Unleashing Mideast Fintech
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Bibliographic details
- Authors: Amjad Ahmad
- Published: September 1, 2023
Overview
- A better regulatory environment will bring the Middle East more investment and innovation in digital finance.
- Author: AMJAD AHMAD, chairman of the empowerME initiative at the Atlantic Council and managing partner, MENA, and emerging markets advisor at 500 Global.
- Publication: F&D Magazine, September 2023.
- Core thesis: The Middle East and North Africa (MENA) region has strong demographic and digital-penetration fundamentals that position it for fintech-driven financial inclusion and economic diversification, but realizing this potential requires substantial regulatory and ecosystem reforms.
Market potential and demographics
- A third of the population is under 30, creating demand for products and services for new households and job creation.
- High mobile, internet, and smartphone penetration rates create fertile ground for digital financial products.
- Noncash payments in the United Arab Emirates rose from 39 percent in 2018 to 73 percent in 2023.
- Current digital banking usage: only 17 percent of consumers in the Middle East use digital banking compared with almost 60 percent in the United States.
Current adoption, fintech size, and projections
- Fintech revenues in the Middle East, North Africa, and Pakistan region expected to increase from $1.5 billion in 2022 to $3.5–$4.5 billion by 2025.
- Fintech in the banking sector projected to grow from less than 1 percent to 2–2.5 percent.
- Comparable benchmarks cited: Brazil’s 5–7 percent and Nigeria’s 12–15 percent fintech penetration in banking.
- Venture funding metrics:
- Fintech venture funding in MENA rose to $925 million in 2022 from $587 million in 2021, an increase of 58 percent.
- Funding in 2022 was 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.
- As of Q1 2023, deals and funding in the region recorded the lowest values since the start of the COVID pandemic.
- Venture capital financing in the MENA region declined 13 percent in 2023; the number of deals dropped by 55 percent.
Structural obstacles and market dynamics
- Banking sector is often "sacred ground": banks owned primarily by government, quasi-government institutions, or well-connected elites; protective regulations favor incumbents and entrench national champions.
- Many fintech start-ups operate as service providers or customer-acquisition tools for incumbent banks rather than competitors.
- Fragmented regional regulatory and market structure inhibits scalability; pan-regional fintech players have yet to emerge in substantial numbers.
- Market scalability is costly and regulations are prohibitive; founders report difficulty meeting growth targets and building sustainable, profitable models without regional, multimarket approaches.
- Governments tend to pursue a top-down, government-led approach to fintech hubs (Abu Dhabi, Bahrain, Dubai, Riyadh), which can deter industry-led innovation.
Investment patterns and sectoral focus
- Payment start-ups dominated initial investment waves due to remittances and trading activity.
- Diversification in funded start-ups includes buy-now-pay-later (Tabby, Tamara), open banking (Lean Technologies, Tarabut Gateway), SME lending (Lendo, Liwwa), and wealth management (Sarwa, Thndr).
- Increase in average funding round size noted in 2022 relative to 2021.
Policy actions and recommendations
- Level the playing field:
- Allow incumbents, international players, and start-ups to compete fairly to drive IT spending, innovation, and improved products and services.
- Increased competition should facilitate intracountry and intercountry mergers and acquisitions and enable venture-capital exit opportunities.
- Regulatory harmonization:
- Increase regulatory transparency and public engagement.
- Allow licensed players in one country to operate freely in another where feasible.
- Encourage agreements between regulators in regional hubs to reduce geographic expansion friction.
- Democratize access to information:
- Implement open banking regulations and comprehensive credit registries to lower costs and foster competition.
- Expand investor base:
- Grow local venture capital and limited partner pools beyond sovereign wealth funds and quasi-government entities.
- Attract institutional investors such as pension funds, endowments, foundations, insurance companies, and asset managers via guarantee and incentive programs.
- Human capital and immigration policy:
- Reform education to align talent with knowledge industries.
- Improve current workforce skills via public-private partnerships, targeted programs, and private-sector incentives.
- Launch long-term permanent visa programs and a path to citizenship, especially for talented expatriate professionals.
- Regulatory capacity building:
- Develop expertise and resources to regulate fintech effectively.
- Allow early-stage fintech companies room to build before imposing overly restrictive regulation to unleash innovation.
Conclusion
- Fintech can materially improve financial inclusion, economic growth, consumer welfare, and cross-border investment and trade in the MENA region.
- Governments must implement the outlined reforms to ignite sustainable, scalable fintech innovation that leverages demographic and technology advantages.
Source: "Unleashing Mideast Fintech," Amjad Ahmad, F&D Magazine, September 2023.
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- Unleashing Mideast Fintech