MENA fintech hubs channel funds into sector but need to keep pace: Report
The fintech sector in the Middle East and Africa (MENA) region has already raised $1.73 billion in the first half of 2022, according to a report by global strategy consultancy Strategy&. By 2021, the sector raised $2.5 billion in funding.
Entitled “Fintech in the Middle East: Building on the momentum”, the report highlighted the need for concentrated efforts in both the public and private sectors to bring more growth and sustainability to the Gulf’s fintech sector.
The report pointed out that an increasing number of companies in the sector are moving towards successful IPOs. This is also helped by the GCC region’s investment in the sector in the form of the establishment of fintech hubs which have actively pushed for the growth of smaller companies and startups.
The report mentioned: “Some of the GCC fintech hubs are now so big that they are on the global fintech map.”
Some of the key developments in the region include:
- The number of fintech hubs in the GCC has increased from one in 2018 to four in 2022. These include the Abu Dhabi Global Market (ADGM), Bahrain FinTech Bay, Fintech Saudi and the FinTech Hive at the Dubai International Financial Center (DIFC).
- The amount of fintech investments in the MENA region reached $448 million in 2021, spread over 108 transactions. There were also four fintech “exits” – the highest for a single year. A fintech exit includes IPOs, special purpose acquisition companies (SPACs), mergers and acquisitions.
- Many fintech startups are now closer to becoming unicorns. In 2020, the digital transformation and e-payment platform Fawry became the region’s first unicorn.
They are supported by regulations, national fintech strategies, government-sponsored accelerators and incubators, and regulatory sandboxes.
Critical areas for development
The three priority areas for the region include access to capital and liquidity, exit opportunities and talent acquisition.
The report stated that to build on this momentum, the GCC countries will need to take a few more steps, especially in terms of external VC funding that needs significant attention. While sovereign wealth funds contribute their share to funding inflows in fintech, they operate on a broader mandate for the ecosystem. The region needs sector-focused investors.
For example, Saudi Arabia accounts for only 0.08% of global VC funding, while the country accounts for 0.9% of global GDP. Apart from that, payment systems in the region attract the most funding, while areas such as regulatory technology – or regtech – attract the least.
Another critical area is the exit possibilities for fintech companies. Since the IPO market in the GCC is not yet very dynamic, entrepreneurs find it more difficult to seek higher investments. This limits the exit of initial investors as well as the growth and innovation of VC investments. In many cases, the only visible route is sales to established players. So far, only 21 across all sectors were announced in the first half of 2022.
Talent acquisition is another challenge for the fintech sector in the GCC. The report estimates that currently only 6% of the workforce in the GCC is engaged in technology-related jobs.
But the absence of accurate data on talent shortages from the region makes it difficult to design meaningful programs. The highest demand for technical experts has been for specialized jobs such as cloud computing, application programming interfaces (APIs), blockchain technologies, specialization in risk management and cyber security.
According to another study by Strategy&, if the GCC region becomes comparable to the most advanced digital economies, it could create an additional 600,000 technical jobs. This will quickly reduce the absence of a pool of talent in the region.
Talent acquisition is one of the key areas that needs focus in the Gulf fintech space.
Cooperation between the public and private sectors
The report highlighted the need for collaboration between the public and private sectors to grow the fintech space in the GCC. Key actions include efforts to overcome market fragmentation and achieve scale, strengthen capital markets and attract more talent. The sector’s future market size depends primarily on how successfully the region can overcome regulatory and operational issues.
While regulation plays an important role in the fintech sector to ensure compliance with privacy, data protection and more, it often hinders providers across borders. For example, the lack of preferential treatment for companies licensed and regulated in some GCC countries may be an obstacle to the growth of such companies.
The report suggested that stakeholders in the public and private sectors should align with key aspects of market growth to make it easier to offer services across borders. For example, passporting agreements between regulators in different jurisdictions can enable startups to expand geographically without regulatory hurdles.
This collaboration has already sprouted. In early 2022, the Digital Cooperation Organization (DCO) announced that Bahrain, Nigeria and Saudi Arabia would provide a “startup passport” that allows entrepreneurs in one DCO member country to avoid excessive bureaucracy when entering the markets of other DCO member countries.
Apart from reducing regulatory barriers, the public and private sectors can come together to create public campaigns to raise awareness of investment opportunities, create attractive and innovative asset management solutions, encourage IPOs and more.
The report added that currently the critical challenge for fintech in MENA and the GCC is to remain competitive in a rapidly evolving sector. Some of the forces that will shape the future of fintech in the GCC may be beyond regional control. By focusing on the long-term imperatives for greater fintech scale, deeper capital markets and talent development, GCC countries have the potential to become vibrant players in global fintech.