The Middle East is a huge and diverse region spanning over three continents and populated by more than half a billion people. This diversity is also visible in the FinTech market there, with some regions more technologically advanced and some just at the beginning of their road to the future of financial services. Let’s find out more about the FinTech in the Middle East landscape.
Generalising about FinTech in the Middle East
FinTech is transforming the lives of people in the Middle East in a very practical way. From simple online banking, through revolutions such as the Emirates Digital Wallet, across the whole region FinTech is driven by easy access to technology which improves existing services and enables previously unbanked populations. Besides the impressive smartphone penetration, growth of the industry needs two other factors: regulations and investments. An international law firm, Clifford Chance, prepared an in depth study of the legal situation in most of the countries in the Middle East, let’s take a look at what they found out.
Uncertainty
Historically, the Middle East has not been very swift to adapt international standards in any way. The same goes for modernising legal systems which may often be not ready for new technological solutions. Additionally, Shari’a law which is considered a source of law in many countries (the UAE and Egypt) or is even treated literally (Saudi Arabia) can slow down FinTech advancements.
However, in practice, it’s a bit different. There are special regimes which allow for unrestricted growth of FinTech startups in the region. For example, the UAE offers so-called financial free zones, where English common law is applied in many cases. This provides a sense of security both for foreign investors and entrepreneurs, and a higher level of security in commercial transactions.
When it comes to the fear of the Shari’a laws, the situation is also surprising. The practical approach of the religious leaders is visible in the whole financial sector. As Clifford Chance’s reports say, Shari’a is not a problem, when it comes to doing business:
“Our experience tells us that modern financial services solutions are recognised as necessary by Shari’a scholars for many reasons. The innovation we see across the Islamic finance world parallels the innovation taking place within fintech. One recent example is the issuance of a Shari’a standard on trading in gold by AAOIFI in November 2016, shortly followed by several gold-linked ICOs issued in the UAE”
Clifford Chance’s report
Cybersecurity and privacy
Unfortunately, the Middle East is not considered a 100% stable region. Cybersecurity and privacy regulations there often intend to serve a purpose of national security more than personal security. Moreover, terrorism financing is also a very particular problem in the region. Because of that, specific regulations designed to minimise risks had to be implemented in the Gulf area countries. These laws can theoretically slow down or restrict the growth of the FinTech industry.
But local FinTechs have a solution to this problem. They consistently make use of hosting services located in the EU (e.g. AWS). By using well-tested, global and secure tools, Middle Eastern businesses can offer a hi-tech level of security and because data protection regimes there are simpler than in the EU (no GDPR), they can grow fast and cost-effectively.
Foreign ownership laws
There is a barrier that may block foreign investors from founding their startups in the Middle East. It is especially hard in the UAE and Qatar, where a non-national can only own a maximum of 49% of a company. It definitely discourages foreign capital investment. However, the situation is changing. The previously mentioned free zones in the UAE solve a part of the problem and in jurisdictions such as some regions of Saudi Arabia, the restrictions have already been lifted completely.
Details about local markets of FinTech in the Middle East
The UAE
FinTech is one of the hottest topics among entrepreneurs in Dubai and Abu Dhabi and these hubs have some great accelerators: there is FinTech Hive founded by Dubai International Finance Centre and FinTech RegLab created by the Abu Dhabi Global Market. These institutions, together with financial free zones (which can be created in any of the emirates by a federal decree) allow for a huge level of freedom. Right now there are 45 free zones in the UAE, they all have their own sets of regulations (besides the criminal law) and offer just incredible conditions to found a startup:
- 100% foreign ownership of the enterprise
- 100% import and export tax exemptions
- 100% repatriation of capital and profits
- Corporate tax exemptions for up to 50 years
- No personal income taxes
- Assistance with labor recruitment, and additional support services, such as sponsorship and housing.
Out of all of them, at least two are focused solely on FInTech and these are in fact the accelerators I mentioned above.
Thanks to these, the Emirates are now a home for 24% of all FinTechs in the region and the country is extremely competitive on the global market – definitely the most competitive of the MENA region.
By giving FinTechs in the UAE a holistic, dynamic ecosystem with an independent regulatory and English Common Law judicial system and global financial exchange, start-ups can be better equipped to promote their innovative solutions and expansion plans to investors.”
Arif Amiri, the chief executive of Dubai International Financial Centre
Saudi Arabia
Saudi Arabia is doing a lot to improve their rankings and right now it’s at the 36th position in the global competitiveness index. The reason for such a rapid growth is simple: the oil is going to run out sooner than later and the country is diversifying its economy. The determination to do it is really strong and clearly visible in the ICT adoption (38th position in the global rankings and growing). The broadband connectivity is omnipresent (111 connections per 100 people).
As FinTech itself is concerned, the future is bright in the Kingdom. FinTech Saudi Annual Report 2020 informs us that between 2017 and 2019, the value of FinTech transactions increased by 18% a year to exceed USD 20 billion in 2019. Almost all of this is generated by personal finances services and the number of smartphone payment transactions increased by 352% in just a year, between April 2019 and April 2020! By 2033, the whole FInTech market is expected to grow by another 50-60% and possibly reach USD 33 billion.
It wouldn’t be possible without the Saudi Arabia Central Bank’s initiative to launch its sandbox environment which allows both national and foreign investors to test their new solutions and launch them for a wide audience. Then, there is the FinTech Lab launched by the Capital Market Authority, which works in a similar way in order to allow innovators test their products and adjust them to the local market before releasing them.
Moreover, research institutions and universities have their specific accelerator programs too.
The only drawback is that not everybody can invest in the sandbox environment in the Kingdom. In order to do so, a startup must meet the eligibility criteria, such as providing “real” innovation and benefits to the consumers, having a clear exit plan and, probably most importantly, alignment with the Saudi Arabia 2030 vision. All in all though, Saudi Arabia is the underdog in the global FinTech market, but thanks to the country’s willingness to adapt, it may soon become one of the major players!
Bahrain
Bahrain is another great example of how sandbox environments can boost the local economy and change the whole perspective on an industry. The country is actively developing its FinTech market by means of governmental institutions. The Central Bank of Bahrain which is obviously the regulator responsible for local FinTechs works with local entrepreneurs to create new, innovative retail payment systems and the Economic Development board works on attracting foreign investors.
The partnership allowed for creating the Bahrain FinTech Bay, a leading FinTech hub/accelerator in the region. Not only it offers typical help for startup founders (co-working spaces, a number of accelerator programmes etc.), but also on its own conducts research, hosts FinTech events and educates.
The results are quite spectacular: there appear almost a hundred new FinTechs each year in Bahrain!
Insiders, such as Dalal Buhejji, call Bahrain a new FinTech frontier. Obviously, it calls for pioneers and they are invited, as long as they can offer innovation and are ready to cooperate. More and more global players accept the invitation – for instance, in January 2020, the Bahrain Fintech Hub announced a major partnership with Standard Chartered, the British multinational financial institution that operates in more than 70 countries. It’s exciting how such a small country can compete with the giants on an equal level.
FinTech in the Middle East and its global competition
All in all, considering the rapid growth of FinTech in the Middle East, the way how digital banking solutions can be adapted easily there, there is only one possible future. One in which the Middle East will soon host some of the most important FinTech hubs in the world.
All because there are no legacy dependencies and because local regulators are eager to attract global investors. It’s great they understand the only way of transforming their economies is by innovating.