sandbox.

These global examples provide valuable lessons for Bangladesh in designing and implementing its own sandbox policy. These sandboxes have supported the growth of innovative solutions in areas like fintech, digital payments, and blockchain.

Potential benefits for Bangladesh

Implementing a regulatory sandbox in Bangladesh could offer several benefits to the startup ecosystem:

Faster innovation: Sandboxes provide a safe space for startups to experiment and innovate without the fear of immediate regulatory consequences, leading to the development of new and disruptive technologies and business models.

Reduced regulatory burden: By temporarily relaxing certain regulations, sandboxes reduce the compliance burden on startups, allowing them to focus on developing and testing their products and services.

Increased investment: Sandboxes can attract foreign investment by signalling that Bangladesh is open to innovation and provides a supportive environment for startups. They can also generate international exposure for the Bangladeshi startup ecosystem, attracting more investment and partnerships.

Improved regulatory framework: Sandboxes provide regulators with real-world data and insights into emerging technologies, enabling them to develop more effective and responsive regulations.

Collaboration and knowledge sharing: Sandboxes foster collaboration between startups, regulators, and other stakeholders, leading to knowledge sharing and a better understanding of the challenges and opportunities in the ecosystem. They also offer a platform for mutual education, where startups learn about the regulatory environment while regulators learn about new technologies.

Job creation: By fostering a thriving startup ecosystem, sandboxes can contribute to job creation and economic growth.

Financial inclusion: Sandboxes can promote financial inclusion by enabling the development of innovative financial products and services tailored to the needs of underserved populations.

New business models and increased competition: Sandboxes can promote new business models, processes, and methods that increase competition, deliver new forms of value creation, and open previously unexploited markets. This can lead to the creation of new services and increased accessibility and convenience for consumers.

Challenges to address

While a sandbox policy offers significant potential, it is crucial to acknowledge the challenges and risks:

Uneven playing field: Providing regulatory relief to sandbox participants could create an uneven playing field for startups that are not part of the sandbox.

Limited regulatory capacity: Effectively managing a sandbox requires significant resources and expertise from regulators. Bangladesh needs to invest in building its regulatory capacity to ensure effective oversight and guidance for sandbox participants.

Consumer protection: It is essential to ensure that consumer protection measures are in place to mitigate potential risks associated with innovative products and services being tested in the sandbox. This includes data privacy safeguards, dispute resolution mechanisms, and clear communication of potential risks to consumers.

Exit strategies: Clear exit strategies are needed for startups that successfully complete the sandbox testing phase to ensure a smooth transition to full regulatory compliance. This will provide certainty and clarity for both startups and regulators.

Coordination challenges: Effective implementation requires coordination among various government agencies and stakeholders. This includes establishing clear communication channels and collaboration mechanisms to ensure a cohesive approach.

Macroeconomic instability: Macroeconomic instability, including factors like inflation, currency devaluation, and political uncertainty, can significantly impact the startup ecosystem. This underscores the need for government policies to address these macroeconomic challenges and create a stable environment for startups to thrive.

Investor concerns: Investors have expressed concerns about the reliability and regulation of the startup ecosystem in Bangladesh. This highlights the need for a trusted operator ecosystem and clear regulatory frameworks to build investor confidence.

What Bangladesh needs to do

To implement and maximise the effectiveness of a sandbox policy in Bangladesh, the government should consider the following recommendations:

Empower BIDA: Authorise the Bangladesh investment development authority (BIDA) to issue sandbox licenses to applicant startups for a specified period.

Clearly define objectives: Establish specific objectives for the sandbox, such as promoting financial inclusion, fostering innovation in specific sectors, or attracting foreign investment.

Create a transparent framework: Develop a clear and transparent framework with well-defined eligibility criteria, application processes, testing parameters, and exit strategies. This should include a clear application process, panel review, and the issuance of sandbox tools, such as informal steering, individual guidance, restricted authorisation, waivers, and no-enforcement action letters.

Ensure consumer protection: Implement strong consumer protection measures, including data privacy safeguards, dispute resolution mechanisms, and clear communication of potential risks to consumers.

Build regulatory capacity: Invest in training and resources to enhance the capacity of regulators to effectively oversee the sandbox and provide guidance to participants.

Foster collaboration: Encourage collaboration among startups, regulators, investors, and other stakeholders through workshops, networking events, and knowledge-sharing platforms.

Tailor to local context: Consider the unique characteristics of the Bangladeshi startup ecosystem, such as the dominance of early-stage ventures and the need for local investor participation.

Promote financial inclusion: Design the sandbox to encourage the development of innovative financial products and services that address the needs of underserved populations.

Address bureaucratic hurdles: Streamline regulatory processes and address bureaucratic hurdles to facilitate the smooth operation of the sandbox.

Monitor and evaluate: Continuously monitor the sandbox's performance, gather data, and conduct evaluations to identify areas for improvement and ensure it is achieving its objectives.

Create frameworks for easy exit: Develop frameworks for easy exit for foreign investors to provide them with confidence and encourage greater participation in the Bangladeshi startup ecosystem.

Encourage authentic innovation: Promote a culture of authentic innovation and market disruption among Bangladeshi startups, encouraging them to develop unique solutions rather than simply replicating existing models.

Develop a comprehensive startup policy: Enact a comprehensive startup policy that provides a clear and consistent framework for startup operations, regulations, and incentives.

Bangladesh stands at a critical juncture. By embracing a regulatory sandbox approach, the country can unleash the full potential of its startup ecosystem, drive economic growth, and improve the lives of its citizens.

The government, regulators, startups, and investors must collaborate to create a sandbox tailored to the unique needs of Bangladesh. The time for a sandbox policy is now. Let Bangladesh take this bold step toward a future of innovation and prosperity.

Ashfaqul Amin Mukut is a Joint Secretary at Economic Relations Division, Ministry of Finance, Government of Bangladesh.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.