Fintech in GCC Countries: Successful Models, Challenges, and Opportunities for Growth
By Imane Hmiddou,
Specialist in multidisciplinary research of Artificial Intelligence
FINANCIAL TECHNOLOGY (Fintech) is a term that refers to all technology-driven tools developed to increase efficiency of financial services. The needed technologies range from accessing internet, smartphone, cloud and blockchain networks, to developing softwares, mobile applications, data centres, and artificial intelligence (AI).(1) Through machine learning methods, AI enables the automation and optimisation of specific tasks to improve the efficiency and accuracy of operational and decision-making processes. In the banking sector, the potential value of AI was estimated at around $1 Trillion (USD) – by McKinsey in 2020 – knowing its potential in enhancing the capacity to forecast economic, financial, and risk occurrences, among others.(2) These untapped opportunities drive competition among several actors, including sovereign states, which aim to develop a strong fintech ecosystem.
What is the current positioning of Gulf Cooperation Council (GCC) countries in the Fintech industry within the broader global competitive landscape? What specific challenges do they encounter in this sector, and what opportunities exist for further growth and development?
Regional and Global Positioning of GCC Countries in the Fintech Industry
The United Arab Emirates (UAE)‘s and Saudi Arabia’s fintech landscapes illustrate a successful and globally competitive model. Based on the “2021 Global Fintech Rankings Report,” the UAE ranks 28th out of 82 countries in terms of the number of fintech companies, their quality, and the business environment in the Emirates.(3) The UAE invested in the industry earlier than Saudi Arabia, taking the lead in the number of fintech firms in the Gulf region.(4) However, Saudi is catching up and already positions 65th globally in the same report.(5) Also, Saudi Arabia took the lead in the projected digital transactions size in 2023 – as the graph below illustrates.
In 2023, digital investments are expected to reach 1 567 Million (USD) in Saudi Arabia and 669 Million (USD) in the UAE. The graph illustrates the gap among GCC countries in the industry, especially since digital investment is the largest market in fintech in all seven countries.(7) Digital investments include all digital transactions of financial assets operationalised via brokerages, trading applications, and algorithmic-driven financial advice.(8) They are expected to grow in all GCC countries, but the gap persists.(9)
Venture capital funds are another indicator that reveals the size of fintech in the region as they illustrate private investments fuelling companies that create value in the industry. In Saudi Arabia, fintech startups raised 1700% more capital in the first quarter of 2023 than last year.(10) This massive increase underlines the high access to capital in Saudi, favouring the industry's growth further. Overall, in Middle East and North Africa (MENAP), the UAE, Saudi Arabia, and Bahrain attracted the highest funding share in 2022, respectively, 37 %, 25%, and 12%.(11)
Assessment of the GCC Countries’ Fintech Landscape
The region is taking a pro-regulatory approach to build its fintech ecosystem. All GCC countries, except Qatar, created regulatory sandboxes to ensure a secured maturation of the industry.(12) Initially, four pillars must be placed to develop a competitive and efficient fintech ecosystem: Business environment and ease of accessing the market, Government and regulatory support, Easy access to capital, and financial expertise.(13) Thus far, only the UAE and Saudi Arabia represent a rising global successful model from the region, despite the GCC countries have all developed the four pillars for Fintech ecosystems.(14) The governmental strategies are relatively new and are yet to mature to assess their efficiency in the majority of the seven countries.
In the last two decades, the banking sector grew exponentially in the GCC countries, which enabled the creation of a financial ecosystem, infrastructure, and expertise. In the 2018 IMF report on “Gulf Cooperation Council: How Developed and Inclusive are Financial Systems in the GCC?” it was underlined that the financial development of the GCC countries compares well with emerging markets (EMs), yet, it is not the case compared to advanced economies (AEs). Indeed, equity markets and banking systems are very well developed in the region in terms of their sizes, but also equity markets are argued to be not competitive enough, knowing that they are dominated by a few big entities, mainly public sector-owned ones. Additionally, the report underlines that the region has established an inclusive financial ecosystem. However, the authors underline some noticed gaps in capital access for small and medium enterprises, women, and youth, which they attribute partly to social norms, low levels of women's participation in the labour market and private sector activity, and the high level of youth unemployment.(15)
The GCC countries are encountering such gaps by endorsing new economic development strategies, providing funding solutions, establishing innovation hubs, and offering incentives to facilitate access to capital. For instance, Women in Fintech Bahrain (WIFBH) is an initiative dedicated to promoting the inclusion of women in the fintech ecosystem and addressing the importance of women’s representation in the industry’s development in Bahrain. Furthermore, like all other GCC countries, Qatar established a fintech hub to enhance the development of the industry.(16) Hubs are beneficial in growing the industry, considering their positive impact on expertise exchange between companies in the hub. They also enable daily communication among labour and incentivize global talents to join. In the tech industry, talent is a crucial factor in a company’s success, therefore, countries engage in a global competition for attracting the best talent by offering several incentives to grow their tech sector, including fintech.
Challenges and Potential of Fintech’s Growth in the Region
The 'FINTECH Middle East & Africa 2023' report provides a comprehensive overview of the fintech industry in the MENA region and concludes with a list of promising projections and challenges for the industry's growth in the region. For the GCC countries, more unicorns are expected to emerge from the region, and non-payments such as cryptocurrencies are also projected to grow. However, global recessions and the ongoing inflation might hinder the growth of fintech.
The GCC countries are aware of the necessity to diversify their oil-based economies to other sources of growth. Fintech is an industry that countries in the region are strategically investing in to nurture a competitive ecosystem and leverage the opportunities it offers. It is worth emphasizing that fintech development in the region is part of a larger "National Vision" agenda to enable technological advancement and lead digital transformation. (17)
A distinctive area of potential growth for the GCC countries within fintech lies in the Islamic Fintech. On average, Islamic Banking represents 25% of total bank assets in the region, with Saudi Arabia and the UAE taking a significant share.(18) Therefore, the region has already developed financial expertise in this sector and could build competitive Islamic fintech firms to attract global customers. Also, the GCC countries could capitalise on an Islamic cryptocurrency, building a competitive blockchain currency at the global level.
In Conclusion, it is imperative to strike a balance between digitizing financial operations and preserving effective existing processes. This approach helps avoid succumbing to the hype surrounding fintech and allows for the prioritization of businesses that genuinely address the financial market needs for the sustainable growth of the fintech industry in the region.
(1) Columbia Engineering. 2021. “What Is Financial Technology (FinTech)? A Beginner’s Guide for 2022.” Columbia Engineering Boot Camps. September 2, 2021. https://bootcamp.cvn.columbia.edu/blog/what-is-fintech/#:~:text=FinTech%20(financial%20technology)%20is%20a.
(2) Boukherouaa. E.B, AlAjmi. K, Deodoro. J, Farias1. A, & Ravikumar. R, (2021) ‘Powering the Digital Economy: Opportunities and Risks of Artificial Intelligence in Finance’ In International Monetary Fund https://www.elibrary.imf.org/view/journals/087/2021/024/article-A001-en.xml
(3) “Global Fintech Rankings Report: Bridging the Gap.” Findexable. Published on June 28, 2021. https://findexable.com/wp-content/uploads/2021/06/Global-Fintech-Rankings-2021-v1.2_30_June.pdf
(4) Aramco. 2023. “WAED Ventures - How Does the Saudi Fintech Landscape Compare to the Global Scene?” Waed . 2023. https://www.waed.net/en/articles/HowDoesTheSaudiFintech.
(5) “Global Fintech Rankings Report: Bridging the Gap.” Findexable. Published on June 28, 2021. https://findexable.com/wp-content/uploads/2021/06/Global-Fintech-Rankings-2021-v1.2_30_June.pdf
(6) “FinTech - Worldwide, Statista Market Forecast.” Statista. Published in 2023. https://www.statista.com/outlook/dmo/fintech/worldwide.
(7) “FinTech - Worldwide, Statista Market Forecast.” Statista. Published in 2023. https://www.statista.com/outlook/dmo/fintech/worldwide
(8) “Digital Investment - Worldwide | Statista Market Forecast.” Statista. Accessed July 25, 2023. https://www.statista.com/outlook/dmo/fintech/digital-investment/worldwide#:~:text=Digital%20Investment%20refers%20to%20the
(9) “FinTech - Worldwide, Statista Market Forecast.” Statista. Published in 2023. https://www.statista.com/outlook/dmo/fintech/worldwide .
(10) Aramco. 2023. “WAED Ventures - How Does the Saudi Fintech Landscape Compare to the Global Scene?” Waed . 2023. https://www.waed.net/en/articles/HowDoesTheSaudiFintech
(11) Flötotto, Max, Sheinal Jayantilal, Sagar Shah, and Rinki Singhvi. 2023. “Fintech in MENAP: A Solid Foundation for Growth | McKinsey.” Mckinsey. May 24, 2023. https://www.mckinsey.com/industries/financial-services/our-insights/fintech-in-menap-a-solid-foundation-for-growth.
(12) Santosdiaz, Richie. 2023. “The Fintech Times FINTECH Middle East & Africa 2023 by the Fintech Times - Issuu.” The Fintech Times. May 23, 2023. https://issuu.com/fintechtimes/docs/the_fintech_times_fintech_middle_ea_ae91c7221fbcfe.
(13) Diemers, Daniel, Abdulkader Lamaa, Jean Salamat, and Tom Steffens. 2015. “Developing a FinTech Ecosystem in the GCC Let’s Get Ready for Take Off.” PwC. https://www.strategyand.pwc.com/m1/en/reports/developing-a-fintech-ecosystem-in-the-gcc.pdf
(14) Staff of the International Monetary Fund. 2018. “Gulf Cooperation Council: How Developed and Inclusive Are Financial Systems in the GCC?” International Monetary Fund. December 4, 2018.
(15) Staff of the International Monetary Fund. 2018. “Gulf Cooperation Council: How Developed and Inclusive Are Financial Systems in the GCC?” International Monetary Fund. December 4, 2018.
(16) Santosdiaz, Richie. 2023. “The Fintech Times FINTECH Middle East & Africa 2023 by the Fintech Times - Issuu.” The Fintech Times. May 23, 2023.https://issuu.com/fintechtimes/docs/the_fintech_times_fintech_middle_ea_ae91c7221fbcfe
(17) “PYMNTS GCC Series: Still in Its Infancy, Oman FinTech Hub Shows Huge Potential for Growth.” 2022. Pymnts. July 15, 2022. https://www.pymnts.com/emea/2022/pymnts-gcc-series-still-in-its-infancy-oman-fintech-hub-shows-huge-potential-for-growth/
(18) Staff of the International Monetary Fund. 2018. “Gulf Cooperation Council: How Developed and Inclusive Are Financial Systems in the GCC?” International Monetary Fund. December 4, 2018.