Chris Kiew-Smith, head of fintech strategy at Abu Dhabi Global Market (ADGM)
Last October, on the sidelines of its inaugural financial technology summit, Abu Dhabi did something that had never been done before. It brought together the principal financial authorities from around the Persian Gulf (Saudi Arabia, Oman, the UAE, Bahrain, Kuwait and Lebanon) and sat them at a table with a single topic on the agenda: the development and regulation of fintech.
“It was the first time that we got together at a chairman/CEO level to talk about fintech and only fintech,” says Chris Kiew-Smith, head of fintech strategy at Abu Dhabi Global Market (ADGM).
The meeting highlights the focus now placed on financial technology in the Gulf, as the region’s financial centres commit to entering a space they have been slow to engage with until now. It also speaks to a difficult balancing act: the Gulf’s hubs would like to collaborate and learn from each other, yet they are also jostling for the status of regional fintech champion.
In fintech, the Gulf has found itself several steps behind rival financial centres in the US, UK and Asia, where authorities have been nurturing startups for longer. But as low oil prices push economic diversification to the top of the region’s agenda, governments and regulators have been arguing that financial services should now be given greater support, including through the conception and implementation of brand new technologies.
Of the regional powerhouses driving these efforts, Kiew-Smith says: “Oil is the main source of national wealth, and they are trying to get away from that. So they are investing very heavily in technology and financial services.”
Euromoney spoke to officials from Dubai, Abu Dhabi and Bahrain – the Gulf countries leading the push into financial technology – to assess how they are at once working together to drive the region’s collective growth in this sector and working to outdo one another as the most welcoming environment for financial startups. The picture that emerges is of a region eager to innovate, and in which no single hub can yet claim leadership.
Fintech has brought innovation to financial services at a faster pace than at any other time in living memory, crowding the minds of bankers, investors and customers with the prospect of blockchain, big data, machine learning and artificial intelligence.
Some financial centres have been quicker to adapt to this new state of play. London’s Level39, the hippest office space in Canary Wharf, was opened as early as March 2013 to provide an 80,000 square foot area where technology companies could be supported in the early stages of their development.
Some of the fintech firms that have gone through Level39 – from social trading platform eToro to cloud-based digital money platform Uphold – are among the leaders in their sectors today.
The Gulf has been a lot slower to enter this space, but it is now working hard to catch up, with fintech projects cropping up across its financial centres. All over the region, computer programmers race to develop software in crowded ‘hackathon’ events sponsored by governments and regulatory bodies. Around 400 participated in the UAE’s event in February, while another, in Bahrain, brought together close to 1,000 startups, investors and companies in early March, under the sponsorship of American Express.
The next was due to be held in Abu Dhabi in late April.
Conferences being held across the Gulf are turning to the latest innovations in fintech, too. On the sidelines of these events, regulators discuss financial technology with their peers as well as with firms in this sector, in a bid to build relationships that might one day translate into more formal collaborations – and into the creation and implementation of new regulation.
Financial services startups
Little research has been done on the fintech landscape of the Middle East and North Africa (Mena). The most extensive report published on the subject, by the Dubai-based venture capital firm Wamda and online payments company Payfort, dates back to 2016. The report found that the number of startups offering financial services in the region doubled from 46 to 105 between 2013 and 2015 and that the UAE was the most dynamic hub for such companies.
The number of such startups is now likely much higher thanks to recent regulatory efforts in the Gulf to support these firms in the early stages of their development.
The report gave good reasons for why the Gulf, and more broadly Mena, may be a fertile ground for fintech development. It said that around 86% of adults in Mena did not have a bank account, while lending to small and medium-sized enterprises in the region stood at half of the global average.
Wamda and Payfort also predicted that the volume of e-commerce there would quadruple over five years. They also projected around 250 fintech startup launches by 2020.
Already some of the region’s fintech companies have demonstrated their promise. Euromoney profiled two of them – the DFSA-regulated crowdfunders Beehive and Eureeca – last year. These firms were among the first to break into the region’s fintech space, crowdfunding dozens of the region’s companies and tapping the gaps in the market identified by the Wamda and Payfort report.
The growth of fintech in the Middle East is well under way, but the sector’s advocates in the Gulf realize that if it is to lead to sustainable economic development, rather than merely contribute further risk to the financial sector, it must be properly regulated.
The heads of Beehive and Eureeca told Euromoney that the increasing regulation of fintech would help, not hinder, expansion.
Regulators have been working to identify and nurture companies that may follow in the footsteps of these two firms.
At the Euromoney Bahrain conference in February, Bahrain made much of the launch of FinTech Bay – an area of the capital Manama dedicated to hosting fintech players. The launch complements Bahrain’s adoption of a regulatory sandbox in June 2017 – an increasingly common framework used by central banks to facilitate and encourage the development of financial technology in a safe environment, where budding companies can test and refine their technology ahead of possible regulation and wider implementation.
Abu Dhabi launched its RegLab in November 2016 and Dubai its FinTech Hive in August 2017, followed by the launch of a $100 million fintech fund in November. Saudi Arabia’s regulatory sandbox is due to open in April.
Abu Dhabi’s RegLab accepted five firms into its programme in May last year and another 11 in October, while Dubai’s Hive took on 12 last year – two of which ended up being granted an innovation testing licence by the DFSA – and another five this year.
Beyond regulatory sandboxes, the region’s regulators are contemplating other ways to promote technological improvement. In coming months Dubai is looking to extend its existing crowdfunding framework to real estate, while Abu Dhabi is making SME funding the theme of its upcoming events.
Abu Dhabi is also working on a know-your-customer facility, with the assistance of its three largest banks (First Abu Dhabi Bank, Abu Dhabi Islamic Bank and Abu Dhabi Commercial Bank) and its top three exchanges (the UAE Exchange, Al Fardan and Al Ansari), to allow these institutions to share information and better understand the identity of prospective clients.
Abu Dhabi expects to launch this facility within months and then expand it – including internationally – to other financial institutions. ADGM says it will be the first facility of its kind in the region. It hopes to partner with peers in Hong Kong and Singapore to give the project further reach.
Dubai’s Hive, meanwhile, is mentoring participants in the field of Islamic finance technology, by partnering with the Dubai Islamic Economy Development Centre.
“If we can create ties with other parts of the GCC and of the Middle East and North Africa, everybody wins. For us it’s all about collaboration, not competition” – David Parker, Bahrain Economic Development Board
International collaboration is an increasingly important part of fintech and several Gulf authorities have signed agreements with foreign regulators in recent months. Most recently Abu Dhabi and Bahrain entered into a partnership to share information about fintech and facilitate the movement of startups between those two hubs. It is the first such partnership between two Mena countries.
One of Abu Dhabi’s sandbox users, Now Money’s subsidiary Iboc, a firm that provides mobile banking technology for use by low-income migrant workers, has recently moved into Bahrain’s sandbox as a result of this collaboration.
The regulators of Abu Dhabi and Bahrain are now sharing information about Iboc, to improve each other’s monitoring and future regulation of such businesses.
Abu Dhabi is also working in more informal ways with Egypt and Saudi Arabia, to help them develop their fintech offering, ADGM tells Euromoney.
“If we can create ties with other parts of the GCC and of the Middle East and North Africa, everybody wins,” says David Parker, head of the financial services team at Bahrain’s Economic Development Board. “For us it’s all about collaboration, not competition.”
Still, while Gulf regulators have signed many such agreements, virtually all of them have been with far-flung peers, rather than with their nearest neighbours.
David Parker, head of the financial services team at Bahrain’s Economic Development Board
Dubai, for example, has entered into partnerships with regulators in Hong Kong, Malaysia and Australia, while Abu Dhabi has done so with Canada, Japan, Singapore, Australia, Kenya, France, China and Malaysia. Malaysia is important in both cases, because of its regulator’s knowledge of Islamic finance.
This focus on collaborating with distant markets reflects the fact that much of the know-how on financial technology is located outside the Gulf. When Silent Eight, a company that uses artificial intelligence to combat money laundering and the threat of terrorist financing, won an innovation challenge in Abu Dhabi, ADGM then arranged for the firm to demonstrate its product in Singapore, where it was more likely to find fintech specialists to learn from. Silent Eight is now working on a proof-of-concept and collaborating with a Singaporean bank, ADGM says.
But why encourage such firms to travel so far to meet potential partners rather than keep them within the region? It may have something to do with the fact that the region’s financial centres are also in competition with one another. As every financial centre in the Gulf is seeking to become the dominant force in fintech, they may prefer to partner with Singapore or London, so as to be seen there as the Gulf’s primary fintech hub.
However, the regulators say their job is to regulate, not to compete.
Peter Smith, managing director of policy and strategy at the Dubai Financial Services Authority, says: “I’m a regulator – you have to set aside the fact that some people might be trying to get the same business because, as a regulator, that’s not my job. My job is to regulate things as well and as effectively as I can.”
He says the region’s authorities are therefore willing to partner with anyone who can help them improve regulation, including, that is, with their rivals.
“Regulators here, compared to others in Europe and other jurisdictions, are probably more open with their appetite to adopt the latest technology” – Chris Kiew-Smith, Abu Dhabi Global Market
But in conversation with Euromoney, many regulators slip into promoting the firms they regulate, and extolling the advantages of doing business in their jurisdiction over others in the Gulf. They may not want this to be too obvious, but the support they provide fintech fits into their countries’ broader push to attract business.
Smith says Dubai’s regulatory focus on fintech is part of the Smart Dubai initiative – a campaign to promote the emirate’s technological development. In Saudi Arabia, meanwhile, fintech is to be part of the kingdom’s Vision 2030 – an ambitious plan to diversify its economy away from oil and rebrand itself as a society open to foreign capital and foreign ideas.
Wai Lum Kwok, executive director of capital markets at ADGM, readily extols the qualities of Abu Dhabi’s fintech firms. Of the work done by blockchain-powered securities exchange business EquiChain, for example, he says: “It is a very, very innovative and interesting experiment they’re doing”.
Kiew-Smith at ADGM says that the Gulf’s regulators are more likely than those elsewhere to push for fintech adoption and sing the virtues of their fintech offering.
“We have a government mandate to try and promote economic diversification,” he says. “Regulators here compared to others in Europe and other jurisdictions are probably more open with their appetite to adopt the latest technology.”
Dubai aims to outdo competition
As the Gulf’s financial centres compete over fintech, Dubai believes it can easily outdo all of its competitors. Smith seems almost surprised when Euromoney asks if Dubai will be able to fend off regional rivals in this space.
“What we see is that the ecosystem as a whole in Dubai is the most developed,” he says. “We have the best level of government support and involvement, and of government facilitation of technology-based businesses here than there is anywhere else in the Gulf region. The push for innovation from the Dubai government provides quite a significant starting point, quite a significant advantage to Dubai.”
Because Dubai is considered more attractive to expatriates and to the young, Smith thinks that the founders of international startups are more likely to settle there than anywhere else in the region.
“We have a situation where it’s easier for Dubai to attract talent from the broader region and from places like India, because of Dubai’s nature as a hub,” he says. “Dubai has well-established trading links with many western centres as well. So, the ecosystem for fintech and for technology development as a whole is the strongest here, stronger here than it is anywhere else in the region.”
But his confidence may be misplaced. Dubai is clearly ahead of regional rivals when it comes to banking as a whole; in fintech, however, the emirate has multiple programmes in place to foster that sector of activity, but so do its neighbours.
Bahrain has long been superseded by Dubai as the Gulf’s pre-eminent financial sector – and it knows it. But it hopes it can reclaim a piece of the pie through fintech, hence the recent launch of FinTech Bay.
“One of the ways in which we’ve been positioning Bahrain into a fintech hub is to present its small size as an advantage,” says Parker, of Bahrain’s EDB.
Fintech firms, the argument goes, would have more flexibility and government support than elsewhere because Bahrain is not set in its ways, with its attention split between many different sectors.
“[This year] will be a very exciting year for Bahrain because of companies coming into the sandbox but also because of those coming out of it,” says Parker.
Abu Dhabi, meanwhile, believes that it can gain a reputation as the Gulf’s fintech champion in part by being the one to arrange meetings of fintech leaders from around the region, as it did last October.
“One of the key roles we’re trying to play is we try to demonstrate a certain amount of leadership, we try and convene the other regulators in the Gulf,” says Kiew-Smith. “We were, for example, the very first to have a fintech programme – our regulatory laboratory – and we’re very pleased to see that a lot of other regulators have launched similar initiatives very close to us – in Dubai, but also in Egypt.”
It is still early days for fintech in the region. The Gulf has much to do if it is to become a credible competitor to other financial centres. According to the consultancy Accenture, not only are the US and UK well ahead of their rivals in this area but they are also growing a lot faster than anyone else.
The Gulf thinks that if it acts fast – especially with regulation – it may yet catch up. Kiew-Smith points out that new rules typically take years to produce and implement in London, compared with just months in Abu Dhabi.
Still, Abu Dhabi and its neighbours must be careful not to prioritize speed over safety. Nothing would harm fintech and the broader financial industry in the Gulf more than an early-stage debacle of a fintech product that was not properly supervised by regulators before being deployed to the public.
Regulators say they are aware of the risks. The DFSA, for one, has issued a warning to investors on initial coin offerings after seeing press coverage in the UAE that it thought “was giving the public perhaps too rosy an impression of ICOs”, according to Smith.
Abu Dhabi’s Kwok is more broadly positive on the matter: “If it is used in the correct way, [an ICO] is a very effective, very novel way of raising capital, and that itself is a very promising prospect. We think it can add a lot of value through other fintech players who want to raise capital in that manner.”
Such disagreements are healthy for new and largely untested sectors such as financial technology. Having regulators debate these ideas openly through official and more casual channels is also worthwhile. What the region must avoid, however, is an overly competitive mood that leads to lax regulation that may put a jurisdiction ahead of its rivals but hurt the broader market’s security in the long run.
