The Atlantic Council’s empowerME Initiative in partnership with ABANA is convening a virtual event series to shed light on the changing financial technology (FinTech) landscape in the Middle East and North Africa (MENA) region, identify challenges and opportunities, and explore policy recommendations.
The first webinar in the series held on October 26 focused on financial regulation and reform and was moderated by Atlantic Council Nonresident Senior Fellow and Oliver Wyman Senior Partner, Dominik Treeck, and featured DIFC FinTech Hive Executive, Vice President Raja Al Mazrouei, Central Bank of Bahrain Fintech & Innovation Unit Director, Yasmeen Al Sharaf, and Qatar Financial Centre Senior Advisor, Thaddeus Charles Malesa.
The key points made at the event are summarized below.
Objectives in building a FinTech ecosystem and what success looks like
- Yasmeen Al Sharaf noted that it wasn’t formerly part of a central bank’s role to host and incubate startups. But, now, during the context of digital transformation—also called the Fourth Industrial Revolution—central banks have started encouraging innovation. In Bahrain, they seek to “act as an enabler to innovation within the financial services sector by putting in place a supervisory environment to help identify new emerging business models, test them, assess risks, and then come up with the necessary regulations.”
- Al Sharaf added that in 2017, Bahrain created the first on-shore regulatory sandbox in the region, with more than 150 participants and applications coming in from all over the globe, including MENA, Asia, and the United States. She said that “regulators have learned a lot from solutions tested” and then “can update regulations and laws to support emerging business models.”
- Raja Al Mazrouei explained that the “Dubai International Financial Centre (DIFC) is home to three thousand financial services companies” and, therefore, “saw an opportunity to bring financial institutions closer to technology and enable startups to tap into markets and opportunities.” DIFC launched the FinTech Hive back in 2017 to introduce financial institutions to new technology. Ten startups participated at the time, and the program continued and included more regional and global startups and more financial institutions.
- Al Mazrouei elaborated that “most technologies need regulation and so the DIFC’s regulatory arm, the Dubai Financial Services Authority, works closely with technology startups to learn how the technology is affecting the sector” before tailoring progressive regulations accordingly. New technologies are launched in a controlled environment to examine regulatory requirements and this has been a “very successful model,” Al Mazrouei stated. The DIFC model also enables startups to get commercial licenses and permits at subsidized rates, which lowers barriers to entry. The FinTech Hive has accelerated around 120 startups so far and is graduating forty-three in November. The startups have raised over $350 million in funding, generated eighty-five proofs of concept, and put fifty products in the market, including chatbots, robot advisory solutions, peer-to-peer lending, crowdfunding, and machine learning-based artificial intelligence for compliance and regulatory requirements. Al Mazrouei added that, currently, the FinTech Hive is working “online with virtual experiments and startups don’t need to come to the United Arab Emirates (UAE)” right away—they can begin the program remotely.
- Thaddeus Charles Malesa explained that Qatar currently “offers FinTech startups partnerships with national champions, which are some of the largest companies in the MENA region.” He added that Qatar’s sovereign wealth fund also provides funding to some of the startups.
- Malesa explained that the Qatar Financial Centre helps FinTech startups explore the local market through its licensing platform. He added that Qatar FinTech Hub is led by Qatar Central Bank and focuses on the following priorities: (1) payments, (2) RegTech firms, (3) small and medium-sized enterprises, and (4) Islamic finance. Qatar also has incubator and accelerator programs that have completed two waves with over forty companies and also offer startups access to their angel and venture capital (VC) investors network.
Challenges for FinTech regulators
- Al Sharaf said that the biggest challenge “is trying to keep up with the pace of change in technology and emerging business models. We have to always be on the outlook and keep research up to date.” She grouped the obstacles for regulators into three categories: (1) the emergence of new business models with risks that regulators have to understand and measure, (2) the lack of necessary laws today that would support emerging business models, and (3) the new skills that supervisors and regulators need, which require investment in training and up-skilling. To address these challenges, Al Sharaf stated that the “best solution is the creation of supervisory testing environments on a smaller scale, which can then be deployed to the market once the regulatory checks are completed.” She cautioned that understanding the local context is critical because “what works elsewhere in the world may not work in every market.”
- Al Sharaf contended that “a new skillset is needed for regulators” but underscored that it “takes a whole ecosystem to make this work. Without the support of other key stakeholders, regulators can only do so much. We also need buy-in from the public and private sector, including incubators, accelerators, and funding from VCs. It takes a whole army to make this happen and for them to evolve.”
- Al Mazrouei said that “The major issue with regulators is really time to market. You want to grow, scale, and expand with partnerships. It’s really frustrating if regulations aren’t ready.” However, she added, “volume for regulators is also an issue.” She explained the FinTech Hive approach: “We try to stay friends with regulators and invite them to our events, so they get insights into what is happening and how fast it’s happening. Before we accept a FinTech Hive cohort, we invite regulators to meet with startups for their feedback.” If a startup’s idea takes too long to regulate, they opt for a technology that has a better chance of making it through the necessary hoops more quickly, she noted.
- Al Mazrouei added: “Regulators have been caught by surprise during the FinTech boom. They followed the traditional way of regulating financial services and now technology is challenging their daily work. Regulators have a huge responsibility and, in the UAE, it’s more complex because you have regulators with different jurisdictions. How do you bring the whole ecosystem together to work toward enabling technologies?” She explained that the DIFC FinTech Hive tries to bring people together to discuss opportunities and challenges and go through an experiment to find enabling regulation. “How fast can we do it remains the question,” she stated, adding that “Bahrain is very impressive in their speed.”
- Malesa further explained that commercial players are frustrated when regulations are not fully in place for companies. He noted that advanced applications are only now starting to be addressed with regulations. He argued that “regulators should shift to a more matrix-like approach as opposed to the traditional entities and products focus. They need to shift to activities and entities such as real-time payments and new digital banks.” He added that Qatar is also hampered slightly by having multiple regulators and that “this could be sharpened in terms of focus if FinTech is overseen by a single regulator, and we see this in payments where Qatar Central Bank is more in charge than any other body. We are all learning as we go. Qatar is learning from the experiences of Bahrain and the UAE as well as other FinTech hubs in London and Singapore and absorbing new skills and learnings.”
Special challenges such as regulating BigTech
- Al Sharaf said that “BigTech typically holds certain advantages over traditional financial institutions. They sit on huge datasets, which gives them an edge. We have already started to see BigTech getting into payments, such as Google Pay, and the provision of credit and insurance services as well. The penetration of BigTech into financial services puts regulators on alert since those companies can grow too big to fail. We need to create a level playing field for BigTech and traditional financial institutions with rules that will protect access.”
- Al Mazrouei expressed her concerns, saying “BigTech has access to all sorts of social, educational, and financial data. We’ve seen this data used and abused in many different ways.” She gave an example of her son asking her if Facebook should be permitted to have a currency and the problems they discussed about granting one entity so much power. Al Mazrouei said that the task ahead is to “control barriers to create consumer safety” and that “regulators can play an innovative role and build trust in the system.”
Women in the FinTech ecosystem in MENA
- Al Sharaf highlighted the “huge role” women play in Bahrain and highlighted the first woman leading the country’s parliament, Fawzia Abdulla Yusuf Zainal, as well as the Supreme Council for Women. She added that women are also playing a significant role in Bahrain’s financial services sector and are now represented on boards and at executive management levels as well. She added that Bahrain has a dedicated women in FinTech committee with government backing.
- Al Mazrouei stated that “women co-founded FinTech businesses in the UAE are around 5 percent,” and the country has launched a female talent accelerator program that has so far supported sixty women, two of whom have founded their own startups. She added that the UAE sees a great opportunity to grow in this area.