Financial Technology (fintech) is a vast and all-encompassing term that evokes hope, cynicism and plenty of confusion. From Bitcoins to blockchains, various buzzwords are bandied about in a bid to appear economically ahead and digitally ready.  

But it’s a world that governments, companies and citizens ought to understand as we edge closer to cashless societies and services underpinned by technology.

The fintech space in the Middle East and North Africa (Mena) region is currently worth $2 billion according to Mena Research Partners, and is expected to rise to $2.5 billion by 2022.

It is still at a very nascent stage, but with 86 per cent of adults in the region remaining unbanked and with some of the highest mobile penetration rates in the world, the Middle East market is ripe for testing and scaling these new technologies.

Regulatory competition

The UAE in particular is nurturing its fintech sector, establishing funds and incubators designed to accelerate the growth of fintech companies in the country. Most recently, Abu Dhabi Global Market (ADGM) launched a digital sandbox to enable financial institutions and innovators to experiment on products and solutions in a digital platform environment.

“The objective of the digital sandbox is to help financial institutions build deep digital capabilities to tap market opportunities and promote financial inclusion through innovative technologies to better cater the underserved population in the Mena region,” says Richard Teng, chief executive officer at Abu Dhabi’s Financial Services Regulatory Authority (FSRA).

It follows the Dubai International Financial Centre’s (DIFC) Fintech Hive accelerator which launched in 2017 with 11 startups who went onto raise $10 million. The 2018 cohort is comprised of 22 companies.  

Meanwhile the Bahrain Development Bank launched a $100 million fund specifically for fintech in June 2018, while Egypt has produced several successful fintech startups including payment system Fawry, which exited for $100 million back in 2015.

This eagerness to attract and enable a fintech sector is creating competition between the different regulators in the region which benefits the wider market.

“The conversations with regulators are sophisticated, we see clear understanding and curiosity of the technology,” says Ola Doudin, co-founder and chief executive officer at BitOasis, a UAE-based cryptocurrency exchange. “So they design their regulations in a way that is friendly to the business and meets the requirements of regulation.”

No more middleman

Cryptocurrencies like Bitcoin and Ethereum are essentially a form of digital money, operating like a decentralised, peer-to-peer electronic cash system on the back of blockchain technology – a public digital ledger that records all transactions that take place.

Blockchain technology today has gone beyond its cryptocurrency roots and can be used for better traceability of a product’s lifeline, from food supply, to government decrees or even voting. The UAE government recently announced it would base all government transactions on blockchain by 2020.

“It’s [blockchain] a technology that transcends borders and industries and it’s one of those innovations that happens rarely, across every industry and completely shakes up current structures,” says Doudin.

For the unbanked, fintech solutions can provide an easy and hassle-free way of buying goods and transferring money, without involving a third party, like a bank.

Cutting out the middleman (and thus time and costs) is proving to be an attractive proposal, particularly for small to medium sized enterprises (SME) in the region who are turning towards crowdfunding and peer-to-peer lending platforms for funding instead of taking out a loan from a bank.

SME lending is half the global average in the region, so platforms like Jordan-based Liwwa which enables private investors to provide SMEs access to finance or Beehive, the UAE-based peer-to-peer lending platform that is also Shariah-compliant, can disrupt the banking sector.  

For the individual in need of instant cash, newly launched Buyback Bazaar services the 75 per cent of UAE residents who earn less than Dh5000 a month, providing cash in exchange for a standard item, a system that renders loan sharks obsolete.

Based in the UAE, it is an emergency cash-funding platform for customers who sell their possessions, like a phone or laptop to BuyBack Bazaar’s member shops, and then have the option to buy it back at a later date with an additional service charge of about Dh50. The company is hoping to incorporate blockchain technology into each transaction conducted on its platform.

“There is a dire and global need for more efficient and transparent lending platforms to disrupt illegal and predatory loan sharks operating in many countries,” says Pishu Gangalani, co-founder at BuyBack Bazaar. “This technology gives an element of transparency, everything is asset-backed, it’s not pure lending without any safety net around it. If a customer defaults, he won’t go to jail, he doesn’t lose his dignity.”

A vulnerable hype?

But not everyone is as enthusiastic about fintech. In an essay for Project Syndicate, Nouriel Roubini, a professor at NYU’s Stern School of Business, calls blockchain "the most overhyped - and least useful – technology in human history. In practice, blockchain is nothing more than a glorified spreadsheet”.

The level of transparency might make it easier to track financial crime, but it erodes privacy and like all technology, its ultimate vulnerability lies in its susceptibility to cyber attacks. Cryptocurrency exchanges are regularly hacked and any wealth lost on them is completely irretrievable. They’re also quite unstable as a currency - as of September 2018, cryptocurrency valuations had collapsed 80 per cent from their peak in January 2018. They also consume vast amounts of energy, enough to power a country the size of Austria. 

“Bitcoin is still largely regarded by the public as the ransom currency of choice for cybercriminals,” says David Warburton, senior threat research evangelist of Europe, Middle East and Africa (EMEA) at F5 Networks. “[Blockchain] could become the biggest disruptor yet for the digital economy. However, like any technology, blockchain is not immune to outside threats.”

Whatever the risks, the region and its regulators seem invested in fintech. According to Wamda Research Lab, the number of fintech startups will reach 250 by 2020, up from just 20 back in 2010, but it will require a great deal of education, the right regulatory environment and consumer trust and true proof of concept before people feel comfortable enough to vote in elections via blockchain or buy their house via Bitcoin.

Wamda Capital has invested in BitOasis.