MENA fintech hubs are channelling funds into the sector but need to keep momentum: Report
A report by Strategy& analysed that the need for the growth of the fintech sector in the region will require public and private collaboration. It also said the fintech hubs are channelling significant funds to dynamic, small companies.
The fintech sector in the Middle East and Africa Region (MENA) has already raised $1.73 billion in the first half of 2022, as per a report by global strategy consulting business Strategy&. In 2021, the sector raised $2.5 billion in funding.
Titled “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 a growing number of companies in the sector are moving towards successful IPOs. This is also being aided by the GCC region’s investment in the sector in form of the establishment of fintech hubs that have actively pushed towards the growth of smaller companies and startups.
The report mentioned, “Some of the GCC fintech hubs are now so large 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), , Fintech Saudi, and the FinTech Hive at the Dubai International Financial Centre (DIFC).
- The amount of fintech investment in the MENA region reached $448 million in 2021 across 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 further build on this momentum, GCC countries will have to take a few more steps, especially regarding external VC funding which needs significant attention. While sovereign wealth funds are contributing their bit to funding inflow in fintech, they operate on a broader mandate for the ecosystem. The region needs sector-focused investors.
For example, Saudi Arabia accounts for just 0.08% of global VC funding whereas the country accounts for 0.9% of global GDP. Other than that, payment systems in the region are attracting the most funding while areas such as regulatory technology—or regtech—attract the least.
Another critical area is the exit opportunities for fintech companies. Since the IPO market in the GCC is not yet very dynamic, founders find it harder to seek higher investments. This limits the exit of initial investors as well as the growth and innovation of VC investment. In many cases, the only visible route becomes selling to established players. So far, only 21 exist 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, at present, only 6% of the workforce in the GCC is engaged in tech-related jobs.
However, the absence of exact data on the shortage of talent from the region makes it difficult to design meaningful programmes. The highest demand for tech experts has been for specialised jobs like cloud computing, applications programming interfaces (API), blockchain technologies, risk management specialisation, and cybersecurity.
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 tech jobs. This would rapidly reduce the absence of a talent pool in the region.
Talent acquisition is one of the key areas that need focus in the Gulf fintech space.
Collaboration of public and private sectors
The report highlighted the need for collaborative efforts between the public and private sectors to boost the fintech space in 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 regulations play a vital role in the fintech sector in ensuring privacy compliance, data protection and more, it often hinders cross-border providers. For instance, the lack of preferential regulatory treatment for companies that are licensed and regulated in some GCC countries can be an obstacle to the growth of such companies.
The report suggested that public sector and private sector stakeholders should align on key aspects of market growth to allow for the easier provision of cross-border services. For example, passport agreements between regulators in different jurisdictions could enable startups to expand geographically without regulatory impediments.
This collaboration has already germinated. In early 2022, the Digital Cooperation Organisation (DCO) announced that Bahrain, Nigeria, and Saudi Arabia would provide a “startup passport” that allows entrepreneurs in one DCO member country to avoid excessive red tape 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 about 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 fast-developing 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 of greater fintech scale, deeper capital markets, and talent development, GCC countries have the potential to become vibrant players in global fintech.
Edited by Kanishk Singh