## 1. Global Investment in Fintech Companies

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---

### Five-year investment trends (2010–16)
- KPMG 2016 and ITA Fintech Market Report, 2016 reported rising global fintech investment through 2016 (chart data presented in source).
- Private equity and venture capital investments in the MENA region:
  - Stagnated at about $1 billion (value of all private equity and venture capital investments in the MENA region).
  - Total private equity investment series shown for 2011–16 in millions of US dollars (Thomson Reuters datastream, 2016).

### Regional overview: MENAP versus CCA
- MENAP has made comparatively greater strides than CCA in developing fintech ecosystems, but investments remain concentrated in a few countries.
- MENAP government role:
  - Governments actively fostering fintech through development funds, incubators/accelerators, and regulatory sandboxes.
  - More than 20 start-ups from Australia, Europe, the United States, and elsewhere established a presence in MENAP.
- CCA experience:
  - Investments mainly undertaken by banks (ADB 2014).
  - Armenia and Kazakhstan appear to dominate CCA fintech activity.
- Growth in MENAP fintech start-ups:
  - A WAMDA 2016 survey across 12 MENAP countries shows a sevenfold increase in fintech start-ups since 2009.
  - Country concentration of MENAP-based fintech start-ups (WAMDA Research Lab 2016): United Arab Emirates, 30; Egypt, 17; Jordan, 15; Lebanon, 15; Morocco, 8; Kuwait, 6; Saudi Arabia, 6; Tunisia, 3; Algeria, 2; Bahrain, 1; Oman, 1; Qatar, 1.
- Segmental focus:
  - Payments and lending account for the bulk of fintech investments in MENAP and CCA.
  - In MENAP: payments account for 50 percent of start-ups; lending and capital raising account for 30 percent.
  - In CCA: investments modest but focused on payment solutions (mobile wallets, cryptocurrencies).

### Demand-side fundamentals and demographics
- Large youth populations support potential fintech adoption:
  - More than 60 percent of the population in the MENA region is younger than 25.
  - The share of youths in the CCA region is also large.
- Mobile and Internet penetration:
  - Mobile phone penetration exceeds the number of bank accounts in many countries in MENAP and CCA.
  - Internet penetration and technology migration charts (sources: International World Internet statistics 2016; GSMA 2016) indicate heterogeneous progress across countries.

### Impediments to fintech growth
- Weak business environment:
  - At end-2016, only four countries were in the top quartile of the World Bank’s Doing Business Index: Armenia, Georgia, Kazakhstan, United Arab Emirates.
  - Continued restrictions on foreign entry limit established global fintech entry.
- Scarcity of private equity and venture capital:
  - MENA private equity and venture capital investments stagnated at about $1 billion and declined further with low oil prices.
  - Investments concentrated in United Arab Emirates; growth constrained by restrictive regulations (BVCA 2013).
- Regulatory gaps and legal uncertainties:
  - Some progress on e-money issuance laws, but limited mobile money regulations (only a few countries: Egypt, Morocco, Tunisia).
  - Consumer protection frameworks and data privacy laws not developed in many countries (World Bank 2014).
  - Prudential regulations not adapted to fintech specifics; large capital requirements for banks represent barriers to fintech entrants.
  - United Arab Emirates among few proactively introducing fintech-related regulations (crowdfunding, digital currencies).
- ICT limitations:
  - Internet reached every country but penetration rates low in several; high-speed Internet limited and costly.
  - Countries with high penetration: Azerbaijan, GCC countries, Lebanon.
  - Countries with low penetration: Djibouti, Pakistan, Sudan, Tajikistan, Yemen.
  - Lack of interoperability of mobile payment systems; mobile costs prohibitive in some countries (Armenia, Georgia, Kyrgyz Republic).
  - More than 80 percent of the population in Armenia, Georgia, and the Kyrgyz Republic need to spend at least 10 percent of household income to afford a basic mobile phone plan (World Bank 2017a).
- Limited institutional support:
  - Very few countries have incubators/accelerators (Egypt, Lebanon, United Arab Emirates) or regulatory sandboxes (Abu Dhabi, Bahrain, Saudi Arabia).
- Trust gap and low financial literacy:
  - Trust and customer education identified as main obstacles in MENA fintech survey (WAMDA 2016).
  - Trust gap drives collaboration between fintech start-ups and banks.
- Cybersecurity weaknesses:
  - Cyberattacks increasing; attacks on banks in the region reported to have increased (Symantec 2017).
  - Cyber risk preparedness weak in many countries.
  - At end-2016, countries with cybercrime and cybersecurity legislation in MENAP: Algeria, Egypt, Oman, Morocco, Qatar, Tunisia, United Arab Emirates (7 countries); in CCA: Azerbaijan, Georgia, Kazakhstan, Uzbekistan (4 countries) (ITU 2017).

### Value proposition of fintech for MENAP and CCA
- Inclusive growth and economic diversification:
  - Mobile payments, with appropriate regulations, can reduce unbanked populations.
  - Fintech can provide alternative funding via marketplace lending (P2P), crowdfunding, online trade finance.
  - Technologies (big data analytics, DLT) can reduce information asymmetries and improve collateral registries; digital payments create data trails for credit assessment of microenterprises.
  - SME lending context: SME lending accounts for 8 percent of total bank lending in the MENA region, compared with 18 percent in middle-income countries globally (Lukonga and others 2014).
- Cross-border trade and remittances:
  - Virtual currencies, blockchain-based DLT, and P2P platforms may provide more efficient, transparent, and cost-effective cross-border payment mechanisms than traditional banks or money transfer operators.
  - This could help mitigate challenges from loss of correspondent banking relationships in some countries (Erbenova and others 2016, IMF 2017).
- Financial stability and integrity:
  - Fintech can reduce banks’ operating costs and facilitate large-scale data analysis for risk management and fraud detection.
  - Data-driven technologies can aid AML/CFT implementation as countries move from improving regulations to implementation.
- Fiscal and monetary operations:
  - Digitization can enhance government revenue collection and payments; e-payments can reduce fraud and improve monetary policy transmission.
  - Country examples: Oman promoting government e-payments; Kazakhstan has plans to issue government bonds using DLT and mobile phone technology.

### Policy priorities to unlock fintech potential
- Legal and regulatory reforms:
  - Reviews of legal, regulatory, supervisory, and licensing frameworks to ensure clarity for digital financial products and address evolving risks.
  - Greater use of regulatory sandboxes to understand fintech risks and design appropriate regulation.
  - Shift regulation from entity-based to activity-based frameworks; include telecommunication regulators in collaboration frameworks.
- Compliance with international standards and enhanced surveillance:
  - Sustain reforms to achieve compliance with international regulatory standards and couple them with enhanced surveillance.
  - Prioritize monitoring macro-financial risks and preventing misuse of technologies for fraud, money laundering, and terrorism financing.
  - Strengthen supervisory capacity to manage operational risks from third-party providers and to maintain soundness of financial institutions and payment systems.
- Cybersecurity:
  - Make cybersecurity frameworks a top priority; frameworks should cover prevention, detection, information sharing, monitoring, and recovery.
- ICT infrastructure improvements:
  - Increase Internet and mobile penetration, improve speed, reduce costs, and ensure interoperability of mobile payment systems.
- Business environment and capital markets:
  - Ease restrictions on foreign investment to increase capital availability and facilitate scaling through entry of established fintech firms.
  - Review factors constraining private equity and venture capital; undertake broader capital market reforms.
- Consumer protection and financial literacy:
  - Promote financial literacy programs underpinned by consumer protection frameworks.
  - Develop new legal rules clarifying rights and obligations in the digital financial landscape (He and others 2017).

*Source: 1. Global Investment in Fintech Companies — Chapter content from "5. Fintech: Unlocking the Potential for the MENAP and CCA Regions" (Regional Economic Outlook: Middle East and Central Asia, International Monetary Fund | October 2017).*

### Box 5.1. Fintech: A Primer

### Financial stability implications
- Credit, liquidity, concentration, and operational risks as well as macro-financial and other risks to financial stability, such as procyclicality, shadow banking, and financial integrity, also apply.
- Although these risks are not new, they may be accentuated given the speed of growth of Fintech, new forms of interconnectedness, and increased dependency on, and possible concentration in, third-party service providers (cloud computing, data services) that are outside the regulatory perimeter.
- The emergence of systemically important fintech companies, disruptions from big technology companies (like Amazon, Apple, Facebook, and Google) and increased cyber risks (see FSB 2017) are also potential risks.

### Growth drivers and enabling conditions
- Growth drivers have included enabling regulations and policies, dedicated incubators and accelerators, close engagement with industry participants (both incumbents and fintech companies), clarity of directives, availability of seed and growth capital (including openness to foreign investment), quality of Internet and mobile infrastructure, availability of local talent, market structure, and degree of financial development.

### Selected country experiences
- United States
  - Fintech companies cover all financial segments, and their growth is underpinned by high-quality infrastructure and abundant talent and capital.
  - Government support has been limited, and the regulatory uncertainty caused by the mixture of multiple federal and state regulators is cited by the industry as a dampening factor.
  - Governance, weak internal controls, and asset quality problems plagued some of the marketplace lending firms (for example, the Lending Club).
  - State-of-the-art technical measures for cybersecurity have been developed. Nevertheless, some successful cyberattacks have resulted in customer data breaches.
- United Kingdom
  - High growth in peer-to-peer platforms, online payments, data and analytic products, capital market trading, and insurance.
  - Growth has been underpinned by favorable government and regulatory support.
  - In 2014, the United Kingdom’s Financial Conduct Authority launched the Project Innovate program, which includes an innovation hub and regulatory sandbox.
  - Banks are also required to direct small businesses to alternative finance providers if they are unable to fulfill their financing needs themselves.
  - Though credit by fintechs is still small, the market share of digital first, mobile-only banks (“challenger” banks), and alternative finance providers jumped from 4 percent in 2012 to 12 percent in 2014 (Ernst and Young 2016b).
  - Prudential oversight of peer-to-peer lending has enabled significant credit growth through lending platforms while concurrently containing credit risks.
  - The recent Wannacry cyberattack exposed vulnerabilities in several financial and nonfinancial companies, indicating that continuous defense efforts are needed.
- China
  - Fintech growth is driven by fast e-commerce growth, rapid increases in online and mobile penetration, and a large number of consumers underserved by incumbent financial institutions, combined with regulatory support and easy access to capital.
  - Underbanked (or unbanked) individuals and small and medium-sized enterprises have significantly benefited from peer-to-peer lending platforms and e-commerce companies leveraging users’ merchant data.
  - Prudential regulations and a data privacy framework have been introduced in response to recent challenges in the peer-to-peer sector, as well as data breaches, but regulations remain comparatively lax.
  - China introduced more rigorous cybersecurity laws in the aftermath of the global Wannacry ransomware attack, which affected some bank operations (Ernst and Young 2016a).
- Sub-Saharan Africa (selected)
  - Successful models of digital financial inclusion have emerged, along with new regulatory and supervisory approaches.
  - The M-Pesa model in Kenya deployed mobile technology to reach 80 percent of households within four years (World Bank 2016).
  - The Central Bank of Kenya adopted a functional (rather than an institutional) approach to regulation in which banks and nonfinancial corporations (including mobile network operators) are permitted to provide mobile money services.
  - West African countries have also successfully deployed technology for cross-border financial services, including remittances.

### Regulatory balance and cybersecurity
- The box underscores the importance of balancing regulatory oversight with the flexibility to innovate and the need to manage cyber risks.
- Examples show a range of approaches: limited government support with regulatory fragmentation (United States); proactive regulatory innovation and prudential oversight (United Kingdom); rapid expansion with subsequent introduction of prudential and data privacy measures (China); and functional regulatory approaches enabling rapid inclusion (Kenya).
- Cybersecurity remains a pervasive concern: state-of-the-art defenses exist alongside notable breaches (United States, United Kingdom, China), and major incidents such as Wannacry prompted regulatory and legal responses.

*This box was prepared by Inutu Lukonga.*

### 1. Global Investment in Fintech Companies

### 1. Global Investment in Fintech Companies

### Five-year investment trends (2010–16)
- KPMG 2016 and ITA Fintech Market Report, 2016 reported rising global fintech investment through 2016 (chart data presented in source).
- Private equity and venture capital investments in the MENA region:
  - Stagnated at about $1 billion (value of all private equity and venture capital investments in the MENA region).
  - Total private equity investment series shown for 2011–16 in millions of US dollars (Thomson Reuters datastream, 2016).

### Regional overview: MENAP versus CCA
- MENAP has made comparatively greater strides than CCA in developing fintech ecosystems, but investments remain concentrated in a few countries.
- MENAP government role:
  - Governments actively fostering fintech through development funds, incubators/accelerators, and regulatory sandboxes.
  - More than 20 start-ups from Australia, Europe, the United States, and elsewhere established a presence in MENAP.
- CCA experience:
  - Investments mainly undertaken by banks (ADB 2014).
  - Armenia and Kazakhstan appear to dominate CCA fintech activity.
- Growth in MENAP fintech start-ups:
  - A WAMDA 2016 survey across 12 MENAP countries shows a sevenfold increase in fintech start-ups since 2009.
  - Country concentration of MENAP-based fintech start-ups (WAMDA Research Lab 2016): United Arab Emirates, 30; Egypt, 17; Jordan, 15; Lebanon, 15; Morocco, 8; Kuwait, 6; Saudi Arabia, 6; Tunisia, 3; Algeria, 2; Bahrain, 1; Oman, 1; Qatar, 1.
- Segmental focus:
  - Payments and lending account for the bulk of fintech investments in MENAP and CCA.
  - In MENAP: payments account for 50 percent of start-ups; lending and capital raising account for 30 percent.
  - In CCA: investments modest but focused on payment solutions (mobile wallets, cryptocurrencies).

### Demand-side fundamentals and demographics
- Large youth populations support potential fintech adoption:
  - More than 60 percent of the population in the MENA region is younger than 25.
  - The share of youths in the CCA region is also large.
- Mobile and Internet penetration:
  - Mobile phone penetration exceeds the number of bank accounts in many countries in MENAP and CCA.
  - Internet penetration and technology migration charts (sources: International World Internet statistics 2016; GSMA 2016) indicate heterogeneous progress across countries.

### Impediments to fintech growth
- Weak business environment:
  - At end-2016, only four countries were in the top quartile of the World Bank’s Doing Business Index: Armenia, Georgia, Kazakhstan, United Arab Emirates.
  - Continued restrictions on foreign entry limit established global fintech entry.
- Scarcity of private equity and venture capital:
  - MENA private equity and venture capital investments stagnated at about $1 billion and declined further with low oil prices.
  - Investments concentrated in United Arab Emirates; growth constrained by restrictive regulations (BVCA 2013).
- Regulatory gaps and legal uncertainties:
  - Some progress on e-money issuance laws, but limited mobile money regulations (only a few countries: Egypt, Morocco, Tunisia).
  - Consumer protection frameworks and data privacy laws not developed in many countries (World Bank 2014).
  - Prudential regulations not adapted to fintech specifics; large capital requirements for banks represent barriers to fintech entrants.
  - United Arab Emirates among few proactively introducing fintech-related regulations (crowdfunding, digital currencies).
- ICT limitations:
  - Internet reached every country but penetration rates low in several; high-speed Internet limited and costly.
  - Countries with high penetration: Azerbaijan, GCC countries, Lebanon.
  - Countries with low penetration: Djibouti, Pakistan, Sudan, Tajikistan, Yemen.
  - Lack of interoperability of mobile payment systems; mobile costs prohibitive in some countries (Armenia, Georgia, Kyrgyz Republic).
  - More than 80 percent of the population in Armenia, Georgia, and the Kyrgyz Republic need to spend at least 10 percent of household income to afford a basic mobile phone plan (World Bank 2017a).
- Limited institutional support:
  - Very few countries have incubators/accelerators (Egypt, Lebanon, United Arab Emirates) or regulatory sandboxes (Abu Dhabi, Bahrain, Saudi Arabia).
- Trust gap and low financial literacy:
  - Trust and customer education identified as main obstacles in MENA fintech survey (WAMDA 2016).
  - Trust gap drives collaboration between fintech start-ups and banks.
- Cybersecurity weaknesses:
  - Cyberattacks increasing; attacks on banks in the region reported to have increased (Symantec 2017).
  - Cyber risk preparedness weak in many countries.
  - At end-2016, countries with cybercrime and cybersecurity legislation in MENAP: Algeria, Egypt, Oman, Morocco, Qatar, Tunisia, United Arab Emirates (7 countries); in CCA: Azerbaijan, Georgia, Kazakhstan, Uzbekistan (4 countries) (ITU 2017).

### Value proposition of fintech for MENAP and CCA
- Inclusive growth and economic diversification:
  - Mobile payments, with appropriate regulations, can reduce unbanked populations.
  - Fintech can provide alternative funding via marketplace lending (P2P), crowdfunding, online trade finance.
  - Technologies (big data analytics, DLT) can reduce information asymmetries and improve collateral registries; digital payments create data trails for credit assessment of microenterprises.
  - SME lending context: SME lending accounts for 8 percent of total bank lending in the MENA region, compared with 18 percent in middle-income countries globally (Lukonga and others 2014).
- Cross-border trade and remittances:
  - Virtual currencies, blockchain-based DLT, and P2P platforms may provide more efficient, transparent, and cost-effective cross-border payment mechanisms than traditional banks or money transfer operators.
  - This could help mitigate challenges from loss of correspondent banking relationships in some countries (Erbenova and others 2016, IMF 2017).
- Financial stability and integrity:
  - Fintech can reduce banks’ operating costs and facilitate large-scale data analysis for risk management and fraud detection.
  - Data-driven technologies can aid AML/CFT implementation as countries move from improving regulations to implementation.
- Fiscal and monetary operations:
  - Digitization can enhance government revenue collection and payments; e-payments can reduce fraud and improve monetary policy transmission.
  - Country examples: Oman promoting government e-payments; Kazakhstan has plans to issue government bonds using DLT and mobile phone technology.

### Policy priorities to unlock fintech potential
- Legal and regulatory reforms:
  - Reviews of legal, regulatory, supervisory, and licensing frameworks to ensure clarity for digital financial products and address evolving risks.
  - Greater use of regulatory sandboxes to understand fintech risks and design appropriate regulation.
  - Shift regulation from entity-based to activity-based frameworks; include telecommunication regulators in collaboration frameworks.
- Compliance with international standards and enhanced surveillance:
  - Sustain reforms to achieve compliance with international regulatory standards and couple them with enhanced surveillance.
  - Prioritize monitoring macro-financial risks and preventing misuse of technologies for fraud, money laundering, and terrorism financing.
  - Strengthen supervisory capacity to manage operational risks from third-party providers and to maintain soundness of financial institutions and payment systems.
- Cybersecurity:
  - Make cybersecurity frameworks a top priority; frameworks should cover prevention, detection, information sharing, monitoring, and recovery.
- ICT infrastructure improvements:
  - Increase Internet and mobile penetration, improve speed, reduce costs, and ensure interoperability of mobile payment systems.
- Business environment and capital markets:
  - Ease restrictions on foreign investment to increase capital availability and facilitate scaling through entry of established fintech firms.
  - Review factors constraining private equity and venture capital; undertake broader capital market reforms.
- Consumer protection and financial literacy:
  - Promote financial literacy programs underpinned by consumer protection frameworks.
  - Develop new legal rules clarifying rights and obligations in the digital financial landscape (He and others 2017).

*Source: 1. Global Investment in Fintech Companies — Chapter content from "5. Fintech: Unlocking the Potential for the MENAP and CCA Regions" (Regional Economic Outlook: Middle East and Central Asia, International Monetary Fund | October 2017).*

### Box 5.1. Fintech: A Primer

### Box 5.1. Fintech: A Primer

### Financial stability implications
- Credit, liquidity, concentration, and operational risks as well as macro-financial and other risks to financial stability, such as procyclicality, shadow banking, and financial integrity, also apply.
- Although these risks are not new, they may be accentuated given the speed of growth of Fintech, new forms of interconnectedness, and increased dependency on, and possible concentration in, third-party service providers (cloud computing, data services) that are outside the regulatory perimeter.
- The emergence of systemically important fintech companies, disruptions from big technology companies (like Amazon, Apple, Facebook, and Google) and increased cyber risks (see FSB 2017) are also potential risks.

### Growth drivers and enabling conditions
- Growth drivers have included enabling regulations and policies, dedicated incubators and accelerators, close engagement with industry participants (both incumbents and fintech companies), clarity of directives, availability of seed and growth capital (including openness to foreign investment), quality of Internet and mobile infrastructure, availability of local talent, market structure, and degree of financial development.

### Selected country experiences
- United States
  - Fintech companies cover all financial segments, and their growth is underpinned by high-quality infrastructure and abundant talent and capital.
  - Government support has been limited, and the regulatory uncertainty caused by the mixture of multiple federal and state regulators is cited by the industry as a dampening factor.
  - Governance, weak internal controls, and asset quality problems plagued some of the marketplace lending firms (for example, the Lending Club).
  - State-of-the-art technical measures for cybersecurity have been developed. Nevertheless, some successful cyberattacks have resulted in customer data breaches.
- United Kingdom
  - High growth in peer-to-peer platforms, online payments, data and analytic products, capital market trading, and insurance.
  - Growth has been underpinned by favorable government and regulatory support.
  - In 2014, the United Kingdom’s Financial Conduct Authority launched the Project Innovate program, which includes an innovation hub and regulatory sandbox.
  - Banks are also required to direct small businesses to alternative finance providers if they are unable to fulfill their financing needs themselves.
  - Though credit by fintechs is still small, the market share of digital first, mobile-only banks (“challenger” banks), and alternative finance providers jumped from 4 percent in 2012 to 12 percent in 2014 (Ernst and Young 2016b).
  - Prudential oversight of peer-to-peer lending has enabled significant credit growth through lending platforms while concurrently containing credit risks.
  - The recent Wannacry cyberattack exposed vulnerabilities in several financial and nonfinancial companies, indicating that continuous defense efforts are needed.
- China
  - Fintech growth is driven by fast e-commerce growth, rapid increases in online and mobile penetration, and a large number of consumers underserved by incumbent financial institutions, combined with regulatory support and easy access to capital.
  - Underbanked (or unbanked) individuals and small and medium-sized enterprises have significantly benefited from peer-to-peer lending platforms and e-commerce companies leveraging users’ merchant data.
  - Prudential regulations and a data privacy framework have been introduced in response to recent challenges in the peer-to-peer sector, as well as data breaches, but regulations remain comparatively lax.
  - China introduced more rigorous cybersecurity laws in the aftermath of the global Wannacry ransomware attack, which affected some bank operations (Ernst and Young 2016a).
- Sub-Saharan Africa (selected)
  - Successful models of digital financial inclusion have emerged, along with new regulatory and supervisory approaches.
  - The M-Pesa model in Kenya deployed mobile technology to reach 80 percent of households within four years (World Bank 2016).
  - The Central Bank of Kenya adopted a functional (rather than an institutional) approach to regulation in which banks and nonfinancial corporations (including mobile network operators) are permitted to provide mobile money services.
  - West African countries have also successfully deployed technology for cross-border financial services, including remittances.

### Regulatory balance and cybersecurity
- The box underscores the importance of balancing regulatory oversight with the flexibility to innovate and the need to manage cyber risks.
- Examples show a range of approaches: limited government support with regulatory fragmentation (United States); proactive regulatory innovation and prudential oversight (United Kingdom); rapid expansion with subsequent introduction of prudential and data privacy measures (China); and functional regulatory approaches enabling rapid inclusion (Kenya).
- Cybersecurity remains a pervasive concern: state-of-the-art defenses exist alongside notable breaches (United States, United Kingdom, China), and major incidents such as Wannacry prompted regulatory and legal responses.

*This box was prepared by Inutu Lukonga.*

---


_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2017/october/menap/11-chapter-5.pdf_