Many great changes involve struggles between the center and the periphery. The great decolonization after World War Two involved many countries throwing off the shackles of centralized colonial states like Britain or France. Today in the Middle East and North Africa there are new struggles around FinTech, which could potentially be as liberating. The center, in this case, is governments, regulation and backward-looking structures like courts and archaic historical practices. The periphery is new, disruptive, flatter, fintech innovations which could bring benefits to businesses and ordinary people across the region. Of course, each country is different, but there are overall trends which I will look at in this article.
The Surge in FinTech
Across the Middle East, there has been robust growth in startups in the sector. With a nexus comprising government initiatives (like Dubai’s FinTech sandbox), individual entrepreneurship, and the opportunities presented by under-development, the facts give a positive indication for the future:
According to a report co-authored by Wamda Research Lab and Payfort, “FinTech startups in MENA have raised over US$100 million in funding in the last ten years. This year alone, the sector is expected to attract US$50 million, a 270% increase compared with 2016’s US$18 million in disclosed investments.”
In the last three years, FinTech startups have gone from 46 to 105, with UAE holding the top position with 29%, followed by Egypt with 16%, then Lebanon and Jordan tied with 14% each — the remaining 27% was spread across the rest of the countries.
Ventures like Paytabs ($20million), Souqalmal ($10 million) and Beehive ($5 million) have raised significant amounts of capital to develop their businesses.
Unsurprisingly payments processing is the most popular niche for new ventures, with international money transfer, wealth management, insurance, and cryptocurrencies/blockchain lagging. A big boost will come with the greater adoption of e-commerce — projected to reach US$20 billion by 2020: as more people order goods or services online, payment volume increases and more retailers see the benefits, encouraging more consumers: a virtuous circle.
Forces pulling the periphery back to the center include government complacency and reliance on oil to provide revenues, rather than innovative financial services, social conservatism which does not foster entrepreneurial talent, particularly from women — even though Islam has a long-standing tradition of female business initiative: the Prophet’s first wife, Khadija, was a renowned and wealthy businesswoman, and not particularly exceptional for the time.
Other difficulties include the strictures of Islamic Finance (see my previous article here) , a lack of support structures, which includes soft loans or grants to finance first-stage project development, “accelerators” with expert mentors to nurture people, networks where business people can meet like-minded individuals for mutual support and knowledge sharing, and light-touch tax and legal systems to ensure projects are not crushed by “red tape” before they start.
With investment in the fossil fuel sector remaining high, and governments looking to tourism for revenues, both of which are variable and can result in sudden slumps — if the oil price falls or an unpleasant incident discourages tourism. Having a resilient domestic market is a cushion against externally-imposed financial woes, but some countries are not looking beyond the short-term so have hesitated to build the infrastructure necessary to create a thriving hub.
Other countries are diversifying, however: Bahrain has a strong ICT sector, and in February, it launched the first dedicated FinTech hub and corporate incubator in the Middle East and Africa region: Bahrain FinTech Bay (BFB). This innovation is predicated on creating a networking workspace for startups, attracting inbound finance, creating partnerships and evolving businesses in the region.
Dubai is also making a play for FinTech leadership, with the Dubai Financial Services Authority’s FinTech sandbox — an area for developing ideas free of intrusive regulation, and their FinTech Hive — an incubator program for nurturing people and projects.
Projects are blossoming across MENA. A new initiative called FinTech Galaxy — a digital crowdsourcing platform focusing on the region. They empower entrepreneurs and connect them to financial institutions, consultants, technology companies, mentors, and investors. They also work as an open innovation marketplace for organizations to post challenges to their global network of startups, who then can look at solving them, for business contracts or cash rewards.
CEO Mirna Sleiman says, “Tech is a hot sector, and I see more women are getting into it. This doesn’t necessarily mean the coding part of it (like the men’s world) but rather an extension of it. Just like I’m a fintech enthusiast, more women are getting into online business models, digital marketing, e-commerce, new media, social media strategy, gadgets, and technology ecosystems. Women are social butterflies by nature, they enjoy the ‘out there’ connecting side rather than ‘behind the desk’ aspect.”
One factor holding back these developments is the damage done across the region — previously significant countries, with high levels of development, like Iraq, Syria, and Libya are mired in conflict, and other major powers like Iran have economic difficulties exacerbated by sanctions and religious conservatism.
Another is the political potential of blockchain and Distributed Ledger Technology — it scares governments and banks, which hitherto have had a monopoly of issuing currency, and being “trusted third parties” to every kind of transaction. Cryptography has rendered that obsolete, in the same way, that email did away with fax machines. Many autocratic regimes will be wondering whether the oncoming disruption of cryptocurrencies will make their system untenable, so they try to clamp down on it: The Reserve Bank of Zimbabwe (RBZ) has gone to court to try to ban cryptocurrencies in the country, as people are using them as a hedge against financial instability. Given the anonymity of cryptos, and all you need to trade them worldwide is a smartphone and net connection, this bit of old-fashioned government control freakily is bound to fail.
The Middle Kingdom seems to be looking to take back its crown as the most economically influential country in the world — which it was from Roman times to around the seventeenth century — with its Belt and Road project — a new Silk Road — linking Asia to Europe via the Middle East.
Xi Jinping, the Chinese President, said at the 2017 OBOR conference, “We will not follow the old way of geopolitical games during the push for the Belt and Road Initiative, but create a new model of win-win and cooperation. It will not form a small group undermining stability, but is set to build a big family with harmonious co-existence.”
The Belt and Road initiative is probably the most extensive civil project in history. It looks likely to have a significant positive economic effect along its route of travel. This is bound to have geopolitical consequences, but the influx of Chinese investment into a belt often defined by low incomes and political insecurity is to be welcomed. China is, of course, one of the most prevalent technology manufacturers: how this will influence MENA FinTech growth, if more outside expertise and readily-available technology are coming, nobody knows yet.
“Education is the most powerful weapon you can use to change the world,” said Nelson Mandela. There is no point in creating new ICT and FinTech ecosystems if you do not have the personnel to make the vision happen. Importing specialists from other countries is short-term, and they can leave. Much better to educate your workforce. A UNESCO report in 2013 found that the teaching and use of computers in schools was relatively low across the region. Without early access to the full range of computer technology, students will struggle to access the benefits of an interconnected age. The report says, “In the Arab States, the implementation and use of ICT in education often lag behind other social and economic spheres, including communications, employment, and commerce. In fact, in many countries in the Arab States, children and youth learn more about how to use various ICT tools informally outside of the school system.” Without a prioritized program for creating a digitally literate workforce, especially at the high end of postgraduate education, including programming, project management, analysis, cybersecurity and blockchain, MENA FinTech will be reliant on outside staffing, which is not desirable in the long-term.
Smartphones Erode the Cash Economy
Although there is a high penetration of smartphones and other mobile platforms in the region, 86% of the adult population does not have a bank account. Fortunately, new apps are leaping over this obstacle. Dubai-based startup Bridg, which allows smartphone-to-smartphone payments using Bluetooth, uses fintech as an innovative way to bridge the divide and provide cheaper services to the unbanked. Moussa Beidas, the co-founder of Bridg, says, “Banks in the Middle East are notorious for stifling fintech growth due to lack of understanding.
Now that regulators such as DIFC[Dubai International Financial Centre] and DFSA [Dubai Financial Services Authority] and governments across the region are taking a more active role in nurturing fintech infrastructure, banks must respond better and invest in the ecosystem, which will ultimately benefit them in the long run.”
There are vast opportunities for FinTech in the MENA region. Venture financing is available, but project development is hampered by the weight of old-fashioned thinking and legacy structures, particularly amongst government and official institutions.
“In total, we project around 250 fintech startup launches by 2020,” the Wamda Labs and Payfort report say. “Their failure rate can be lowered; priority market share can grow faster and job creation can increase.
“Unlocking a virtuous cycle requires governments to step in and provide the foundations on which entrepreneurs, investors, and customers democratize financial services.”
“An alliance of policymakers, investors, innovative corporations, and entrepreneurs can place the UAE among Asia’s most promising fintech hubs. Lebanon, Jordan and Egypt stand good chances to become hubs for fintech as well.”
Will the banks and financial institutions be agile enough to get on board the periphery revolution? Or will they hang on in the center and become part of the dust of history? It is not clear which approach they will take. Embracing the coming future, however disruptive to antiquated business models, will surely benefit ordinary people across the region.