As digital finance moves from incubation to implementation in the Gulf, the race is on to see which market will emerge as the region’s fintech hub.
The expansion of financial technology, or fintech, has taken some time to take off in the Gulf.
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The digitalisation of retail banking services in particular, from the provision of digital banking to the adoption of mobile wallets, has lagged years behind the world’s most mature markets.
However, it would be a mistake to view this slow transition away from physical bank branches and cash transactions as indicative of the banking sector’s broader approach to fintech.
Just as Gulf countries have seized the global initiative in sectors ranging from oil and gas to aviation and logistics, fervent efforts are now under way to ensure that Gulf markets not only catch up with global fintech trends, but become global leaders and trendsetters in the sector.
This newfound zeal for fintech is the result of a confluence of several factors, including, notably, the tighter profit margins in the banking sector due to regulatory requirements for higher capital adequacy ratios and the tempering of regional economic growth and related financing needs.
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By GlobalDataRestructuring banking
These factors have already led to a significant rise in merger and acquisition activity in the region as a means of reducing overheads in the sector.
However, the benefits of such corporate restructuring pales in comparison to the potential advantages of Gulf fintech, which promises to overhaul the banking sector root and branch, by digitalising customer interactions and robotising back-end functions, for instance, by leveraging big data to perform due diligence and quantify risk.
One study that was commissioned by Visa, on the economic impact of cashless payments across 100 cities, found that governments could achieve $130bn per year in estimated direct benefits, equivalent to a 3 per cent of the average GDP for these cities, derived from increased economic growth and cost savings.
Businesses across the 100 cities could meanwhile achieve more than $312bn per year in direct benefit, derived from factors including up to 3.1 billion hours in time-savings from processing payments.
From a government perspective, the resources spent in developing the correct regulatory framework and business environment for fintech ventures to thrive is a strategic one aimed at a combination of direct economic gains and indirect gains arising from the improved collective competitiveness of local banking systems and the growth and development of a financial services ecosystem.
As Rasheed al-Maraj, governor of the Central Bank of Bahrain (CBB), explains: “I am looking more at the opportunities that the fintech industry can make available to us and to Bahrain at large; I am hopeful that this new opportunity will allow the young generation to participate in this new innovation and technology. We do not claim to have all the answers, but we have ignited this path, have seen banks such as ABC taking the lead and unbundling these opportunities, and I am hopeful that the rest of the banks in Bahrain will become involved.”
Regional competition
However, the rise of fintech is also giving rise to fierce competition between the Gulf’s financial markets to emerge as the region’s fintech hub. The various claimants are increasingly articulating their claims to both superior regulatory regimes and business environments.
From among these claimants, the emerging leaders are three markets – Bahrain, Abu Dhabi and Dubai – that wield several key advantages: long-established and diversified financial markets, gateway status to the Saudi Arabian market, and authorities that are pro-actively legislating to encourage the growth of fintech.
Bahrain’s shift towards fintech reflects the country’s desire to reclaim the lustre it had in the 1970s as a finance hub for the Gulf, but which it slowly lost to Dubai in the 1990s as the latter enjoyed its boom.
For Abu Dhabi too, the clear desire is to direct some of the financial market success that the Dubai International Financial Centre (DIFC) has enjoyed back towards the capital and the Abu Dhabi Global Market (ADGM).
All three countries have a variety of government-backed regulatory sandboxes and public and private incubator programmes, some notable examples being Bahrain Fintech Bay, the ADGM’s Regulatory Laboratory (Reglab) and the DIFC Fintech Hive.
One key edge that the Gulf’s financial markets have over the world’s heavyweight financial hubs is the region’s agile, executive style of governance, which can allow regional authorities to deliver legislation and regulation at a fast pace given the right injection and direction of political will.
The relatively light regulation of the region’s financial sector could meanwhile lend itself to faster reform than possible in the more bureaucratically layered finance sectors of mature economies.
This is critical, because with fintech, which can be government-sponsored but which is overwhelmingly private sector led, the ability to get the right type of regulation in place – and to do it quickly – is key.
As CBB’s Al-Maraj adds: “For us in Bahrain, it is important that the central bank becomes very agile, very forward-looking and innovative in their thinking, and I see similarities with Singapore, for instance.
“We are not going to reinvent the wheel: we have [observed] the best practices in the industry, looking at the experience and jurisdiction in Hong Kong, Singapore, the UK and Canada, and we want to emulate those successful experiences.”
This willingness to not just learn from other markets, but to pick and choose regulation from around the world exemplifies the pragmatic, direct approach to regulation possible in the Gulf.
Open banking
Bahrain will also imminently be moving to an open banking system, and published draft open banking legislation in December with a view to implementation by 30 June.
The CBB will be meanwhile be launching an open banking platform supported by Token OS, an open banking infrastructure company, and Almoayed Technologies, a Bahraini start-up that is the first company to graduate from CBB’s regulatory sandbox.
ABC subsidiary Arab Financial Services launched Bahrain’s first peer-to-peer mobile payment app, ‘b-wallet’, in 2018, while ABC is also planning to launch ‘Ila’, the region’s first digital-only bank, that will interact with customers through digital and mobile banking only, in the near future.
Yet all of these developments are only possible with regulation.
Speaking to the regulatory environment in the Gulf, Ahmed Ismail, co-founder of digital currency platform, notes: “The leadership out here has the ability to be very nimble, whereas a lot of other regulators around the world are like big oil tankers [and is slow] to move.
“The Financial Conduct Authority (FCA) in the UK is two years behind the ADGM right now in terms of proper fintech regulation; they have just released sandboxes in the UK.”
Havyn is a pertinent example of a fintech start-up that has been drawn to Abu Dhabi specifically by the regulatory framework.
Unlike existing cryptocurrency platforms, exchanges and transaction brokers, the platform has been designed as a highly secure custodian of crypto-assets enabling institutional investors to make safe, insured over-the-counter transactions with no counterparty or liquidity risk.
Ismail notes that, as it stands, there are only a handful of regulated exchanges around the world, and these are regulated either as brokers in markets such the UK or, as in the US, regulated as custodians through state-chartered bank licences, but not covered by dedicated regulation for cryptocurrency or other digital assets.
He continues: “The ADGM came out last year with cryptocurrency legislation where they regulated custodians for the first time, and we found that it is probably the most advanced piece of legislation to regulate a financial crypto-asset institution globally.
“We have been speaking with them for more than a year and we still do not have a licence, because it is very rigorous. But that is what you need, and it is perfect for us.”
Nevertheless, despite the natural competition between the Gulf’s financial markets, the maturing of local fintech regulation will likely be a mutually beneficial process for all parties.
Slower regulators will learn from the faster ones, and so the fintech journey will ultimately lift the entire region’s financial sector.
MEED
This article is sourced from Verdict Technology sister publication www.meed.com, a leading source of high-value business intelligence and economic analysis about the Middle East and North Africa. To access more MEED content register for the 30-day Free Guest User Programme. https://www.meed.com/registration/
