The Growth and Challenges of Fintech in MENA

Lynn Bizri, Apr 03 2017

Fintech has become one of the hottest topics in the startup scene and is one that will continue to dominate in 2017, with over 1000 fintech companies worldwide disrupting and transforming the world of finance. In this second installament of our Fintech & Banking Series, we highlight the growth and challenges of fintech in MENA. 

The Growth of Fintech Startups
Half of all fintech startups in MENA did not exist prior to 2013, and according to Jonas Feller, research associate at Wamda, the number of fintech startups in MENA has grown 39% annually since 2010 and currently outnumber education, energy and healthcare startups in the region.  While the primary target of fintech companies worldwide has been the retail and corporate space, capital markets are also being affected by growth in trade and investments, data and analytics, and blockchain technology and planning. “The emergence of new sectors in the Fintech space is mirrored by the MENA market; we are just beginning to see the arrival of crowdfunding/lending, blockchain and particularly payment fintech businesses cropping up across the region,” says Sullivan.

The Challenges facing Fintech
Although growing, fintech is still fairly new in the Middle East and has faced a number of obstacles in its development. Many of the initiatives launched to promote financial technology services have stalled, and fintech startups continue to face several challenges including lack of access to capital and regulation.

According to a survey by the World Bank and the Union of Arab Banks, nearly 63% of SMEs do not have access to finance. ‘Local investors have yet to build an appetite for the industry, and because of that, we have to look further afield for investment opportunities’, says Mousa Beidas, CEO and Co-founder of the payments solution startup Bridg. Moreover, ‘since the cost to start a fintech company is particularly high, requires more patience and has a higher risk of failure, most investors would rather deploy capital in companies with less risky business models,’ says Fares Ghandour, partner at Wamda Capital. While the controlling environment and regulations in MENA are problematic for startups and VCs, in order for a fintech startup in MENA to grow, it needs to be fostered from early on. ‘We believe in partnering with companies from the initial stages until they become industry leaders,’ says Shailesh Dash, founder and CEO of Al Masah Capital. Therefore, investments at the seed level or during early rounds of capital-raising are crucial and highly valuable. ‘Fueling money into the fintech space allows two major developments to occur: easier access to funding for those who need it and easier methods of spending money for those who seek it,’ says Omar J. Sati, Managing Director of Dash Ventures. By lending support and resources to regional fintech startups that are aspiring to convert their ideas into reality, institutional investors and family businesses have an opportunity to partner with, foster and incubate the fintech ecosystem.

In addition to funding, regulation is seen as one of the most important factors that can either catalyze or stall innovation adoption, and in the region, is also one of the biggest challenges for fintech companies. ‘Most fintech companies require regulatory approval before they launch, which requires capital, connections and patience. The process to get approval is often not defined and regulators have not had to play that role in the region before’, says Ghandour. Moreover, while incubators and innovation hubs are supporting the creation and growth of fintechs in the UAE, in less mature fintech environments, regulations are lagging and the involvement of both governments and financial institutions is necessary to regulate, set policies and provide the necessary infrastructure for the industry to grow sustainably and foster innovation. ‘Fintech companies today are not directly monitored, supervised or regulated, but instead subject to existing financial and banking regulations. This limits fintech operations and restricts the development of the overall ecosystem’, says Sati.

Stay tuned for our next installment 'The Role of Banks in Fintech' on Monday!

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