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By Jamal Saleh, Director General, UAE Banks Federation (UBF)
The banking and financial sector in the Middle East and North Africa (MENA) region is undergoing an unprecedented and rapid transformation, driven by innovations, digital breakthroughs, fintech (financial technology) advances, and evolving regulatory frameworks. This sector has been at the forefront of developing and employing innovative solutions to provide different segments’ clients and customers with secure and seamless experiences.
Over the past few years, innovations such as artificial intelligence (AI), blockchain, and open banking have revolutionized how consumers and institutions interact with money while offering efficiency and accessibility. Supported by a tech-savvy youth demographic (of MENA’s 480 million population, 75 percent are under the age of 35) and high smartphone penetration, the region has emerged as a hotspot for technological innovations in the financial sphere.
Governments in the region are boosting this growth through initiatives that offer regulatory sandboxes and funding opportunities. In GCC (Gulf Cooperation Council) countries, which are focusing on economic-diversification efforts, the financial sector is one of the key sectors that has been targeted to accelerate such a transition. Therefore, the sector has witnessed a surge in fintech startups, digital-banking solutions and blockchain-based financial services. Governments and private-sector key players are increasingly investing in digital payment systems, artificial intelligence-driven financial services and decentralized finance (DeFi).
The proliferation of mobile banking and digital wallets across MENA region has accelerated financial inclusion, particularly among the unbanked and underbanked population, which is estimated to be more than 67 percent of adults. Other innovations, such as micro-lending, have also seen an increase in the quest to address the needs of this vital segment.
COVID-19 pandemic further accelerated digital adoption, driving an exponential increase in digital payments. According to the World Bank, 76 percent of adults globally now have an account with either a bank, a financial institution or a mobile money provider, up from 68 percent in 2017 and 51 percent in 2011.
In the United Arab Emirates (UAE), local banks have invested heavily in modernizing technology infrastructure and providing enhanced specialized services while improving APIs (application programming interfaces), cloud computing, and digital channels. Guided by the Central Bank of the UAE (CBUAE), the UAE banking sector has achieved tremendous progress in developing digital solutions, offering the best services to customers while building a reliable and secure financial environment.
Digital transformation has contributed to increasing the reliance on digital services, as more than 95 percent of all the transactions of leading UAE banks have become digital, which is one of the highest globally. Meanwhile, the provision of services through smart devices is increasing, whereby UAE’s leading banks now provide 90 percent of their services via smartphones, and more than 50 percent of new bank accounts are opened through digital channels. The closure of more than 200 bank branches across the country reflects this growing reliance on digital banking. The UAE is also home to the region’s leading digital-only banks, while many traditional banks have also launched their own digital arms.
Innovations turn new ideas, methods, or inventions into goods and services that create value for customers. This is essential for businesses and economies due to the various advantages, such as better standards of living, greater efficiency, job opportunities, competitive edge, and increased productivity.
Among its many benefits, innovations in the banking and financial sector enhance financial inclusion, efficiency, and competitiveness. For example, digital payments, mobile banking, and open finance have reduced reliance on cash and offer user-centric services. DeFi platforms and cryptocurrencies promise faster cross-border transactions and financial inclusion for unbanked and underbanked segments, while artificial intelligence and machine learning (ML) enhance credit scoring and fraud detection.
Such innovations improve operational efficiency, reduce costs, and expand access to financial services. Many countries around the globe have leveraged mobile technology to bring banking to millions of people as well as micro and small businesses, showcasing the innovation potential for social impact.
However, innovations also bring several challenges, such as data security, consumer protection, and financial stability. As in all fields, unchecked innovations pose risks, thus underscoring the need for guardrails.
The right balance
The main objective of financial regulations is to safeguard the integrity of financial systems. Such regulations aim to safeguard consumers’ rights and protect them from malpractices, providing the right frameworks to combat fraud and financial crimes as well as ensuring transparency and fairness in the marketplace. Regulations can supercharge innovations by establishing standards and creating market demand for new technologies.
Yet, restrictive regulations can impede operational flexibility, reducing the ability of businesses to innovate and compete effectively. For example, compliance costs may be a burden for small startups, and rigid frameworks will struggle to keep pace with technological change.
Striking the right balance between fostering innovation and maintaining robust regulatory oversight to ensure stability, protect consumers, and mitigate systemic risks is one challenge facing the banking and financial sector globally. This balance is critical for the sector and, consequently, for sustainable economic growth.
To this end, policymakers and regulatory bodies in MENA region are doubling down on their efforts to pave the way for new innovations by developing and implementing flexible regulations that encourage innovation while ensuring financial stability. A key enabler to reaching this is to encourage collaboration between regulators, banks, and fintech startups to create an inclusive and transparent financial ecosystem.
As we have seen in the UAE, engaging with industry stakeholders in regulatory discussions ensures practical and effective policy implementation. In 2020, the Central Bank of the UAE launched the FinTech Office to build a mature fintech ecosystem and to position the UAE as a foremost fintech hub regionally and globally. Working closely with key stakeholders, the FinTech Office is implementing intrepid initiatives targeting each of its five pillars: demand, capital, policy, talent, and infrastructure.
The region is also investing in regulatory technology (regtech) solutions to automate compliance processes and enhance regulatory efficiency at best possible cost for financial institutions and banks. Innovative and advanced solutions such as AI-driven compliance monitoring and blockchain-based audit trails can improve transparency and fraud detection.
The move towards regtech solutions is reflected in the rapid growth of its market. In the UAE, the regtech market is expected to continue its growth at a compounded annual growth rate (CAGR) of 18.7 percent from 2024 to 2029 to reach more than US$608 million by 2029.
Innovations in advanced technologies also require robust cybersecurity systems and measures to prevent cyber-threats and combat cybercrimes. Enhanced security frameworks, multi-factor authentication (MFA) and real-time fraud monitoring are top priorities for the banking and financial sector.
Initiatives such as the Cyber Wargaming Exercise (CWG) of UAE Banks Federation (UBF) are paramount to protecting digital infrastructure and providing seamless and secure banking experiences for all customers. Organized annually under the supervision of Central Bank of the UAE (CBUAE) and UAE Cybersecurity Council (CSC), the CWG Exercise focuses on conducting simulations to assess UBF members’ cybersecurity teams’ capabilities to handle cyberattacks, identify strengths and uncover vulnerabilities. Virtual attacks at the exercise are designed to enhance the knowledge about techniques, methods, and procedures used by attackers, as well as factors representing sources of threats.
Sandboxes and responsible innovation
The rapid pace of adoption and deployment of innovative advanced technologies in the banking and financial sector has further encouraged regulators to establish policies that promote innovations while enforcing safeguards against systemic risks.
A few MENA countries, including the UAE, have introduced regulatory sandboxes to allow FIs and fintech firms to test innovative products under controlled conditions. These sandboxes provide a safe environment to test and refine innovations by identifying and mitigating risks at the early stages of development. These sandboxes reduce the barriers, time, and costs of new-innovation entry to the financial sector. At the same time, they allow regulators to work with innovators to ensure that appropriate consumer-protection safeguards are built into new products and services. Additionally, they can enable greater access to finance for innovators. For example, 40 percent of the firms that completed the inaugural program of the financial-services sandbox of the United Kingdom’s Financial Conduct Authority (FCA) received investments during or following sandbox testing.
The sandbox is part of the state-of-the-art Innovation Hub that has been recently established at Emirates Institute of Finance (EIF) new campus in Dubai academic city.
Last year, CBUAE issued the Sandbox Conditions Regulation to attract start-ups and global fintech businesses and create an attractive environment for the financial sector to support creativity and innovation within a regulatory and supervisory framework. The regulation outlines specific conditions that participants must meet to comply with regulatory obligations and ensure the best outcomes for all stakeholders.
Other initiatives, such as CBUAE’s digital-banking framework to support open banking, and Abu Dhabi Global Market’s (ADGM’s) and Dubai International Financial Centre’s (DIFC’s) fintech sandboxes, testify to the UAE’s drive in empowering innovations and encouraging innovators to contribute positively to the growth of the banking and financial sector by bringing new products and services to the market while ensuring consumer protection and achieving the interests of all stakeholders.
As innovations in MENA region’s banking and financial sector are poised to continue their growth trajectories, regulators and key stakeholders are also focusing on developing specialized talent. For instance, the Innovation Hub, launched by the CBUAE in cooperation with global tech leaders, aims to build a talent pool that will drive excellence and innovation by training more than 10,000 professionals in the financial sector to use AI and upskill 5,000 in key areas such as data analytics and cybersecurity. Additionally, educating consumers on digital-finance risks, cybersecurity best practices, and responsible financial management will support efforts to safeguard customers and the overall financial system.
Last but not least, enhancing cooperation with regional and international counterparts is vital since innovations know no borders. Developing common regulatory standards will also facilitate cross-border digital financial services and enhance economic integration and growth in the MENA region.
Policymakers are remaining proactive in adapting regulations to new trends to ensure that innovations serve socioeconomic development. A well-balanced approach that fosters innovation and safeguards financial stability and security will solidify UAE’s position as a global leader in the future of finance.
ABOUT THE AUTHOR
Jamal Saleh has been the Director General of the UAE Banks Federation (the sole representative and unified voice of banks in the United Arab Emirates) since January 2019. Before joining UBF, he was the Head of Credit & Risk and Acting Regional Chief Risk Officer with leading GCC (Gulf Cooperation Council) banks. With a career spanning more than 30 years in conventional and Islamic banking in the UAE and the United States, he has commanding expertise in private banking, corporate banking, corporate credit and risk management.
