Ερευνητική Ομάδα «Οικονομικές Δυναμικές»
Fintech is a term used to describe tech-enabled products and services that improve traditional financial services. They are usually faster, cheaper, more convenient, and accessible. In most cases, start-ups develop them. Start-ups using financial technology have raised over 100$ million in the MENA (Middle East and North Africa) region in the past 10 years, while the number of start-ups launched, and investments raised will more than double in 2020, according to the State of Fintech report. The region is small when compared to the global proposition in fintech funding, since it represents 1%, but the industry’s growth rate is estimated to accelerate by 270%.
Fintech has become popular due to developments in mobile payment technology, along with the introduction of blockchain technology that has sparked the public’s interest and pushed the sector’s growth. Blockchain’s evolution will have a massive impact on the industry, since its technology is trustworthy and allows risk-free transactions, being a network that permanently combines a ledger with the digital item being transacted. Other accelerators are the high smartphone penetration rate, the increase of technically adept people, and the states’ desire to reduce overreliance on oil. Despite the ubiquity of smartphones and internet connectivity, 86% of the adult population in the Middle East is unbanked, while three GCC (Gulf Cooperation Council) bank customers are ready to switch banks for a better digital experience. Half of the fintech companies offer a form of payment solution, while a third is involved in money lending and capital raising.
The main advantage of fintech that is needed in the region is the cheaper services it provides. Fintech has become an innovative way to bridge the divide provide more affordable services to the unbanked. Financial inclusion is crucial for economic diversity and growth across the region. It is challenging to provide financial services in a cash reliant ecosystem because legacy financial institutions require all customers have a link with a bank to legally offer financial services. Fintech provides different approach. Instead of forcing customers to become banking clients, it focuses on customers experience and addressing each step of the process separately. As a result, it runs lean customer-driven businesses and still manages to leverage a bank’s processing, issuing, and acceptance systems.
A very interesting direction fintech has taken is within the Islamic community. Islamic finance, in general, is faith-based and complies with Sharia law which prohibits usury fees such as interests, and has prohibitions such as alcohol. Islamic Fintech is the digital delivery of Islamic finance. This market enables Murabaha (asset-backed interest-free loans) instruments to buy and sell goods in addition to Takaful(insurance). Since it promotes ethical and responsible finance, Islamic fintech presents an opportunity to lead and influence all forms of finance globally.
Both the opportunity and challenge for Islamic Fintech is to ensure accessibility, convenience, and transparency. Accessibility is ensured through mobile phones, apps, and the internet, while convenience is based on the ease of utility by the removal of friction. The third element, transparency derives from a certification that is recognised and respected by both consumers and institutions. Sharia-compliant investment funds are currently being designed to use to invest in small and medium-size enterprises and digital infrastructure. At the same time, blockchain provides the opportunity to revolutionize Islamic banking by adapting standard Islamic finance contracts to smart contracts and cutting costs of services by up to 95% with an immutable record of ownership and assets.
With over 170 Islamic banks, and 80 further banks that offer Islamic finance windows, putting balance sheets to work on Islamic Fintech is a key part of the future. The global requirement for digital infrastructure is an opportunity for Islamic banks, asset managers, and investors to harness through Islamic Fintech both in Islamic and non-Islamic economies. This market offers the opportunity to transform the lives of millions of people globally and to help transform the Islamic Fintech hubs into 4th Industrial Revolution digital leaders.
The sector’s growth is mainly attributed to the dynamic regulatory landscape. Banks in the Middle East always had a lot of power and control over regulations on how the financial sector operates, given that most of them are supported by governments and influential stakeholders. As a result, these regulations used to limit the number of start-ups due to extremely high entrance and compliance costs for new financial service providers. The high entry barriers existed from both a regulatory as well as an investment perspective, hampering the development of the sector. In the recent years, regulators, such as Abu Dhabi Global Markets’ regulator ADGM Financial Services Regulatory Authority (FSRA) and Dubai Financial Services Authority (DFSA) are looking to create ‘sandboxes’ to provide start-ups with less regulated environments to test their products more quickly.
This positive environment facilitates the improvement of regulations as governments become more familiar with where the world of fintech is heading and the sector is encouraged to continue growing. An example is the regulations issued in January by the central bank of the UAE. They are related to stored-value and electronic payments, payment operations, netting and settlement systems to facilitate robust adoption of digital payments across the UAE in a secure manner. As a response to the governments’ support of fintech, many banks are collaborating with start-ups that provide fintech solutions and other larger banks are allocating capital to explore potential investments in the start-up space.
The UAE has been one the states in the region where fintech has blossomed. The state’s capital, Dubai, has seen a surge of interest from fintech start-ups and banking assets because of its location, private investment, and innovation. In November, Dubai International Financial Centre (DIFC) launched a $100 million fintech-focused fund and signed an agreement with the Monetary Authority of Singapore to undertake joint fintech projects. In August, Hong Kong’s Securities and Futures Commission entered into a cooperation agreement with the Dubai Financial Services Authority (DFSA) to establish a framework for the two regulators to help each other develop the fintech industry.
Another very important step is that the UAE Ministry of Finance has joined forces with a global fintech conference series, Finovate, with the aim to drive innovation, growth, and investment in financial, banking and payments technology in the Middle East. The Ministry has hosted regular fintech seminars to display modern technologies and their impact across the sector. It continues to be a key player in helping to foster the investment environment in the UAE for tech entrepreneurs through the Mohammed bin Rashid Innovation Fund that is worth2 billion.Taking place from 26-27 February, during UAE Innovation Month and Dubai Innovation Week, Finovate will bring together early-stage start-ups, leading established companies, media, financial service institutions and funders drawn by the opportunity to see the future of fintech both regionally and globally.
Bahrain is also embracing fintech. The Central Bank of Bahrain (CBB)recently announced that it will be officially endorsing the launch of Bahrain FinTech Bay (BFB) and its fintech initiatives in Bahrain. The BFB will be the first dedicated fintech hub and corporate incubator in the Middle East and Africa region. The CBB and its recently announced FinTech and Innovation Unit will work closely with the BFB to support the development of the Bahrain fintech ecosystem and ensure the participation of financial institutions seeking to innovate and invest in fintech. In addition, the CBB will work closely to support innovators at the BFB in providing access and guidance to its regulatory framework, including the regulatory sandbox that was mentioned before.
Other countries in the region are catching up fast as well. Last year, Egypt launched two accelerators schools to nurture start-ups. Bahrain and Qatar also launched their own regulatory sandbox programme and held fintech conferences. Additionally, Saudi Arabia’s 2030 vision, which aims to reduce the dependency on oil revenues and diversify the economy by empowering small and medium enterprises, creates opportunities for fintech.
The fintech sector’s rapid growth within the region poses a threat of disruption towards traditional banks. By relying heavily on regulation and huge distribution networks as the primary means of value creation for the past decades, banks have become used to an environment of limited competition, a mentality that has seeped into every aspect of the industry from culture to business processes. On the other hand, start-ups that are entering the industry understand that in an age where distribution is solved through mobile devices, data is at the centre of all financial transaction and have therefore been built with that core competency in mind. Additionally, as cyber attackers have targeted many traditional financial services and cybersecurity solutions become more sophisticated, fintech services are able to provide banks and governments with greater protection.
A survey confirms that over 80% of large financial institutions fear their business is at risk from the new fintech players. Therefore, it is critical for companies to co-operate and create a supportive ecosystem. Considering the governments across the region taking an active role in nurturing fintech infrastructure through regulatory actions, banks should respond and invest in that ecosystem. Even though it is hard to draw the conclusion if banks are partners or competitors to fintech start-ups, the collaborative approach is gaining significant traction. Traditional financial institutions are trying to take advantage of these technologies to complement their existing business models. However, the collaboration between the banks and fintech players can be harmonised only through a robust regulatory framework, which currently remains at an incubation stage in many of the region’s economies. The ‘regulatory sandbox’ efforts made by regional governments have started testing the waters of this collaborative approach in addition to bringing more financial stability in the market.
The digital transformation fintech has caused should be perceived as a reinvention strategy, rather than an incremental enhancement to bank’s existing offerings. Regional banks have already proactively accelerated the pace at which they adopt technology to reduce costs and improve customer experience. They have been adopting these new technologies at various levels, but the transformation has been rather gradual for several banks in the region. It is important for them to understand that technological innovation will continue to remain an ongoing process and fintech companies will keep innovating new solutions that might bring about new changes within the financial service industry. Hence, regional banks will have to develop an ecosystem that will continue to track the latest changes and help in quickly adopting the latest technologies to capitalise on the changing opportunities within the sector.
According to a recent report by the global organization Ernst and Young, Islamic banks are enthusiastic about the prospects of fintech and are investing in digital initiatives. Fintech could facilitate Islamic banks in becoming more efficient and scaling up their operations.The rapidly evolving industry sector is currently in the spotlight, with businesses and consumers demanding innovative products, investors providing significant funding, and labour gaining expertise. In my opinion, the Islamic fintech sector that has been slower to engage with new technologies than conventional banking. While there are hundreds of firms threatening to render some traditional banking services obsolete, there are only a handful of sharia-compliant fintech solutions. Islamic banks should take advantage of this opportunity and solidify their ability to compete in the digital world. In this environment, the region’s financial institutions, and specifically Islamic ones are compelled to transform to keep pace with the rapidly evolving fintech industry.
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