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OPINION

Digital bank stake takes Saudi’s PIF into new territory

It’s rare to see a sovereign fund backing a digital bank before its launch.

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Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, has emerged as a key investor in Saudi Arabia’s latest new digital bank. Sovereign wealth funds seeking exposure to digital banking plays is nothing new, but seeding one from scratch is an interesting step.

On February 15 the Saudi Central Bank, Sama, confirmed that the King and Crown Prince of Saudi Arabia had approved a licence for a new local digital bank called D360 Bank.

It will be led by Derayah Financial, which is a closed joint stock investment company known for its mutual fund and margin loan platform, but the PIF is named as one of the key backers among a consortium of individual and corporate investors.

Like everything else in Saudi, the news must be seen through the prism of Saudi Vision 2030, the roadmap for the Kingdom’s growth and transformation. Supporting the growth of the financial services sector is one of the key ambitions within this roadmap, and it’s also one of the PIF’s 13 strategic sectors within its 2021 to 2025 strategy outline.

There’s not a huge amount of money being deployed here: Sama says the new bank will be seeded with R1.65 billion ($440 million). It’s also not the first digital bank to be licensed in the Kingdom, but the third, following STC Bank and Saudi Digital Bank, which were licensed in June 2021.

It is interesting to see Saudi Arabia’s sovereign wealth fund coming in as a backer from the outset for a new financial institution

But it is interesting to see Saudi Arabia’s sovereign wealth fund coming in as a backer from the outset for a new financial institution. In this respect it is somewhat reminiscent of Singapore’s Temasek, which has its own internal teams helping catalyze development in financial technology, blockchain, digital payments and trade finance, among other things, creating the very enterprises in which it invests.

It seems a good call. The dynamics of Saudi Arabia – and the Middle East generally – suit digital banks: these countries have very young populations, high internet penetration, disposable income, widespread smartphone use and a trust of technology. Saudi Arabia has not been a pioneer in digital banking, but Sama can clearly see the penetration digibank models are enjoying elsewhere in the world.

Sama hopes that its support of the digital banking economy will add to a broader goal to prompt financial institutions to support private-sector growth. It also hopes that startups in banking and related technology will create their own economic force. In total, 19 Saudi financial technology companies have been licensed to provide payments services, consumer microfinance and electronic insurance brokerage to date.

The next step is to make it work. Licensing new digital players is easy enough. Ensuring there is a suitable environment for them to gain critical mass without bruising the market with unsustainable offers – that’s the next challenge.

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