Financial technology (FinTech) is a faster, cheaper, more convenient, or more accessible technology-enabled product and service that improved traditional financial services.
In fact, in the past few years, Fintech has emerged as one of the primary challengers and disruptors of the once-traditional banking industry. It revolutionized the banking landscape and transformed the delivery of financial services across the Middle East.
This technology, mainly developed by startups, provided routes for unbanked populations to access financial services. Thus, challenging traditional investment and wealth management models creates margin pressures and forces banks to rethink strategies (Deloitte, 2018).
Today, Fintech sandboxes and Government driven initiatives with high smartphone interferences contribute to the development and the support of these startups in the Middle East and the GCC in particular.
Also, several MENA region laws are being put in place to recognize E-commerce and digital signatures with more regulations covering electronic payments. Nonetheless, these regulations still contain significant exclusions, limiting the use of electronic communications.
Because the Middle East has great potential for future investment in Fintech due to significant development and modernization happening across the region, governments and regulators are increasingly adopting legislative reforms.
What are the legal concerns for those considering investing in Fintech in the Middle East? And how can they potentially be mitigated or even resolved?
- Uncertainty regarding the enforcement of rights and obligations:
The Middle East has always been slow to adjust to international standards and modernize changes to its legal systems, most probably due to linguistic or cultural barriers.
Also, the application of Shari’a laws in varying degrees across the Middle East provides restrictive disciplinary provisions for wide-ranging matters relating to “decency,” which can restrict the development of certain technological innovations.
Nonetheless, there are concrete steps that regional and international actors can explore to mitigate these uncertainties. Many specific licensing regimes, for instance, have been introduced to counteract uncertainty issues, such as the financial regulatory regimes in the UAE free zones as they tend to provide “political and economic stability in the region, accompanied by an economic development and planning” (Dr. Naydenov, Ivanov, 2018).
Also, modern financial services solutions are being recognized as necessary by Shari’a scholars. Islamic finance encourages keeping pace with modern and innovative structures by providing equivalent finance and insurance products to consumers and investors seeking Islamic compliance (Clifford chance, 2017). By analogy, these practices extend to Fintech.
- Narrowed specific regulations:
The regulatory regimes in the MENA region, such as the UAE financial free zones, do not all comply with the fintech business concept because they limit access to new consumer markets (requiring additional local licenses).
Since trust and conformity to law, provided through financial service licenses, are crucial to accessing new markets. In the UAE’s financial free zones, financial regulatory regimes created regulatory sandboxes that endorse a tailored, firm-specific licensing regime for startups for a limited testing period.
Overseas licensing options are also being adopted.
- The difficulty of engagement and compliance costs:
The Middle Eastern Arab consumer is unique. He has a set of characteristics and demographics that set him apart from consumers in other parts of the world.
Targeting the consumer in the Middle East is not limited anymore to international companies. It thus became increasingly important for startups and mid-size companies in the region to aim the right audience to facilitate their introduction to the markets. These operations may, however, require high costs in KYC/CDD checks.
Luckily, governmental authorities and supporting departments are being very responsive. They are dedicating resources to establishing networks and collaborating in the fintech space. They even include Fintech within the central principles of Government agendas for the future advancement of technology and innovation (Clifford chance, 2017).
- Barrier to foreign entrants:
In some provinces, such as the UAE and Qatar, non-national shareholders can only hold 49% of a company. Investors may thus be unwilling to invest capital and establish a presence. Hence, the advantages of free zones incorporation.
- Perceived risks and sensitivities:
Cyber risks are on top of a business concern. They are associated with financial loss, and significant disruption, and reputational harm. In the Middle East, there can be a higher sense of anxiety due to the geographical proximity to regional instability. (Fear of terrorist financing).
Nonetheless, this matter is a global threat rather than a region-specific issue that can be mitigated through tools available worldwide.
- Undeveloped Intellectual Property regimes:
Intellectual property is a particular concern for fintech engineers because of the prevalence of open source code, the use of third-party developers, and the collaborative environment. Even though well recognized in the Middle East, IP protection laws and brand rights are still nascent in copyright, industrial design, and patents compared with some other jurisdictions (Clifford chance, 2017).
To give effective protection against potential international violations, entrepreneurs are urged to obtain licenses from more developed provinces and the GCC.