It’s no secret that financial inclusion levels in the Arab world are low. Not counting the Gulf Cooperation Council (GCC) countries, two-third of adults in the Arab world do not have a formal account, according to CGAP's analysis of Findex data. Closing the gap would benefit millions of low-income people and small businesses, and new research by CGAP suggests that fintechs in the region could generate billions in revenue by serving these excluded customers.
A growing number of fintechs in the Arab world
Fintech solutions have proliferated in the Arab world over the past few years. In November 2020, CGAP identified 400 fintech solutions in the region. With 44 percent of these solutions being payments products, and half of those offering store of value, fintech presents several countries with new opportunities to expand financial inclusion. Most of the fintech solutions we identified are still relatively young, but their outreach and impact can be expected to materialize over the next couple of years, as they grow and network effects kick in.
Fintech solutions are concentrated in countries where recent legal and regulatory changes have enabled fintechs to grow. In fact, 75 percent of the solutions we’ve identified are located in just six countries: the United Arab Emirates (UAE), Egypt, Morocco, Tunisia, Jordan, and Lebanon.
For instance, since 2010 Jordan has been allowing non-bank e-money issuers to operate. In 2015 and 2016, respectively, Morocco and Tunisia introduced banking laws that opened their markets to new categories of providers. Morocco went so far as to allow the opening of low-value transactional accounts with only a valid national mobile phone number. In a push to further digitize their economies, Jordan issued an electronic transaction law in 2015, and Egypt made cashless payment mandatory in 2019. Iraq issued such a law in 2014 and recently licensed payment service providers. Arguably, such changes are bound to make a difference in the way people use formal financial services.
A market opportunity worth billions to local fintechs
Forty-six percent of the fintech solutions identified by CGAP have a financial inclusion mandate. If financial services providers in the six countries with the most fintechs were to expand access to financial services to 50 percent of the untapped market there, they could generate $7 billion in revenue while bringing financial inclusion levels close to those of middle-income countries like Bolivia, South Africa, Uganda and Ukraine.
What will it take to harness fintech’s potential in the Arab world? Our study has revealed three major factors of success:
- Enabling regulation. First and foremost, policy makers should proactively support competition and innovation. Recently, regulatory sandboxes and innovation hubs have been established in countries like Bahrein, Egypt, Jordan, Oman, Saudi Arabia and Tunisia, facilitating pathways to build modern digital financial services. Bahrein has gone further by mandating an open banking framework. More is still to be done. It can take several years and millions in investments to significantly scale a fintech operation, so regulatory certainty will be key to fostering investment. Many markets with dynamic fintech spaces are relatively small, leading successful solutions to expand regionally and giving policy makers a key role to play in facilitating innovation across borders. Finally, there is a need for transparent and reliable information on access and usage of financial services to serve as basis for more competition-oriented policies.
- Sustained investment. Investments are still needed at the angel stage to fuel the next generation of innovators. Additional investment is also needed after the Series A round of funding, when fintech solutions have matured though perhaps not yet broken even and require larger amounts of sustained financing.
- Education and training. Higher-quality education programs are also needed to foster new talent and improve employability by providing practical, on-the-job skills in addition to theoretical training.
The Arab world can count on a young population whose digital skills are on par with the global average, according to the World Economic Forum’s Global Competitiveness Report. And the COVID-19 pandemic is accelerating young people’s adoption of digital payments. Arab countries have an opportunity now to encourage home-grown fintechs to solve the sometimes uniquely local challenges faced by their financially unserved or under-served populations.
Falling short means leaving others reap the benefits of digitization. Or worse, waiting for another generation to do so.