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Fintech firms have been growing at an increasing pace in the Middle East, particularly in the Gulf states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates. As the open banking and open finance conversation hijack the global fintech discussion, a renewed focus on open banking in the Middle East is taking place.
In a survey of central banks and monetary authorities representatives in 18 Arab countries, 94% said they view their national open banking frameworks as critical in the early stages of this new industry. As consumers eagerly adopt innovations in banking, with almost a quarter of Middle Eastern customers already using digital, open banking is positioned to create another wave of new disruption in the region.
Innovation has always been second nature to many countries in the Asia-Pacific region. In particular, Malaysia and Indonesia have consistently ranked amongst the top OIC countries in Islamic finance offerings like Sukuks and Mudharabah. However, what has changed in recent years is a new generation of Sharia Fintechs bringing a fresh approach to digital Islamic finance and leveraging technology to bring financial inclusion to millions.
Financial inclusion has been a trending topic for some time. Traditional banks, in their previous attempts to address it, faced challenges like limited access to services, inadequate identity documentation, and low financial literacy.
However, there has been a recent acceleration towards financial inclusion. Inspired by disruptive fintechs, banks and financial institutions are reimagining their product roadmaps and strategies, embracing digital banking and transformation. These innovations have been welcomed warmly, as they swiftly uplifted people out of poverty, improved lives, and served as a lifeline for millions globally.
Open Banking is a growing trend in the MENA region.
Open banking in the Middle East exists on a spectrum, from models driven by regulators to those led by industry. Among these countries, Bahrain, Egypt, and Kuwait exist on the regulatory side of the scale, similar to the European Union, while UAE, Saudi Arabia, and Qatar are following an industry-led approach, as in the United States. Oman’s framework is yet undetermined.
Bahrain
With its relatively small oil reserves, Bahrain is relying on its burgeoning financial sector. Bahrain’s Fintech Bay, a partnership in which the Bahrain Economic Development Board (EDB) has joined with a consortium of industry stakeholders, shows how involved the public sector is in encouraging fintech in this country.
Additionally, Bahrain is the only country in the region with open banking regulations, which require financial institutions to open up APIs. In October 2020, Bahrain created the Bahrain Open Banking Framework (OBF) to define standards and encourage the adoption of open banking.
United Arab Emirates
In UAE, open banking is industry-led, with guidance from the Abu Dhabi Global Market (ADGM) and Dubai International Finance Centre (DIFC). These “free zones” are trade areas that offer preferential tax and customs rates, along with data privacy laws.
ADGM has developed its API regulatory guidance, while DIFC has been collaborating with industry players to establish an API sandbox. Consequently, there is significant enthusiasm among banks in the country, with up to 88% of UAE banks eager to open up their APIs and engage in collaborative efforts within the open banking space.
Saudi Arabia
Saudi Arabia’s approach to open banking began with impetus from industry but has shifted toward regulatory involvement over time. In December 2019, the Saudi Arabian Monetary Authority (SAMA) published draft payment services regulations, which do not require opening up APIs or upholding particular security standards.
Subsequently, SAMA and the country’s central bank began to issue licenses to fintechs working in the payments space. Despite the growing role of regulators, the industry is still a potent force here. For example, one fintech company creates a universal API platform to connect banks with third parties in Saudi Arabia and Bahrain.
Egypt
Egypt’s developing open banking scene is also regulatory-focused. In 2019 the government passed a data protection law. Currently, the Egyptian Banks Company, a venture co-owned by the country’s central bank, the Ministry of Finance, and several national banks, is creating formal regulations for open banking. The industry is taking cues from these developments and pushing ahead: Banque Misr, the nation’s second-largest commercial bank, plans to launch a digital-only bank in the second half of 2021.
Jordan
The Central Bank of Jordan has set up a Regulatory Sandbox to drive digital innovation, recognizing the criticality in banking technology driving financial inclusion. In addition, any third-party provider who wants to participate in open banking in Jordan needs to be approved by the Financial Conduct Authority (FCA) or a European equivalent.
Iraq
The Fintech space in Iraq is not currently subject to any particular legislative or regulatory provisions. However, most fintechs need to comply with specific laws set out by the Central Bank of Iraq (CBI) that apply to banks and financial institutions when carrying out any regulated activities.
Lebanon
At present, Lebanon has not adopted an all-inclusive legal framework to govern fintechs or non-banks. For the most part, fintech and digital banking services are offered by traditional banks and institutions licensed in Lebanon by Banque du Liban (BDL), the Lebanese central bank.
Future Outlook
Open banking in the Middle East presents an opportunity for economic diversification and reduced reliance on oil. The region’s simultaneous response has created a competitive open banking hub, fostering exponential industry growth. Regulatory-dependent countries require vigilant compliance, while market-driven environments face pressure to develop aggressive strategies. Despite this, the near-term forecast for open banking in MENA remains optimistic, driven by increasing competition and coordination.
MENA and GCC states are rapidly catching up to their international peers in terms of regulations and widespread adoption of open banking and open finance innovation. Traditional financial institutions, particularly in Islamic Finance, are partnering with technology experts to overcome technological challenges. This partnership allows banks to focus on unique products and services while leveraging cutting-edge technology.
The market shift has benefited both consumers and fintechs, providing broader access to Sharia-compliant digital solutions that align with people’s needs and lifestyles. However, untapped markets in the APAC region with unbanked populations still offer opportunities for Sharia fintechs.
With a global Muslim population of over 1.7 billion, the revolution in Sharia-compliant digital banking is reshaping market dynamics. The emerging dynamic between traditional Islamic institutions and fintechs disrupts the industry as they compete to serve the region’s unbanked populations, demanding innovative digital banking solutions that adhere to their halal lifestyles.
Tagged:
- fintech, mena, Open Banking, services
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Tamer Al-Mauge, Managing Director at Codebase Technologies
A highly qualified Business Management Professional in the Financial Technology field with over 16 years of experience within the financial technology banking, retail and IT Industries, Outsourcing Sectors including exposure to Global Markets. Having worked for a world leading organization such as NCR Corporation for more than 12 years Middle East and Africa.
