The first recorded banking transactions in history are believed to have taken place more than 4,000 years ago in ancient Sumer. Today, the Sumerian civilization is long gone – but the spirit of financial innovation is still alive and well in a part of the world we now call The Middle East.
Spread across three continents and encompassing 18 countries (depending on who you ask), the Middle East is hugely diverse. It is home to nations like UAE, which is a hotbed of innovation of 24% of the region’s fintechs, yet also has more than 800 million unbanked people.
Deloitte has described this region as “one of the world’s highest-potential fintech ecosystems” and last year released its first ever study investigating its financial technology sector.
The Middle East is one of the world’s highest-potential fintech ecosystems.
It found that 82% of Middle East banking customers are “willing to start using fintech solutions”, although just 22% of the region’s banking customers currently are currently using fintech solutions today, which means there is a “significant growth potential to address this gap”.
Banks in the Middle East are “keen to engage with fintechs in a broad range of exploratory projects” but are “reluctant to integrate fintechs into their strategy, as they prefer to follow a ‘wait and see’ approach”.
S&P Global found that the Gulf Cooperation Council (GCC) countries of Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates are “the most ready for fintech” of all nations in the entire Middle East and Africa region.
“The key driver is demand – the preference by clients for digital banking,” it wrote. “Moreover, these countries enjoy the ready availability of financial capital. Their banking systems are strongly capitalized – we estimate the average risk-adjusted capital for rated banks was at close to 12% at year-end 2018. In addition, they are typically net exporters of capital, and some of their governments set aside funds to push forward the fintech agenda.
“For example, the DIFC in 2017 launched a $100 million fund to help establish, grow, and upscale start-up and growth stage fintech firms. Similarly, Bahrain Development Bank and the Economic Development Board of Bahrain have launched two separate funds of $100 million each to support fintech. We believe that the willingness of and actions by regulators and the markets to innovate will be key to maintaining high-quality services by efficient and robust servicers.”
To help you understand this fascinating and historically pivotal region, here are three of the dominant trends in the Middle Eastern fintech scene right now.
The Middle East looks set to become a centre of peer-to-peer (P2P) lending, with Saudia Arabia expected to become the sector’s “capital”.
This emerging industry allows investors to directly lend to consumers or businesses. In 2020, there were 12 P2P lenders operating in Saudia Arabia out of a total of 60 fintechs, according to P2P Finance News.
In February 2021, a SME Crowd Lending company called Raqamyah raised $2.3m in a Series A fundraising round led by institutional and angel investors. Then just one month later, the Saudi-based shariah-compliant crowdlending platform Lendo won $7.2m in Series A funding. It offers “instant short-term finance-against-invoice solutions”.
Lendo wrote: “The concept of peer-to-peer (P2P) lending, also known as social lending or crowd lending, is an alternative financing method that allows individuals to borrow directly from other individuals. This method is gaining increased popularity over traditional financing (such as banks) as it cuts the hassle of a middleman, requires no physical inconvenience from either parties, reduces the waiting time from weeks to barely a few days and allows flexible terms as compared to banks.”
Millennials and Gen Z are driving demand for new financial apps and services which offer modern abilities in a shariah-compliant manner.
This demand is inspiring the creation of new start-ups, but also collaborations between international players and new movers on the local scene.
Earlier this year, Mambu, a pure SaaS banking platform, and Ta3meed, a leading Islamic fintech in trade finance in Saudi Arabia, entered into a “strategic partnership agreement to deliver innovative digital Islamic financing for SMEs and investors in the region”.
The rise of Islamic fintech has been enabled by forward-thinking policies such as the establishment of a fintech regulatory sandbox in Saudi Arabia, which was launched in 2018. The fintech market in Saudi Arabia is expected to be worth $33 billion in transactional values by 2023.
“Saudi Arabia is fast becoming an innovative fintech hub built on a strong ecosystem,” Mambu wrote.
Lending and payments are two areas which are driving innovation in Islamic fintech. The Middle East is also generating interesting “fintech for good” projects involving the payment of Zakat – a charitable donation paid by all Muslims.
In Dubai, zakat can now be paid directly through the government app DubaiNow, demonstrating that ethical and shariah-compliant finance can be enabled by technology.
Start-ups offering short-term credit are “enjoying exponential growth” in the Middle East, Reuters reported this year.
Digital buy now, pay later (BNPL) has only recently arrived in the region and is seen as an alternative to cash on delivery, a common payment method for online purchases in the region.
The challenge to BNPL services lies in offering the ability to pay for products without the service working like traditional credit, which is forbidden under Islamic law.
At least 10 major BNPL start ups have launched in the Middle East in recent years, with the Saudi-based Tamara recently raising $110 million in debt and equity.
“We’re constantly having to re-forecast our numbers just because we constantly get surprised by the consumer adoption,” Tabby Co-Founder and Chief Executive Hosam Arab told Reuters.
To explain how it offers BNPL services which are still shariah-compliant, Tamara posted a FAQ question which said: “Our profit comes from fees that we collect from the stores you buy from, and not from you.”
This combination of ancient laws with modern technology is a demonstration of what’s happening this fascinating region, where old and new collide to create unique fintech products that serve local markets as well as providing ethical alternatives in other territories across the world.
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