The race to become Islamic banking’s fintech hub

FOR all the sophistication of some of its financial centres, and despite the ubiquity of smartphones, the Middle East has been a late adopter of financial technology, or fintech. Of more than $50bn in fintech investment globally since 2010, according to Accenture, a consultancy, only 1% has gone to the Middle East and north Africa.

Khalid Al Rumaihi, head of Bahrain’s Economic Development Board, blames institutional foot-dragging and a lack of infrastructure and venture capital. Yet he insists innovation is inherent to Islamic financial tradition. The modern cheque derives from an Arabic instrument, a written vow to pay for goods on delivery, to avoid carrying money on dangerous journeys. “In the 9th century”, he says, “a Muslim businessman could cash a cheque in China drawn on his bank in Baghdad.”

Several cities are now jockeying to establish themselves as fintech hubs. Last year Cairo launched two “accelerators”—schools to nurture startups. Abu Dhabi has created the region’s first “regulatory sandbox”, allowing new products to be tested for two years without full regulatory compliance. In March, the city’s financial centre signed an agreement with the Monetary Authority of Singapore, the island-state’s central bank, to undertake joint fintech projects, for example in mobile payments and the blockchain. Dubai’s new fintech accelerator, the first in the Gulf region, has begun accepting applications.

Not to be outdone, Qatar and Bahrain have held fintech conferences. Bahrain, too, has teamed up with Singapore to develop a fintech ecosystem. In 2010 there were fewer than 20 fintech startups in the Middle East and north Africa, according to Wamda, a website devoted to regional entrepreneurship. By 2015 there were 105.

Their market includes the masses of migrant workers in need of remittance services. But Chris Skinner, a financial commentator, says it also encompasses the region’s many expatriates accustomed to high-quality services, and the local ultra-rich. At the other end of the scale, fintech can also bring cheaper services to the unbanked: over four-fifths of the population in the region—a higher proportion than anywhere else in the world, according to the World Bank.

Islamic banks are enthusiastic about the prospects. A recent report by EY, a consultancy, says 40 of the biggest have approved investment of $15m-50m for digital initiatives. The industry reaches nearly 100m customers worldwide but the potential market is six times that. Fintech, especially blockchain technologies, ought to be a boon for Islamic finance, because it can streamline transactions between institutions that apply different versions of Sharia law. Islamic-banking users are keen: three out of four say they are ready to look elsewhere for a better digital experience.

Mr Skinner is sure these cities can become fintech hubs. Dubai, he notes, was barely on the map 20 years ago; now it is, by one ranking, the world’s 18th-largest financial centre, above Frankfurt. Others will find their niche, perhaps as hubs linking economies in Asia and Africa or servicing wealthy Saudis next-door. Saudi Arabia is not so global in perspective, he notes, and in Bahrain you can have a drink.