The fintech industry in the MENA region is currently a “$2 billion market and annual growth is expected to reach $125 million by 2022”. Investments are being made to ensure that the banking industry can connect with consumers through technological innovations while also enabling more people to receive access to banking services. According to the 2017 Global Findex, access to formal credit in the Arab world is less than half of the global average, which can hinder development and economic growth. Financial technology solutions, such as blockchain, can thus play a pivotal role in increasing financial inclusion where it presents solutions to traditional banking restraints, such as physical branch presence and access. What is blockchain then and how can it contribute to financial inclusion?
Blockchain is best known for its use as the core operating system for crypto-assets and currencies like Bitcoin – a peer-to-peer version of value storage that allows online payments to be sent directly from one party to another without going through a financial institution. Satoshi Nakamoto, a pseudonym for an unknown individual or group, released the white paper for Bitcoin in October of 2008 and launched the newly developed cryptocurrency in 2009; which is the first to utilize the underlying distributed ledger technology (DLT) of blockchain.
A blockchain is an immutable and encrypted ledger system that is distributed across a decentralized network of independent computers that update in near real time. The beauty of a distributed ledger system is that it allows for each user to prove the record is uncorrupted and was accepted by the majority to be accurate. A plethora of businesses, governmental agencies, and not-for-profit organizations are already creating blockchains to solve organizational friction with great success. Blockchain’s benefits—security, efficiency, and speed—are readily applicable to the public and private sector and the technology’s potential helps explain why many industries such as fintech, supply chain, critical infrastructure, education, and scientific research among others are actively exploring its applications. The unique characteristics and benefits of blockchain make it an appealing tool for integrating the public with the various data platforms for different use cases, especially in emerging markets.
While blockchain has the potential to transform the way we do business, it also has challenges that need to be considered. The legal and regulatory environment surrounding blockchain is still under development and is subject to future unknown controls. Integrating legacy systems to work with the blockchain will require significant IT investment as well as retraining the workforce to use the new system, and due to the relative newness of the technology, there is a limited number of live projects being tested at full scale; which means there could be unknown security issues that would need to be addressed.
In the financial sector, blockchain technology facilitates services and transactions due to its ability to keep records of the account holder’s transactions in an immutable ledger, and to provide an in-depth data source to run better algorithms to determine loan amounts, terms, and interest rates. Utilizing blockchain to automate underwriting and loan distribution will reduce the time and labor costs for financial institutions as well as reducing their operational risk. Recently, IBM announced a partnership with CULedger to create a self-sovereign identity platform for credit unions to streamline identification authorization and compliance across credit unions allowing them to provide services to people who do not have access to financial services. This partnership could ultimately lead to the development of the first live project for underwriting and loan distribution.
As mentioned above, in the MENA region, there is a recent Fintech boom, with the majority of startups (three out of four) based in the UAE, Lebanon, Jordan or Egypt; with the UAE being the most dynamic hub. Under Dubai’s International Financial Center, there is Hive – an accelerator for fintech startups who are targeting innovative solutions for the MENA region and are partnered with several banks, such as Abu Dhabi Islamic Bank, Emirates NBD, First Abu Dhabi Bank, Riyad Bank and Standard Chartered. Other examples of startups include Ajar Online; a startup that allows users of their platform to pay rent via their mobile app and has created a partnership with Ahli United bank and Warba Bank; and FOO, a Beirut-based startup provides digital solutions to the financial industry and was the first HCE (Host Card Emulation) mobile payment app in Lebanon and the region.
There is a new wave of growth in technological innovation in the Arab Region. The uptick in startups is very encouraging but the quality of the infrastructure in many countries in the region (e.g. unreliable internet speed, high prices of connectivity, and poor network coverage) remains a challenge to the widespread adoption of many fintech solutions. A slow build-up of adoption is to be expected, but the area is poised to grow exponentially. We believe that fostering relationships and partnerships across the financial and technological sectors within the adequate policy and regulatory frameworks will eventually lead to a financially inclusive region where populations are served in a safe, fair, transparent, and efficient way.
By Dr. Ayman Omar, Associate Professor of International Business and Supply Chain Management and Research Fellow, Kogod Cybersecurity Governance Center, Kogod School of Business, American University, and Emma Garnick, MBA Candidate, Kogod School of Business, American University, Washington D.C.
Edited by Miranda Beshara. This blog post is part of the “Fintech and Blockchain for Financial Inclusion in the Arab World Blog Series,” published on the Arabic FinDev Gateway and GIZ’s fimena.org. It explores some of the key issues that were discussed at the 2018 Arab #FinTex Symposium held in Abu Dhabi, UAE, from December 12-13, 2018 under the Financial Inclusion for the Arab Region Initiative (FIARI) by AMF, GIZ on behalf of BMZ, AFI, and World Bank, co-hosted by the UAE Central Bank.