The Growing Interest in FinTech from Fund Managers and Regulators alike
By Zubair Mir, Geoffroy Hermanns & Emma Spence
Posted: 4th April 2018 09:47
Financial technology (“FinTech”) is a growing industry in the Middle East and North Africa (“MENA”) with regulators and governments across the region thinking more deeply about the impact that FinTech companies can have on the broader economy. Governments throughout the region are recognising that boosting financial inclusion is crucial for economic diversity and growth across the region. Fund managers must embrace these developments and their interest in FinTech, under the form of investments or to be used as management tools is becoming more and more prevalent.
The market in the Middle East, and specifically the UAE, was previously dominated by crowdfunding, however in light of recent developments regarding FinTech sandboxes and various government driven initiatives, other areas of technology-enabled innovation (such as Blockchain) are quickly catching up following the opportunities available in the market. Blockchain, in particular, has numerous potential advantages within the asset management sector for streamlining efficiencies to further improve current processes. Such advantages include removing friction from the client on-boarding process, streamlining management portfolios and easing compliance burden related to anti-money laundering and know your customer. This will ultimately allow fund managers to further concentrate on their core tasks of fund management whilst streamlining the administrative processing.
The development of these initiatives stems from the innovation demonstrated from within the UAE. Specifically, the Dubai International Financial Centre's (DIFC) FinTech accelerator program called FinTech Hive which provides mentorship to start-up entrepreneurs to support their innovative development, with the aim of the DIFC becoming a global FinTech hub. Blockchain and other money transfer technologies are becoming increasingly popular, supported by various government initiatives, including the Dubai Blockchain Strategy, a program to develop technological initiatives to generate efficiencies across the region. In particular, the Dubai Land Department (“DLD”) has become the world's first government agency to adopt Blockchain technology for its transactions. As part of this, Blockchain systems will be used by the DLD to create a secure database to store real estate contracts and lease registrations. The development of this technology presents huge opportunities for real estate fund managers in the market and is representative of the shift away from more traditional administrative processes, to innovative ways of conducting business, with government initiatives at the fore-front.
Elsewhere across the UAE, the Abu Dhabi Global Market (“ADGM”) has launched its FinTech RegLab (“Regulatory Laboratory”) alongside a FinTech legislative framework. The framework sets out the Financial Services Regulatory Authority's (“FSRA's”) approach to the RegLab, allowing for a controlled environment where participants can develop FinTech solutions without being subject to all of the stringent regulatory requirements. Besides the RegLab, the ADGM has partnered with Mastercard as part of a programme that will allow both organisations to exchange expertise and knowledge and co-operate on FinTech projects. This innovative partnership echoes the region's open-mindedness to FinTech; namely, the ADGM's approach to Initial Coin Offerings (“ICOs”). The ADGM has decided to take a measured approach to ICOs (in comparison to jurisdictions where ICOs are banned) whereby the FSRA will only regulate ICOs where tokens exhibit characteristics similar to that of securities. The placement of fund units through ICOs are however not being considered yet.
The ADGM has further recently signed a FinTech cooperation agreement with the Bahrain Economic Development Board (“EDB”), the first of its kind in MENA. This partnership will see the ADGM and the EDB explore initiatives to promote economic growth through the adoption of new technologies, and allow start-ups to access information from each jurisdiction through one point of contact. This collaboration comes as part of Bahrain's commitment to develop a FinTech industry through its Bahrain FinTech Bay, a facility designed to accelerate FinTech companies' development. The FinTech Bay is set to be the largest dedicated FinTech hub in MENA, and will allow for interaction between investors, entrepreneurs, government bodies, financial institutions and asset / fund managers through a variety of shared infrastructure, including co-working spaces. The announcement of the FinTech Bay comes after the Central Bank of Bahrain (“CBB”) adopting an ad hoc regulatory framework allowing financial technology firms to test and experiment with banking and asset management ideas, and the CBB's recent partnership with the Singapore FinTech Consortium to boost interaction between FinTech start-ups in the Middle East and those in the ASEAN region, which will further enhance opportunities for fund managers to cross market their funds in Asia and the Middle East.
One country in the region that has the potential to be the largest FinTech hub is that of the Kingdom of Saudi Arabia, which already has a very active funds market. FinTech development within Saudi Arabia has been slow, however new initiatives have been set up to create a positive ecosystem for FinTech, and to reduce the reliance on oil. This ambition to pursue FinTech opportunities is evident from the Public Investment Fund's (“PIF”) investment into the Softbank Vision Fund, which is expected to be the largest technology investment fund ever. Similarly, the Islamic Development Bank (“IDB”) has announced it wishes to use Blockchain technology to develop Shari'ah compliant products, which will probably bring a great boost to Shari'ah compliant funds. It is also understood that there are current discussions between the Saudi Arabian Monetary Agency (“SAMA”) and the Saudi Capital Markets Authority (“CMA”) to mimic the innovation demonstrated by the UAE to create a regulatory sandbox, promoting the use of FinTech in Saudi Arabia.
Overall, the use of FinTech in the Middle East is an ever-evolving and growing market. As such, it is critical for companies to co-operate to create a supportive ecosystem with technological innovation at the heart and for funds and fund managers to assist the ecosystem with the necessary financial support and investment programs. With the opportunities available to those who are involved, financial institutions (including asset management firms) in the region have recognised the need to transform and innovate along with the rapidly evolving FinTech industry. These technologies can be used to reduce operational expenses within the wealth and asset management sector, such as speeding up the process of clearing trades and storing client date in a more efficient way. The introduction of disruptive technology in MENA is advantageous despite challenging the traditional banking and funds model, as it allows for traditional players to partner with innovators and take advantage of the plethora of future (investment) opportunities in the FinTech industry.
Zubair Mir, Middle East Managing Partner and Middle East Head of Corporate,
Herbert Smith Freehills LLP, Dubai
+971 4 428 6303, email@example.com
Zubair Mir is a corporate finance lawyer who specialises in mergers and acquisitions, private equity, asset management and Islamic and conventional investment fund formations. He has been-based in the Middle East since December 2000, having previously worked in both London and Melbourne. Zubair has been consistently named each year as one of the world's leading corporate finance and investment funds lawyers over the last 15 years by various international legal directories including Legal 500, Chambers Global and The International Who's Who of Private Funds Lawyers.
Geoffroy Hermanns, Senior Associate
Corporate / Investment Funds, UAE
+971 4 428 6337, firstname.lastname@example.org
Geoffroy is a specialist investment funds and asset management lawyer with over 11 years' experience in funds, corporate and regulatory matters, based in the GCC since 2012.
He advises some of the world's leading financial institutions and asset management firms on the structuring and formation of a wide range of Shari’ah-compliant and conventional investment funds.
Emma Spence, Trainee
Herbert Smith Freehills
Emma is a trainee at Herbert Smith Freehills, currently supporting the corporate practice in the Middle East.