## UNLEASHING MIDEAST FINTECH

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### Demographics, market potential, and demand
- A third of the population in the Arab world is under 30, creating a large cohort transitioning to adulthood and new household formation.
- High mobile, internet, and smartphone penetration rates and widespread digital-native youth underpin demand for digital financial products.
- Noncash payments in the United Arab Emirates rose from 39 percent in 2018 to 73 percent in 2023.
- Only 17 percent of consumers in the Middle East use digital banking, compared with almost 60 percent in the United States.
- Fintech revenues in the Middle East, North Africa, and Pakistan region are expected to increase from $1.5 billion in 2022 to $3.5–$4.5 billion by 2025.
- Fintech in the banking sector in the region is expected to grow from less than 1 percent to 2–2.5 percent; some Middle Eastern countries could reach rates comparable to Brazil’s 5–7 percent and Nigeria’s 12–15 percent.

### Structural constraints and market dynamics
- The financial sector is often treated as “sacred ground,” with banking institutions owned primarily by the government, quasi-government institutions, or well-connected elites.
- Overly protective regulatory regimes favor incumbents and entrench national champions, limiting competition.
- Many fintech start-ups in the region act as service providers or customer-acquisition tools for established banks rather than as independent competitors.
- Gulf Cooperation Council (GCC) banks, supported by government balance sheets, have expanded abroad (for example, into Türkiye) because domestic opportunities are limited; cross-border consolidation among GCC banks is unlikely in the near term.
- Fragmentation across regional fintech hubs (Abu Dhabi, Bahrain, Dubai, Riyadh) impedes scalability and the emergence of pan-regional players.
- Market scalability is a central challenge: founders report difficulty meeting growth targets and building sustainably profitable business models without a regional, multimarket approach.

### Investment trends and risks to momentum
- Venture funding in fintech in the Middle East and North Africa region rose to $925 million in 2022 from $587 million in 2021, an increase of 58 percent.
- Funding in 2022 occurred across 131 deals, compared with 124 deals in 2021; the sector’s share of venture funding increased from 21 percent in 2021 to 29 percent in 2022.
- Payment start-ups dominated early investment waves; later funding diversified to buy-now-pay-later (Tabby, Tamara), open banking (Lean Technologies, Tarabut Gateway), SME lending (Lendo, Liwwa), and wealth management (Sarwa, Thndr).
- As of the first quarter of 2023, deals and funding in the region recorded the lowest values since the start of the COVID pandemic.
- A 2019 Milken Institute report predicted that by 2022, 465 fintech companies in the Middle East would raise over $2 billion in venture capital funding; historically, only 30 start-ups raised nearly $80 million in 2017.
- Venture capital financing declined 13 percent in 2023 in the Middle East and North Africa; the number of deals dropped by 55 percent.

### Technology drivers
- Digitalization of financial services has been enabled by lower-cost digital infrastructure (for example, cloud computing) and greater access to venture capital.
- Artificial intelligence (AI), including AI language models, reduces technological and cost barriers for complex data analysis, increasing feasibility for fintech start-ups requiring sophisticated, high-accuracy analytics.

### Policy recommendations and necessary reforms
- Level the playing field:
  - Ensure equitable regulatory treatment for incumbents, international players, and start-ups to foster competition, drive IT spending, and spur product and service improvement.
  - Encourage intracountry and intercountry mergers and acquisitions to facilitate venture capital exits and attract new venture funding.
- Regulatory harmonization:
  - Increase regulatory transparency and public engagement to smooth geographic expansion.
  - Allow licensed players in one country to operate freely in another where feasible; promote agreements between regulators across regional hubs.
- Democratize access to information:
  - Implement open banking regulations and comprehensive credit registries to lower costs, foster competition, and expand the pool of customers and competitors.
- Expand the investor base:
  - Address the limited number of local investors able to fund large financing rounds by developing a diverse limited partner pool (pension funds, endowments, foundations, insurance companies, asset managers).
  - Use guarantee and incentive programs to attract institutional investors; reduce overreliance on international funds and on sovereign wealth funds and quasi-government entities.
- Human capital development and immigration policy:
  - Reform education systems to align talent with knowledge industries and nurture domestic fintech talent.
  - Improve the existing workforce through public-private partnerships, targeted programs, and incentives for private-sector training.
  - Launch long-term permanent visa programs and create a path to citizenship for talented expatriate professionals already in the region.

### Conclusion
- The Middle East and North Africa possess substantial demographic and technological advantages for fintech-driven financial inclusion, economic growth, and private-sector-led diversification.
- Overcoming protective regulatory traditions, fragmentation among regional hubs, limited scalability, constrained local investor pools, and shortages of specialized human capital is essential.
- Proactive reforms—balancing risk mitigation and consumer protection with regulatory openness, harmonization, information democratization, investor development, and human capital strategies—are needed for the region to realize fintech’s transformative potential.

*Source: Amjad Ahmad, "UNLEASHING MIDEAST FINTECH," F&D, September 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/september/ahmad-amjad.pdf_