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Fintech in the Middle East

Developments across MENA

18 July 2019

In this report, which updates the report we published in October 2017, we highlight key trends and developments in financial technology (fintech) across 10 different MENA jurisdictions. Fintech continues to transform the delivery of financial services across the region and remains high on the agenda of industry participants and governments seeking to develop and modernise and, for GCC governments, to diversify from natural resources.

Regulatory sandboxes, tech incubators/accelerators and government-driven initiatives support a growing base of fintech start-ups. Regional and international financial institutions are rolling out digital platforms and innovative solutions. World leading licensing regimes for crowdfunding and crypto-business are now in place in the UAE. In the past year Clifford Chance has worked closely with regulators, fintech companies, financial institutions and corporates on the existing and emerging regulatory frameworks.

Across the Middle East, fintech is driven by technology-enabled innovation that improves existing financial services, but also provides routes for unbanked populations to access financial services.

Government support and tech developments, together with high smartphone penetration, have contributed to the development of start-ups in the Middle East and the GCC in particular.

As of December 2017, fintech investment in the Middle East remains a small proportion of the massive amounts being invested globally, and total fintech start-ups in the Middle East and North Africa were valued at US$66.6 million (Magnitt State of the Middle East and North Africa Funding report). The majority of investments/start-ups have been in the UAE. However, by 2022, the fintech market is estimated to reach a value of US$2.5 billion across the broader MENA region, according to Accenture. We see an increasing number of exciting mandates for the future.

From a regulatory standpoint, we continue to see rapid change and our work in this area has expanded since our last report to comprise a growing range of issues. The central banks of Egypt, Bahrain, UAE and Jordan have adopted specific initiatives to regulate digital payment services. Lebanon, the Dubai International Financial Centre (DIFC) and Bahrain introduced crowdfunding regulations (as detailed in our last report). During 2018, the Abu Dhabi Global Market (ADGM) also implemented crowdfunding regulations, though its private financing platform licensing framework, and created a licensing regime for crypto-asset business (not ICOs). The UAE securities regulator has announced plans to license ICOs in the coming months and, as part of the Emirates Blockchain Strategy 2021, the UAE government has announced its intention to use blockchain for 50% of federal government transactions by 2021.

In the sandboxes, Clifford Chance continues to support the DIFC Fintech Hive and ADGM Reglab, which have expanded rapidly in the UAE financial free zones. More and more of their initial participants are successfully raising international capital and entering the market, such as Sarwa (a robo-adviser platform in the DIFC). ‘Onshore’ UAE will also host a similar fintech sandbox, as announced by the Securities & Commodities Authority (SCA) earlier this year. The Bahrain Fintech Bay has had success in the crypto-space by hosting one of the first licensed crypto-exchanges and the Sharia Review Board in Bahrain has certified Stellar, the first DLT protocol to be Sharia-compliant. Kuwait shall also host a regulatory sandbox, with the Central Bank of Kuwait announcing such plans in November 2018.

In a major development for the region, Fintech Saudi has been launched, with both the Saudi Arabian Monetary Authority (SAMA) and the Capital Markets Authority (CMA) as partners along with a host of banks, service providers and fintechs. The CMA also created a fintech lab and is issuing permits for financial technology experimentation. Finally, in the UAE, having received input from a public consultation, the SCA Board of Directors approved draft regulations in July 2018, setting the regulatory controls for the fintech sector in the form of a pilot regulatory environment (a UAE sandbox) to enhance and support the financial integrity of fintech companies.

Dialogue is underway between regulators in the region, especially amongst the GCC, regarding the challenges and opportunities presented by the evolution of fintech. For example, we are seeing the first signs of regulatory sandboxes seeking to work together across the GCC and share approaches. We have also seen many public and private institutions working together on new initiatives and the market is recognising the power and speed of collaborative approaches in fintech.

We have worked with a number of regulators and market participants in the region in this space and found a positive trend towards cooperation and openness.

In Saudi Arabia, it was recently reported from some sources that cryptocurrencies have been made illegal. However, a public announcement by a Standing Committee consisting of SAMA, the CMA and other KSA authorities stated that cryptocurrencies were not regulated within the Kingdom and issued a warning, similar to many other jurisdictions, on the dangers of speculating in this market. SAMA has actively supported the adoption of blockchain in payments and signed an agreement with Ripple this year to help banks improve their payments infrastructure in the Kingdom.

Across the Middle East, legislation is in place to recognise e-commerce and digital signatures, with more recent e-commerce regulations covering electronic payments in certain jurisdictions, such as the UAE and Kuwait. However, most e-commerce regulations still contain significant exclusions for certain types of transactions (such as real estate, negotiable instruments and local law notarisation requirements), therefore limiting the use of e-contracts and electronic communications in these areas. We expect this to be addressed in the near future. In May 2018, the Dubai Land Department announced that it is creating a “Real Estate Self Transaction” platform for digital transactions in land for 2020.

We hope you find the information and insights in this report useful and look forward to discussing, and working with you on, many of the upcoming developments in the ever-evolving Middle East fintech space.