Ahmad Al Sayegh, Chairman of Abu Dhabi Global Market (ADGM), recently described Abu Dhabi as “the nascent fintech capital of the Arabian Gulf”. ADGM is looking to anchor fintech (financial technology) in local banks and institutions to capitalise on their strengths and minimise risks.
But what factors make a dynamic fintech hub? And does the UAE have what it takes?
London is the clear front-runner of fintech hubs across the world. According to a report from Accenture, in 2013 the UK and Ireland represented 53 per cent of Europe’s funding rounds and two-thirds of the total raised by fintech start-ups.
Two key ingredients have encouraged the growth of financial technology in the UK capital. Firstly, before becoming a fintech hub, London has long been one of the biggest financial capitals in the world.
From the inception of the Global Financial Centres Index (GFCI) in March 2007 to September 2013, and again from September 2015, London has been ranked the top financial centre. Most big banks have their European headquarters in the city, and this is thanks to attractive regulations and the high level of talent attracted to a global financial centre.
Low entry barriers
Secondly, London is an open and flexible place to do business. The UK’s financial market is a big contributor to the GDP, and so the government is keen to see the sector thrive. Barriers to entry are low, meaning that an entrepreneur can simply set up a business in his bedroom, without having to worry about expensive trade licenses and office space. If there isn’t a law prohibiting you from doing something, then you can go ahead and do it.
Following the financial crisis and resulting redundancies, London saw a sharp increase in technology start-ups eager to exploit opportunities available to them as a result. The city became a fintech hub because tech companies were able to operate in proximity to financial institutions, building on each other’s innovations and filling in market gaps as and when they arose.
The US is a great case in point of the importance of this connection. While Silicon Valley is home to hundreds of the world’s most advanced start-ups and global technology companies, the area lacks the benefit of operating in direct access to a global financial centre, such as New York. The two cities are in the same country, but are detached in terms of geography, which can make all the difference in a competitive market.
The UAE has great potential to become the Middle East’s centre for all things fintech. Commercial banking activity in the UAE was only established in the second-half of the 20th century, but by September 2015, Dubai became the highest-ranked financial centre city in the Middle East on the GFCI, up seven places to displace Riyadh. The emirate ranked 12th in the world in the index on infrastructure alone.
Through attractive tax exemptions and a robust judicial system based on Western markets, Dubai has positioned itself as a regional platform for international financial players looking to set up shop in the Middle East, and at the same time encouraged growth of home-grown financial institutions that cater directly to local demand. In 2015 alone, the Dubai International Financial Centre (DIFC) welcomed 309 new companies, up almost 28 per cent from the year before.
Dubai’s other strength is its strong SME ecosystem which provides a support network for start-ups and encourages entrepreneurship. Organisations like Dubai SME, Khalifa Fund for Development Enterprise, Injaz, and Endeavor, provide entrepreneurs with the support they need to build successful businesses and bring new technology and innovation to market.
To secure its place as a fintech hub, the UAE needs to create an environment where financial firms and technology companies can operate alongside each other and find it easy to collaborate. It also means considering regulatory frameworks for fintech firms like crowdfunding platforms and mobile banking and trading.
But regulation takes time and the market moves quicker. Regulators can only regulate what they understand and know, and thus the government will benefit from the entry of more home-grown fintech companies into the market that they can engage with to shape regulation. This can be achieved by lowering the costs of starting a business by easing trade license laws and the requirement to set up an office.
Two tiers of regulation will help the government to kick-start the growth of the fintech industry in the UAE. To start with, a more flexible environment based on light regulation that authorises companies to operate with low barriers to entry will encourage fintech businesses to set up shop.
Once an entrepreneurship ecosystem has been created, governments can follow through with a robust regulatory regime, which will have far-reaching benefits for all market participants.
Governments play an important role as accelerants in any industry, whether is it through monetary injections, creating a business-ready environment, or putting together guarantee schemes. This is especially true for a nascent industry, before an ecosystem has the chance to become self-sustaining.
The UAE has the resources and opportunity to become a fintech hub, and is on the right track to becoming one.
The writer is the Founder and CEO of Beehive, the online peer-to-peer financing platform.