Fintech and Banking Innovation Get a Boost as Nepal Rastra Bank Introduces Regulatory Sandbox Framework

Kathmandu — Nepal Rastra Bank (NRB) has issued a new Regulatory Sandbox Directive, allowing innovative financial products and services to be tested in a controlled environment with the aim of promoting innovation in the financial sector.

The central bank said the framework has been introduced to create a safe and structured environment for testing rapidly evolving financial technologies. The initiative is intended to modernize Nepal’s financial system and make it more technology-driven and innovation-friendly.

Under the directive, a regulatory sandbox is defined as a controlled and supervised testing environment where banks and financial institutions, payment service providers, fintech companies, and innovative entrepreneurs can test new products and services within a limited scope and under specified conditions.

Ordinarily, new financial services must undergo extensive legal and regulatory procedures before entering the market. However, under the sandbox framework, regulators will provide a degree of flexibility when such services are tested for a limited period and with a restricted group of users. This will enable real-world evaluation of a technology’s risks, effectiveness, and security.

If a product or service successfully completes the testing phase without creating adverse impacts on the financial system, it may be allowed to enter the market through the formal regulatory process.

NRB stated that the primary objective of the directive is to encourage innovation in financial services while also expanding financial inclusion. With technologies such as artificial intelligence, blockchain, and machine learning being increasingly adopted across the global financial industry, the framework is expected to support the development of secure, accessible, and technology-based financial services in Nepal.

The directive is also expected to contribute to making digital payment systems simpler, safer, and more accessible. In particular, the sandbox aims to encourage the use of new technologies to expand financial access in remote and underserved areas.

Eligible participants include banks and financial institutions registered in Nepal, payment system operators, payment service providers, and fintech companies. Even fintech firms that do not hold a direct license from NRB may participate by partnering with a licensed bank or financial institution. This arrangement is expected to foster collaboration between established institutions and innovative technology providers.

Applicants will be required to demonstrate that their proposed product or service is genuinely innovative and offers clear benefits to consumers. The contribution of the innovation toward improving financial inclusion in Nepal will also be a key selection criterion.

The directive further requires that any technology entering the sandbox be fully developed and ready for testing. Participating institutions must also have adequate risk management capabilities in place. The fitness and propriety of directors and senior management will be taken into consideration during the selection process.

During the sandbox period, participating institutions may receive temporary regulatory relaxations. These could include flexibility regarding minimum paid-up capital requirements, liquidity ratios, licensing fees, and certain operational standards. However, NRB has made it clear that there will be no compromise on critical areas such as consumer protection, data privacy, and anti-money laundering compliance.

The directive also requires institutions to clearly inform customers that the service is still in the testing phase and obtain their prior consent before participation.

To oversee the framework, NRB will establish a high-level Sandbox Governing Committee. The committee will be responsible for policy formulation, application assessment, and post-testing decisions. Day-to-day operations will be managed by a dedicated Sandbox Unit under the Payment Systems Department.

To ensure transparency and accountability, the framework also includes provisions for annual evaluations through internal audits.