The number of Fintech startups have surged in the last 10 years: tech ventures which are positioned to serve and disrupt financial markets and the associated knowledge industries in the Middle East and North Africa (MENA) region. As of November 2020, the region has around 425 Fintechs as per the Fintech Galaxy Marketplace.
Among ten different verticals grouped under the umbrella term “Fintech”, almost two thirds are found in three verticals: ventures in the “Payment, Transfers and Remittances” vertical take the lead with over 140 startups, followed by “Lending and Crowdfunding” and “Wealth and Finance Management” with 67 and 64 respectively.
A look at distribution of Fintechs per country shows the United Arab Emirates leading with 154, followed by Saudi Arabia (86) and Egypt (67). Bahrain, currently in fourth place with 40 startups by our count at Fintech Galaxy (noting that these numbers vary between different reports and methodologies), is pressing ahead with Fintech infrastructure initiatives such as the new Central Bank of Bahrain (CBB) digital lab FinHub 973. Launched in October 2020, the platform aims to stimulate open innovation and connect financial institutions in Bahrain to fintech startups from across the globe by offering an API environment, a global Fintech marketplace and digitized regulatory sandbox. Lebanon, by our research, is the home country of 28 Fintech startups in Q4 2020.
The surge in MENA Fintech startups began about seven years ago when 29 new startups were recorded in 2014. Although the 2020 cohort of MENA’s new Fintechs – comprised of 21 in total – sharply dropped from 80 in 2018, primarily due to the uncertainties around the COVID-19 pandemic. However, new opportunities are now rising for Fintech players given the heightened need for digital banking services and increased customer sophistication.
I do not see a drop in passion for creating financial disruption in this region. And where there is passion, there are investors. It’s estimated that the Fintechs in the region will raise $2 billion in venture capital (VC) funding by 2022 — and the sector only found footing in MENA three years ago.
MENA fintech ecosystem trends
We have seen a paradigm shift in recent years as policy makers across MENA markets take steps to diversify their economies with a focus on making them less dependent on government spending and fossil fuels and more driven by innovation and sustainability. The financial sector, which has long been ripe for disruption, stands to play a key role in this shift, with demographics and financial inclusion being fundamental drivers. According to the World Bank, two-thirds of the adult population in the Arab world don’t have a bank account, and SME lending is well below the global average. Indeed, fostering healthy Fintech ecosystems is seen as a leading pillar of economic diversification across member states of the Gulf Cooperation Council.
Fintech regulatory regimes started emerging in the region in 2017. The Middle East has since become a hotbed of regulatory development, with several jurisdictions competing to establish themselves as the leading Fintech hub.
Fintechs were initially associated with payment and lending solutions and a vast majority of MENA Fintechs are concentrated in the digital payments, transfers and remittance sub-sectors. But as the ecosystem develops, we see startups increasingly incorporate more advanced technologies like blockchain, machine learning, AI and big data into their services. These newer technologies allow Fintechs to mitigate risk and offer a more personalized approach to customers.
And Open Banking adoption in the region is just kicking off; this regulatory framework accelerates collaboration between traditional banks and Fintechs and has significant potential to transform MENA’s financial landscape.
COVID-19 has served as a catalyst for digital transformation across a range of sectors, and this is particularly true for financial services and Fintech in the GCC. But it is worth noting that while the pandemic has served as a catalyst, this was a revolution that was already taking place. Between 2017 and 2019, the value of global Fintech transactions increased at a rate of over 18% each year, reaching over $20 billion in 2019.
MENA fintech regulations
A changing regulatory landscape is the main catalyst for fintech growth in the MENA region. Almost all the countries in the Gulf region are trying to diversify their economies, moving towards knowledge-based economies where research and development, and innovation, are main drivers of growth.
Over the past few years, we have seen substantial efforts to design more diverse, competitive, and innovative economies. Government driven initiatives in several Arab countries have been taken to set up tech incubators, accelerator programs and regulatory sandboxes to support the growth of Fintechs. The central banks/ financial governing bodies in the UAE, Bahrain, Egypt, Oman, Lebanon, Jordan and Saudi Arabia have introduced Fintech related regulations and licensing frameworks in a variety of areas such as crowd funding and digital payment services. We’re also seeing regulators launching initiatives around digital currencies and cryptocurrency.
Even though all countries in the region have a commonality in objectives, the approach towards regulatory initiatives and enforcement varies. In some countries, the central banks have taken it upon themselves to do it while in others, economic free zones and different regulatory authorities have played the main role.
The governments across the region are also setting up sandboxes, meaning controlled environments of somewhat relaxed regulations to make it easy for Fintechs to test their services. Some governments and regulatory bodies in the region have also teamed up with different regional and international players to launch Fintech accelerators and incubators.
Both established players and entrepreneurs are seizing opportunities and filling market gaps across a multitude of sub-sectors.
As governments continue to implement favorable incentives and regulatory initiatives, opportunities will continue to develop, giving the region’s Fintech industry the potential to elevate overall welfare of participating countries. We are also seeing government action and investment in this space (eg. Saudi, Bahrain, Egypt, UAE) intent on creating job opportunities, as well as greater financial independence. Investment varies greatly across MENA, but I think we’ll start to see this trend expand across the region as there still are many pain-points along the journeys of Fintech startups.
Mirna Sleiman is the founder and chief executive of UAE based communication and integration platform Fintech Galaxy.