Financial technology to alleviate banking problems in Dubai

Given Dubai’s track record in the GCC region and wider Middle East, for both financial services and IT technology development and entrepreneurship, it is unsurprising that the emirate is now also establishing itself as a regional centre for the development of financial technology (fintech). The rise of the segment is being driven by initiatives from the government, which is looking to develop uses of blockchain in particular; financial sector players such as the Dubai International Finance Centre (DIFC) financial free zone; and major banks, like Emirates National Bank Dubai (NBD), with a particular focus on applications related to financial activities for which the emirate has a strong reputation.

Emerging technologies such as crowdfunding also offer hope for the resolution of finance-related problems faced by companies in the emirate, such as difficulties accessing credit encountered by small and medium-sized enterprises (SMEs) and start-ups.

Fintech Accelerator

The global fintech sector is growing rapidly in importance, with investment in fintech ventures around the world standing at $18.8bn in 2016, according to figures cited by the DIFC. The sector in the UAE is small, with 43 active firms listed by Middle Eastern start-up networking business Magnitt as of August 2017. However, this is growing rapidly, up from around 20 in late 2016, and key financial sector players are working to further speed up its development through a variety of initiatives.

Prominent among these is Fintech Hive, a fintech accelerator programme announced in January 2017 by the DIFC and professional services company Accenture. The initiative, the first to be established in the region, offers fintech start-ups a 12-week accelerator programme, with a focus on areas such as trade finance – one of the major activities of banks based in the DIFC – and peer-to-peer financial platforms. Selected start-ups will receive mentorship from major financial institutions to help get their projects off the ground. Major local and international institutions are working with the programme, with Emirates NBD and Mashreq being the first local banks to sign up, while international firms Visa and HSBC have also been on board since its inception. The first round of the initiative began in August 2017, with 11 finalists selected.

Regulatory Support

In order to further bolster the development of the sector, in May 2017 the Dubai Financial Services Authority (DFSA), which regulates financial services activities conducted in the DIFC, put in place a class of financial services licence known as the Innovation Testing Licence. The new regime will allow fintech firms to test out new products and services within the DIFC for a period of between six and 12 months without having to meet the requirements of a full DIFC licence. This is similar to so-called sandbox initiatives put in place by other regulators in key financial services hubs in recent years to allow for innovation without excessive regulatory constraints. Within the UAE, the Abu Dhabi Global Market’s regulator, the Financial Services Regulatory Authority, put a similar sandbox concept in place in November 2016.

Islamic Fintech

Fintech Hive also includes a focus on sharia-compliant fintech, and several Islamic institutions, including Abu Dhabi Islamic Bank, Dubai Islamic Bank and Emirates Islamic (the sharia-compliant unit of Emirates NBD), have signed up to be involved in the initiative. Pinaki Aich, vice-president for strategy at the DIFC, told OBG that while the Islamic fintech segment is young, an Islamic investment fund based in New York that recently applied for a DIFC licence is specifically interested in fintech development.

Cryptocurrencies

Another example of such activity in the emirate is the launch in May 2017 of OneGram, a Dubai-based, sharia-compliant cryptocurrency backed by physical reserves of gold. The launch of the product followed the Accounting and Auditing Organisation for Islamic Financial Institutions and the World Gold Council’s issue the previous December of a new sharia standard on gold, which enables sharia compliance for financial products backed by physical gold; previous use of gold could only be deemed sharia complaint if used for payment or as jewellery. The emirate is also home to conventional cryptocurrency-related products and services such as BitOasis, a Dubai-based digital currency exchange.

The development of the segment had come under doubt after the Central Bank of the UAE in January 2017 issued a new regulatory framework that appeared to ban the use of such instruments. However, the bank’s governor, Mubarak Rashid Khamis Al Mansouri, in a statement to local media issued a month later, said that such currencies remained under review, though some legal experts suggested their status remained unclear following the announcement.

Blockchain

The actual use of cryptocurrencies – the best known of which remains Bitcoin – in Dubai as a form of payment also remains limited. However, the Dubai authorities and local financial institutions are looking to make widespread use of the technology underlying many such instruments, namely blockchain. This is based around the creation of an encrypted ledger of transactions that is distributed to all users of the service in question – though each user only has access to a portion of the ledger relevant to him or herself, via a personal encryption key – with all versions being modified by consensus each time a new transaction is made. The record of such transactions, once entered into the ledger, can never be changed. The technology has numerous applications, including cheap and efficient storage of data and easy sharing of information among institutions, as well as the automatic implementation of certain types of contracts.

Dubai has been quick to recognise its potential. Smart Dubai, a government initiative to pioneer smart services and develop Dubai as a smart city, in April 2017 announced plans for the local authorities to become the first blockchain-powered government in the world by 2020, with the aim of moving all services to blockchain wherever possible. “Blockchain is one of the key areas of ICT focus in Dubai, where there is a developed community here now looking at all possible uses for it, in both the public and private sectors,” Massimo Cannizzo, managing director and technology strategy lead at Accenture Strategy for the Middle East and North Africa, told OBG.

Some local financial institutions are notable early adopters of the blockchain technology in Dubai. Prominent among these is Emirates NBD, the largest Dubai bank by assets, which in October 2016 announced plans to work with India’s ICICI bank and technology services firm Infosys to pilot the use of the technology for both international remittances and open account trade finance using the EdgeVerve Blockchain Framework for Financial Services, a blockchain ledger designed specifically for use by banks. The banks said that the blockchain technology could provide a range of benefits in these arenas, including increased efficiency, reduced costs, and near real-time transfers and monitoring of transactions.

In February 2017 the financial institution also began working with IBM, the Dubai government’s lead strategic partner for technology, to examine potential blockchain uses in a range of areas, again including trade finance. In May of the same year Emirates NBD announced plans to spearhead an initiative known as Cheque Chain among its employees that will see the printing of a blockchain-registered Quick Response code on cheques issued by the institution in order to reduce cheque-related fraud (see ICT chapter).

Crowdfunding

Another key area of focus regarding fintech development is crowdfunding, which allows individuals and companies to appeal to large numbers of small investors in order to receive debt- or equity-based financing. Prominent Dubai-based crowd-funding platforms include Beehive – the first platform to register with the DIFC – which, according to a company press release in October 2017, has channelled more than Dh130m ($35.4m) worth of funding from crowd investors to over 200 businesses.

The lack of a dedicated crowdfunding rule set in the emirate or the UAE as a whole had been an obstacle to the development of the segment in Dubai. However, this changed in August 2017 when the DFSA launched a new regulatory framework covering both debt- and equity-based crowdfunding models, a move that should give a substantial boost to the sector.

The development of such technology could have a significant economic impact, particularly on SMEs, which dominate the Dubai economy, and start-ups, which can struggle to obtain funding from conventional sources (see ICT chapter). “Crowdfunding is starting to become a viable funding option for SMEs, which is very positive for firms that are less than three years old in particular, as they face a vicious circle of being unable to obtain bank loans, and in turn being incapable of financing development to the point where they might qualify,” Alexandar Williams, director of the business development department at the Dubai Department of Economic Development, told OBG.