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The world is continuously developing, and the financial services industry is following suit.
The rapid development of innovative technology in growing economies like the Middle East, coupled with regulators' proactive engagement in establishing regulatory sandboxes, are laying the framework for a new set of futuristic laws necessary to support the FinTech revolution.
Therefore, we will extensively explore how Middle Eastern countries and their regulatory authorities are responding to FinTech innovation product by product, whilst also revealing the regulatory challenges they confront and also proposing some solutions.
The Middle Eastern FinTech Revolution
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The Middle East region accounts for less than 1% of overall FinTech venture capital investments. [1]
Nevertheless, venture capital figures don’t provide an overall picture of the situation. Other factors, such as demographic and business developments, which are extremely supportive of FinTech growth in the region, are being hidden by the amount of funding that this area receives.
We have 450 million people who live in the MENA region. About half of the population is under the age of 25 years old. And with a large and young population, the demand for early technology adopters is attractive and increasing. [2] Also, owing to its geographical position, the area offers various opportunities.
The authorities in Bahrain and the United Arab Emirates have said that their countries serve as a portal to the rest of the region. By establishing a foothold in powerhouse countries, the FinTech industry is reaching out to emerging markets all over the world.
With an increasing population and 70% of them having little or no access to financial services, the growing region is an $8 trillion industry. [3]
The Middle East's FinTech industry is growing at a "30 percent compound annual growth rate while accounting for just 1% of worldwide FinTech investment (CAGR)". “By 2022, 465 Middle Eastern FinTech businesses are expected to receive more than $2 billion in venture capital investment, compared to 30 FinTech businesses that received almost $80 million in 2017.” [4]
- Investments in venture capital in the Middle East between 2017 and 2021
 [5]
However, the payments industry is receiving the vast majority of funding: nearly 85 % of FinTech companies in the Middle East and North Africa region work in the sector of payment services, money transfers[6] such as Payments and remittances startups, as well as Insurance Technology, online financing, RegTech, online banking, crowdfunding, blockchain, and Cryptocurrency companies. These companies are all gaining traction throughout the area.
The bulk of investment in the area has migrated to the payments sector, which is understandable given the region's status as a hotbed for payments-related activity. Because of its expatriate workforce, which accounts for nearly 90% of the country's overall population, the UAE is a driving force in remittances.[7]
In 2017, the UAE's expat remittances reached $44.5 billion, with 75% flowing to money exchange businesses and one-quarter to banks. The top three receiving countries were India, Pakistan, and the Philippines. [8]
Regulations covering FinTech products
- United Arab Emirates
- Bahrain
- Egypt
- Lebanon
- Jordan
- Saudi Arabia
- Kuwait
- Qatar
- Oman
- United Arab Emirates
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FinTech is regarded as a prominent subject in the United Arab Emirates.
The Dubai International Finance Centre (DIFC) is the domicile to an internationally renowned, independent regulation authority and a well-established judicial system based on English common law, and also the area's biggest financial ecosystem, with over 24,000 individuals actively working across 2,200 corporate entities. It has one of the most sophisticated FinTech and venture capital ecosystems in the area, with low-cost licenses, appropriate legislation, unique accelerator programs, and investment schemes attributing to the growth of start-ups. [9]
The Dubai International Finance Centre (DIFC) established FinTech Hive that offers an opportunity to FinTech, InsurTech, RegTech, Islamic FinTech startups to capitalize on unlimited opportunities and get their product or solution before some of the region's most well-known financial services firms.
They offer accelerator programs, licenses, group work spaces, a network of professionals with the same mentality, and a supportive regulatory environment.
The Abu Dhabi Global Market (known as ADGM) has established the FinTech Regulatory Lab (RegLab), which is a custom made legal framework that allows FinTech players to mature and experiment novel FinTech products in a regulated setting. [10]
The RegLab is the first in the area and the second most successful FinTech sandbox in the world. Its goal is to promote competition through the Emirates financial services industry for financial institutions that are new to the market and those that have been there for a long time. FinTech participants will be able to discover and build FinTech technologies in a risk-free and cost-efficient atmosphere due to the given setup.
The UAE is likely to foster the upcoming wave of FinTech technologies established in the area, with innovation and entrepreneurship taking center stage and major investments already taking place. In this respect, the Emirates will be regarded as a center for the Middle East as well as an active FinTech jurisdiction.
FinTech companies in the UAE started in the payments and crowdfunding markets, but have since expanded to serve the Middle East's diverse entrepreneurial and SME community, which is seeking to connect with a population that is becoming more mobile.
Government-led projects such as the Dubai Blockchain Strategy, are aiming to leverage technology to lay the foundation for contemporary E-networks to improve efficiency throughout the city.
Numerous banks also launched online platforms and novel digital services, like the UAE Banks Federation's Emirates Digital Wallet, which is intended to transform payments throughout the Emirates.
The RegLab, which was established in 2016, provides each candidate with a customized legal framework that has been accepted by the ADGM’s Financial Services Regulatory Authority (FSRA).The latter evaluates proposals and decides, after consulting with the candidate , what laws are applicable and also which rules are disregarded or amended.
The Financial Services Regulatory Authority (FSRA) also implements a series of restrictions or requirements that are unique for the intended activity of the applicant.
FinTech companies can get a ‘Developing Financial Technology Services' (DFTS) license from the RegLab for a limited period of time, and then upgrade to a complete license or halt their operations. The licensing period can go up to two extendable years.
In January 2017, the Dubai International Financial Centre (DIFC) revealed their FinTech Hive project. The DFSA will provide an “Innovation testing license” (ITL), which is comparable to the Abu Dhabi Global Market’s RegLab because it enables license holders to evaluate their FinTech services for six to twelve months in a sandbox environment under a bespoke regulatory regime.
Following an incubator model embraced by the FinTech Hive and the Abu Dhabi Global Market RegLab, FinTech companies are capable of developing and validating products while also minimizing the danger they cause to the financing system.
In addition, the applicants will be provided more support in the form of training and discussion panels, mentorship and a possibility to meet new investors.
The FinTech Hive and The ADGM RegLab are both incubator-style institutions that provide FinTech innovators considerable latitude in developing and testing FinTech concepts while minimizing the risk to the financial sector. Moreover, FinTech entrepreneurs would benefit from a network of professionals, special mentoring and support, expert opinions, training and workshops.
Licensing period is from six to 12 months and can be extended.
Deloitte produced research on global FinTech hubs, and the ADGM RegLab was named as the world's finest FinTech hub, as well as the top hub in MENA.[11]
The ADGM has a significant number of linkages to other ecosystems such as a bridge with the Monetary Authority of Singapore. It also provides additional advantages for those participating in the sandbox due to a flexible free zone regulating authority. However, the DIFC is home to several global and regional financial firms in the free zone as well as through the DFSA, and also is the first to develop a regulatory framework for crowdfunding past the testing licenses of a sandbox.
Institutions founded in free zones, like the ADGM and the DIFC, should also be regulated in the countries where their products and services will be provided. At this time, the free zones do not grant passports to nationals of other countries.
This means that FinTech business owners would have to follow by a variety of rules imposed by; the Central Bank of the United Arab Emirates for conventional finance and banking operations, the United Arab Emirates Insurance Authority for insurance activities and the country's Securities and Commodities Authority (SCA) for securities and investing activities. Moreover, the Central Bank of the UAE has enacted legislation governing a particular area of the FinTech sector, particularly services related to payments. This new licensing framework was implemented in 2018.
It was uncertain if these laws extend to all suppliers of payment services, like payment gateways on websites (which just act as a conduit connecting retailers with credit or debit cardholders,) and providers of stored value services, like e-credit issuers. Nevertheless, the Central Bank is actively working with a range of payment market participants in order to provide an understanding of its regulations and take into consideration any new initiatives.
In January 2017, the Securities and Commodities Authority of the UAE announced that it will introduce a regulatory sandbox that will compete with the already established Free Zone Initiative. This initiative intends to support the FinTech Industry and to “bring together FinTech companies, companies that offer innovative financial services, financial institutions, and telecommunications and internet companies to test and launch modern technological initiatives in the securities sector.”
The DFSA recently published innovative guidelines governing Crowdfunding platforms based in or operating out of the DIFC. The regulations seem to be extremely thorough because they impose a lot of requirements on DIFC-based Crowdfunding companies.
According to the new Conduct of Business Module Rules, the operators should offer thorough information about risks on the platform, including possible failures, investment performance, and proprietary evaluations, in addition to providing analysis about their business plans for investment opportunities.[12]
Also, Operators should monitor the different stages of the fundraising and halt any company trying to acquire funding from its counterparts.[13]
In addition, each Crowdfunding service must be operated by different entities. Therefore, operators must guarantee, on the debit side, that loan commitments are enforceable by law. A separate authorization is also required to accept non-institutional participants and comprehensive regulations on corporate funding transparency are to be implemented.
So, it stays unclear whether smaller enterprises with less resources but a rising target market can meet these terms in an economical method.
Abu Dhabi's first FinTech pioneer, Beehive, is the first in the Middle East to get DFSA authorization to provide crowd-funding while maintaining its P2P lending activities. [14]
The regulation of operators such as “Beehive” will enable these firms to enhance their profiles, attracting fundraisers and investors.
A lot of firms operating onshore are still unregulated, therefore a special licensing scheme should be established.
Crowdfunding issuers are highly regulated by the Central Bank and/or the Securities and Exchange Commission.
For instance, UAE LLCs are prohibited from offering securities to the public. Regulations put in place by the SCA in 2017 would significantly limit promotions and activities related to securities. Yet, we still haven't seen notable crowdfunding initiatives licensed by the Central Bank or SCA.
Experts believe that certain legislation and policies are missing, which gives rise to loopholes in the regulatory system, like the Central Bank's reluctance to regulate certain lending operations. Moreover, some consider that stricter rules might be taken in the future.
FinTech companies in the Gulf Region, particularly in the United Arab Emirates are establishing partnerships with local banks regarding payment gateway because of the local banks desires to digitize and reach their customers more easily.
Regulating online payment relies on the bank’s license for the payment transaction chain and gives the responsibility to FinTech firms regarding other aspects.
For example, a company called Emirates Digital Wallet LLC (EDW) owns and operates “klip”, which is the United Arab Emirates' Digital Cash Platform. Nonetheless the UAE government is raising efforts to drive digital transformation and create a cashless environment in the country. Also introducing Apple Pay shows the drive for a cashless offline society.
In order to add credibility to their operations and ensure the application of international standards, certain companies are required to obtain licensing in a foreign country that is not in the Middle East.
CASHU, for example, is a company that offers stored value cards to people without credit cards in the Middle East, allowing them to conduct online transactions. The company managed to relocate to Singapore in 2016 and is now licensed by the Singaporean Monetary Authority (MAS). “CASHU has introduced a variety of operational improvements to its payment platform in accordance with MAS’s requirements for Stored Value Facility (SVF). These changes fall in line with global demands to enhance due diligence on wallet account holders and business partners to ensure compliance with new regulations and combat cybercrime.”[15]
Due to the introduction of improved rules, CASHU has committed to building a safer and more stable prepaid services industry. The MAS regulatory system also allows CASHU to collaborate with local regulators in various jurisdictions.[16]
Some stored-value companies, on the other hand, have tried to work around the regulations. For instance, "Beam Wallet'', a digital wallet application available in the United Arab Emirates, allows users to pay in "Beam Credits" that are created specifically for that purchase at the point of sale reacting as a gift card. Beam might be able to circumvent any tougher credit-related legislation by using this form of framework.[17]
Although payment services are financial in nature and don’t need a license, they require consumer due diligence or a KYC and special monitoring in several Middle Eastern jurisdictions for counter-terrorism funding and anti-money laundering.
The UAE has established the emirates Blockchain technology initiative 2021, as well as the Dubai Blockchain initiative. Accordingly the government wishes to maximize the returns of Blockchain technology in order to convert by 2021, fifty percent of its transactional activities towards Blockchain platforms. However, licenses are not granted to any firm to issue crypto-currencies.[18]
ADGM has introduced a regulatory framework for the regulation of spot virtual assets, including those done by multilateral trading platforms, brokers and asset managers. This framework does not apply to Digital Securities, Offerings or for other capital raising purposes.[19]
In the UAE Crypto-currencies are not specifically regulated, however, they require certain regulatory authorizations. The Central Bank may face the same challenges as the rest of the world in attempting to control crypto-currencies because of their complex and ambiguous legal nature. It may also focus on components of an Initial Coin Offering that are compatible with preexisting regulatory mechanisms, like operating exchanges.
Consequently, the DFSA has alerted investors in the financial free zones about ICOs, expressing the riskiness of cryptocurrency investment. According to UAE legislation, the DFSA does not control ICOs and will not license firms that engage in such activities.
The FRSA has issued regulatory guidelines for investors stating that ICOs are not restricted and certain of their aspects such as the selling of securities and units in funds, or trading in derivatives comply with the country’s regulations. However investors should be aware of the lack of regulation regarding special transactions in virtual currencies such as Bitcoin or its counterparts.
Accordingly, Dubai has adopted a Blockchain strategy as a key component of the Smart City Initiative. Therefore using Blockchain in Financial Technology will take place in a supervised setting at first, and so is the case with other approaches around the world. Furthermore, the Blockchain initiative would indeed digitize all of Dubai's governmental operations, and also create tons of potential technological and business prospects. An interesting example would be of the Dubai government that is working on developing and implementing EmCash which is a digital currency that is encrypted and powered by Blockchain.
Thus, “EmCash reduces fraud, as well as inflation since the currency is issued in real-time, based on actual demand”.[20]
a. Digital Signatures
The UAE Federal Law No. 1 of 2006 Concerning E-Transactions and E-Commerce (Electronic Signature Law) recognizes electronically created signatures and states that “it applies to civil and commercial transactions except for certain excluded transactions such as negotiable instruments, documents of title to immovable property, transactions relating to the sale and purchase of immovable property and others.”[21]
Contract automation will present obstacles for Emirati legislation and regulatory framework, notably in terms of notarization and Arabic translation requirements. To ensure contractual commitment certainty, substantial tests must be incorporated into such activities.
Moreover, International innovations, like the R3 initiative in the domain of derivatives, will lead to the rise of smart contract potential in the coming years. Major Banks operating throughout the UAE may use automated contract drafting by incorporating electronic standards and mechanisms, therefore enabling them to conduct basic operations on the Blockchain platform.
Under the UAE Civil Code, smart contracts are legally enforceable. The method of execution and the smart contacts irrevocability pose a challenge. Following an expert opinion, smart contracts are irreversible, which means once prerequisites are completed and execution has begun, further performances cannot be amended or terminated.
Finally the Electronic Signature Law doesn’t contain new technologies such as Blockchain.
1.7 Investment Tokens
Token Investments are now regulated by the Dubai Financial Services Authority (DFSA). Proposed in March 2021 Consultation Paper 138, the framework is the first phase of the DFSA's Digital Assets regulation.
Investment Tokens are classified under the regulatory framework as either Security Tokens or Derivative Tokens. Basically, they are:
“a security or derivative that is issued, transferred, and stored using Distributed Ledger Technology (DLT) or other similar technology;”
“a cryptographically protected digital representation of rights and duties that is issued, transferred, and stored using DLT or other similar technology and it confers rights and obligations substantially similar to those conferred by a Security or Derivative; or (ii) has a substantially similar purpose or effect as a Security or Derivative.”
It also covers authorized firms who wish to provide Investment Token-related Financial Services to clients, such as trading, advising, or arranging transactions relating to Investment Tokens, or managing discretionary portfolios, or collective investment funds investing in Investment Tokens.
The DFSA is currently developing recommendations for tokens that do not fall under the Investment Tokens legal framework. These should include cryptocurrency trading tokens, utility tokens, and asset-backed tokens (stablecoins). Also, the DFSA is planning to release a second consultation paper in Q4.
- BAHRAIN
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FinTech in Bahrain is actively being developed. In June 2017, Bahrain's financial regulator, the Central Bank of Bahrain (CBB), worked on creating a regulatory sandbox, and modified it in august 2017 to accommodate FinTech testing. The kingdom’s Economic Development board wants to attract foreign investments.
Bahrain’s Central Bank launched a FinTech regulatory sandbox that will enable financial institutions and other enterprises to try their services and products. This procedure is available to current Central Bank license holders such as financial firms with advanced technological innovations as well as other enterprises, whether from Bahrain or abroad.
Further, the sandbox can comprise corporations from the financial industry and technology and telecommunication businesses who aim to try out a new service or product, as well as specialized service industries that collaborate with or serve, financial institutions.
“Benefit pay” is the country’s mobile e-wallet that was launched in a collaboration between the Central Bank and a local payment settlement service provider named “BENEFIT Company”.
Customers will no longer use debit or credit cards or even cash to make or receive payments. The technology is currently in the early phases of implementation, and will ultimately be integrated with several other retail payment platforms in the Kingdom of Bahrain.
The Central Bank of Bahrain (“CBB”) issued regulations regarding Crowdfunding. The regulatory framework for loan crowdfunding (including Sharia) offers regulation for financial technology or FinTech enterprises as well as client protection.
The laws are designed to assist start-ups, small and medium-sized businesses, and to provide accessibility to alternate sources of capital when more conventional finance options are unavailable. Consequently, all lending businesses that use an electronic platform must be licensed in Bahrain as ‘operators of P2B Conventional Financing-based Crowd financing Platforms.'
According to the Central Bank of Bahrain Rulebook, “The minimum capital requirement for the CFC Platform Operators is Bahraini Dinars (“BD”) 50,000 to be maintained on an on-going basis. This is new type of license. A CFC Platform Operator is not permitted to engage in Business to Business (B2B), Business to Person (B2P) or Person to Person (P2P) lending.”[22] Also, only enterprises with paid-up capital that does not exceed BD250, 000 may use the Crowdfunding site.
In order to limit the amount each borrower may borrow and the total exposure each lender can have to a single borrower, quantitative limits are imposed.
Furthermore, only highly experienced and authorized investors may use this service. And due to the adverse outcomes, individual investors are not eligible to get on it. Recently, the Central Bank of Bahrain has released draft rules related to equities that are based on Crowdfunding for public review. It is proposing a special licensing framework as an alternative for offered equities that are defined by the securities law.
- EGYPT
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FinTech start-ups in Egypt are on the rise due to the Central Bank and government officials' ambition to implement new payment methods by shifting to a digital economy with no cash involved. Payment systems, mobile currency, and smart wallets are the most developed industries.
The Central Bank of Egypt established new laws for smartphone-based cashless payments in 2016. FinTech businesses may cooperate with banks to provide the infrastructure and technology required to offer mobile wallets as issuing banks, by collecting deposits paid in cash and producing electronic currency in return.
Mobile wallets are thought to be user-friendly and convenient. Customers may use these systems to send or receive money, pay the bills and make contributions. Further, these solutions are open to both banked and unbanked customers.
Egyptian FinTech firms that serve as payment processing providers for retailers have been growing in the online payment services sector via the use of gateways [23] mainly on e-commerce sites. They allow merchants to email, receive, handle, and send financial data to banks, as well as promote electronic payment by the customer to the merchant with no cash involved.
Most online payment portal services have bank-provided card payment credit facilities for cardholders which enables retailers to identify and pay all purchases.
The Egyptian central bank is cooperating with ministries and government organizations to promote Egypt's booming FinTech sector.
Moreover, the Egyptian President established the “National Council for Payment” in February of 2017, in order to encourage electronic transactions. The council consists of the President, the governor of Egypt's Central Bank, and the Chairman of the FSA (Financial Supervisory Authority).
Further, the country is witnessing a surge of reforms and new financial legislation in order to address the rise of online lending and crowdfunding.
Along with big institutions choosing to focus on FinTech investment opportunities, the Central Bank of Egypt decided to commit up to 1 billion EGP to a special Fund-of-Funds.[24]
Recently, an independent investment catalyst vehicle which promotes VC funds that focus on Technology/FinTech sectors is established in partnership with several large institutions for the express purpose of obtaining CBE's expertise and strengths and partnering with them in order to create a sustainable and independent investment platform to boost the development of FinTech.
On March 2019, the Central Bank of Egypt launched a strategy for supporting the FinTech ecosystem and positioning the country as a regional FinTech hot spot. Accordingly, clearer regulations on enabling infrastructure such as open APIs, cloud and data sharing are to be developed in order to encourage the emergence of FinTech and investments in the sector.
Furthermore, the Central Bank established a FinTech and Innovation Unit within the bank to address regulatory and governance matters, facilitate regulatory updates, publish thought leadership and represent CBE at local and international FinTech events.
Also, new mobile wallet laws, such as the implementation of e-KYC, growing restrictions, digital lending and spending, and new payment regulations, such as digital authentication, show that enforcement is being improved. However, FinTech continue to face significant regulatory obstacles that must be tackled. One of the most important roadblocks is the absence of a consistent FinTech licensing scheme.
The lack of consistent FinTech licensing schemes and the general vague guidance on an applicable and standardized regulatory regime across the major regulators are the most important roadblocks.
Many foreign regulators and FinTech hubs have also signed Memorandums of Understanding (hereinafter referred to as "MoUs") with the CBE. Finally, in order to encourage collaborative work and information sharing, the Centre Bank of Egypt will continue to extend its international collaboration agreements with regulators and related stakeholders.
The Egyptian Central Bank strives to be on top of financial technology and push for an ideal balance between stability and consumer protection while also enhancing the banking and financial institution's ability to foster beneficial innovation.
The regulatory sandbox will serve as a test platform for FinTechs developing novel business models which are now constrained by stringent authorization procedures and regulatory uncertainties.
The objective of the Regulatory Sandbox is to facilitate compliance embedment and financial solution adoption, early on in the FinTech ecosystem. Allowing FinTech entrepreneurs to focus on their primary offering means there will be no interruption in the market.[25]
- LEBANON
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