The Middle East is one of the world's most heterogeneous regions, spanning three continents and 21 countries, with a population of close to 600 million. It is a culturally, politically and economically diverse region that also encompasses the six Arab states that are members of the Gulf Coordination Council. This diversity is reflected in the vastly different stages of advancement of the FinTech industries across the region.

The number of FinTechs per country across the Arab world also differs considerably. The UAE is the leader in FinTech innovation, comprising some 24% of the FinTechs in the region. Both Morocco and Egypt follow, with 12% and Tunisia with 10% of FinTechs.

In terms of the areas likely to most benefit from FinTech across the entire region, S&P Global pinpoints remittances, banking penetration, the security of transactions, and compliance.

The entire MENA region is home to some of the world's most unbanked populations, particularly in Africa, but with the Arab states not far behind. Ultimately this will see the FinTech playing fields within the region begin to level out during the decade ahead, as long as the regulators keep the field open for them.

Regulations across the region are also at various stages of development as authorities grapple with how to balance the need to protect customers while allowing innovation to thrive and ultimately benefit customers by offering them lower fees and access to financial facilities they would otherwise not be able to use.

In Clifford Chance's Fintech in the Middle East – Developments across MENA, it noted that there had been a rapid change in the regulatory environment. The central banks of Egypt, Bahrain, UAE and Jordan have adopted specific initiatives to regulate digital payment services. Lebanon, the Dubai International Financial Centre (DIFC), Bahrain and Abu Dhabi Global Market (ADGM) have introduced crowdfunding regulations. Meanwhile, the UAE securities regulator allowed the licensing of ICOs. When it comes to Africa, the African Continental Free Trade Area Agreement (AFCFTA), which entered into force on 30 May 2019, is supposed to accelerate FinTech innovation on the continent. These are just some of the developments that have taken place over the last few years.

United Arab Emirates

The UAE is, without doubt, the furthest along on their FinTech journey and the most globally competitive country in MENA.

"By giving FinTechs in the UAE a holistic, dynamic ecosystem with an independent regulatory and English Common Law judicial system and global financial exchange, start-ups can be better equipped to promote their innovative solutions and expansion plans to investors." - Arif Amiri, the chief executive of Dubai International Financial Centre

The UAE is the 25th most competitive country in the world, gaining two positions from the previous year. It gained ground primarily because of significant improvements in ICT adoption and skills - arguably the most important drivers of growth opportunities in FinTech. The WEF notes that these pillars complement "the long-standing UAE competitive advantages, namely a stable macroeconomic environment, sound product market and infrastructure."

The one dampener on the horizon is the economic outlook, which has been adversely affected by the pandemic. Fitch Ratings' assessment of what lies ahead is a recovery that is likely to be reasonably sluggish but, it adds, there is some scope for optimism. The UAE economy is not expected to return to the pre-pandemic levels in 2021 and forecasts growth of 4% in 2021 after a sharp 6.1% contraction this year. Fitch attributes the somewhat sluggish recovery to relatively tight fiscal policy and a lacklustre global economic recovery, which it expects to weigh on domestic and external demand.

From a FinTech perspective the UAE is considered a wager by Findexable, which publishes the Global Fintech Index. Moreover, UAE is seventh on the list of the top 10 wagers. Findexable explains what they mean by a wager:

"They might not be at the top of the tables. Yet. But this group of countries are giving the old-guard of financial centres a very good run for their money - by showing what it takes to wage a FinTech battle. And how to focus regulatory, innovation and ecosystem efforts to best effect to build FinTech success at scale."

Saudi Arabia

Saudi Arabia also improved in the WEF Global Competitive Report, gaining three positions and coming in at 36th place globally in the competitive rankings. Saudi Arabia is seen to be making strides to diversify its economy: the non-oil sector is expanding, and further public and private investments outside the mineral sector are being deployed.

The country's determination to transform its economy is most visible in terms of ICT adoption, where it gained 9.4 points to reach the 38th position globally. The reasons for this increase were the rapid deployment of broadband technology (subscriptions to broadband internet have increased from 90 to 111 per 100 people) and healthy 18.4% growth in internet users. Innovation capability also gradually improved.

Regarding its economic outlook, Fitch expects fiscal consolidation imperatives to limit its growth recovery from its second-quarter 2020 low. The country is expected to grow by a relatively low 2.7% in 2021 compared to the rest of the region after contracting 4.3% this year.

Drags on investment and consumption are expected to be fiscal measures, such as Capex cuts and VAT hikes, which will constrain non-oil activity. Oil output will remain capped by OPEC+ supply restrictions, declining markedly this year, and rising moderately in 2021.

Bahrain

Bahrain's economy is also expected to be held back by fiscal constraints, with the economy forecast to grow only 2.7% in 2021, up from a 4.2% contraction in 2020. Fitch points out that Bahrain's fiscal positions are by far the weakest in the GCC and that lower oil will accelerate Bahrain's budgetary reforms. However, the government of Bahrain does have a long-term economic plan, named the Economic Vision 2030, to shift to a private-sector led economy rather than an oversized public sector.

Bahrain is the GCC's longest established financial center, according to the Milken Institute, with nearly 400 licensed financial institutions. It says that unlike the UAE, Bahrain has taken a country-wide approach to FinTech development and promotion, with the Central Bank of Bahrain overseeing the financial services sector and its Governor, Rasheed Mohammed Al Maraj, adopting an innovative mindset in promoting Bahrain as a FinTech hub in the region.

Qatar

Qatar is expected to muddle through the next couple of years, growing by 3.1% in 2021 from a 2.2% decline in 2020. Non-oil activity will benefit from firms' expansion plans in the run-up to the 2022 FIFA World Cup, which should prompt a temporary boost in tourist arrivals.

On the FinTech front, KPMG says the expected introduction of key FinTech regulations will "further facilitate the build-up" of the digital banking ecosystem. It is referring to the Qatar Central Bank's establishment of the FinTech section, Fintech Regulatory Sandbox and the launch of the Qatar FinTech Hub (QFTH).

"The FinTech scene in Qatar is expected to grow rapidly and start disrupting the banking sector," - KPMG

Pulling it all together, it is evident that digital penetration is high and continuing to grow across the GCC countries. Regilators are following the evolution of the financial services and we can expect 2021 to bring much more outstanding FinTech startups, especially in the retail sector. There are also more technology vendors started their presense in the region, boosting the developments and delivering crafted solutions for this market.