Majd Zghyer is the strategy officer at uMake, an entrepreneurship support organisation (ESO) based in Ramallah, Palestine.
This year has seen shifting investor appetite towards innovative startups that aim to disrupt and transform the financial services industry. A recent report by KPMG recorded that in the first half (H1) of 2021, investments in financial technology (fintech) companies in Europe, the Middle East and Africa (EMEA) reached $39.1 billion across 792 deals – almost double the fintech investments of 2020 which totalled $26. Importantly, the global fintech market is anticipated to grow at a Compound Annual Growth Rate (CAGR) of around 20 per cent over the next four years.
The global boom in fintech investments in 2021 points to the enormous opportunities that are being unlocked in this dynamic and rapidly evolving space in the post Covid-19 era. Indeed, transformative and bigger opportunities have been made possible through advancements in digital technologies including big data, artificial intelligence (AI), machine learning, crypto-assets and blockchain. Strictly speaking, these technologies have resulted in the proliferation of fintech startups that aim to provide efficient and cost-competitive solutions to problems in various subsectors such as payments, open banking, personal finances, wealth management, insurance services and many others.
In the Middle East & North Africa (Mena) region, fintech startups closed the most amount of deals to become the most funded sector in the first half of 2021 according to Wamda. Some of the biggest rounds of the year went to buy now pay later (BNPL) startups including the $110 million raised by Saudi Arabia-based Tamara in April 2021. More importantly, the fintech sector has garnered attention from policymakers across the region who recognise the significant role of financial innovation in harnessing digital transformation and achieving sustained economic growth. For example, Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM) have both created a legal foundation for nurturing, supporting and scaling fintech startups in the UAE. Likewise, Bahrain Fintech Bay continues to offer advanced services and infrastructure that allows for experimentation and innovation while the Central Bank of Egypt (CBE) provides Egyptian fintech startups with access to funding via the EGP1 billion fund that was launched in 2019. Without any doubt, advancing the fintech sector across the Mena region can provide a wide range of opportunities for economic empowerment through its role in reducing the cost of reaching the underbanked and financially excluded populations as well as the positive spill over effects that could be realised across various industries and business verticals.
The path towards financial inclusion in Palestine
Unfortunately, when talking about financial innovation in the Mena region, very few people would think of Palestine as a fintech hub. This perception is understandable given the uncertain political reality in the country due to long years of conflict, occupation and severe restrictions imposed on the Palestinian economy. Of course, the inexistence of a sovereign national currency and the lack of an independent monetary policy are among the main obstacles that have hindered the development of an enabling environment conducive to fintech innovation.
Nonetheless, it is worth recognising that despite the challenges, the Palestine Monetary Authority (PMA) has managed to fulfil most of the responsibilities assigned to any independent central bank - apart from the ability to issue a national currency. PMA has been able to ensure the effectiveness and stability of the banking sector by adhering to globally recognised financial best practices. In fact, today around 60 per cent of adults (those aged 15 and over) in Palestine have bank accounts and access to basic banking services such as savings and borrowing. In addition, the Palestine Capital Market Authority (PCMA) has played a pivotal role in overseeing the performance of the non-banking financial sector including insurance, financial leasing, mortgage financing and securities trading companies.
In recent years, Palestinian policymakers and regulators have started to pay greater attention to the fintech sector and consider its socio-economic impact. For instance, in April 2020, the PMA granted permission for the use of mobile payments services and digital wallets. And in January 2021, it created the National Fintech Taskforce that aims to streamline collective efforts to explore the potential of the fintech sector and promote it in Palestine. However, according to the “National Strategy for Financial Inclusion in Palestine: 2018-2025”, the country is still experiencing low levels of access to, and use of financial services where large numbers of adults remain excluded from the formal financial system.
While 60 per cent of adults have bank accounts, only 10 per cent use credit cards and around 8 per cent hold an insurance policy. Ultimately, it is estimated that 63.6 per cent of the adult population in Palestine (the equivalent of 1.57 million adults) fall within the financially excluded category. In other words, despite its importance, owning a bank account is considered the initial step towards financial inclusion. Hence, addressing the challenges of financial exclusion requires greater intervention from governing bodies as well as the presence of genuine public-private partnerships aimed at including larger segments of society into the formal financial system.
the challenges of access to financial services are not only limited to individuals. In fact, Palestinian small and medium-sized enterprises (SMEs) continue to face obstacles in accessing conventional financing opportunities through banks and credit institutions. It is believed that alternative tech-enabled financing options (such as crowdfunding and peer-to-peer lending) can play a significant role in filling the annual estimated SME financing gap of $630-900 million.
That being said, it is worth noting that with a mobile phone penetration rate of over 85 per cent and an internet usage rate of 70 per cent, there could be a massive role for fintech startups in achieving the national ambitions of financial inclusion through digital technology. Palestine’s youthful and tech-savvy population (around 65 per cent are below the age of 29) can also provide the fertile ground for the adoption of innovative tech-enabled solutions in financial services. Undoubtedly, raising awareness of the importance of financial inclusion, upgrading the digital infrastructure across the country and reforming the regulatory environment still represent some of the key pre-conditions on the path towards achieving greater financial inclusion in Palestine through harnessing, developing and investing in fintech solutions.
The rise of impact-driven fintech
As history has shown, real innovative solutions might come from the most unexpected places. Precisely, transformative innovations in emerging markets usually respond to existing local challenges, and as a result, they play a critical role in addressing development needs and unlocking many untapped opportunities along the way. While 1.7 billion adults remain unbanked globally, fintech has the potential to make financial services more accessible to an increasing number of beneficiaries. An inspiring example in the impact-driven fintech space is the success story of Kenyan mobile banking and money transfer company M-Pesa, which managed to successfully turn the challenges of access to financial services into viable opportunities not only in Kenya but across Sub-Saharan Africa. By targeting the vast unbanked and financially excluded population, M-Pesa developed a simple tech-enabled solution that allowed people to withdraw, send, receive and save money, pay for goods and services and access credit just by using their mobile phones.
Similarly, Egypt’s leading digital transformation and e-payments platform, Fawry, has been able to revolutionise the delivery of financial services through its multiple payment options which include online, mobile wallets, ATMs and retail points of sales channels. The impact of Fawry’s success is evident in its ability to earn the trust of 29.3 million customers and process more than three million transactions on a daily basis.
Impact-driven fintech innovation can also help to address financing gaps for SMEs in emerging markets. One of the clearest models when it comes to this field is the Jordan-based digital lending platform Liwwa, which aims to simultaneously offer loans to small businesses and enable investors/lenders to generate competitive returns and earn profit online. To date, Liwwa has underwritten around $65 million across more than 1200 small business loans. It is believed that Liwwa’s innovative offerings will help support job creation and income growth in the Mena region.
In addition to monetary transactions, the scope of financial inclusion can be extended to include diverse areas such as insurance services. One such example is BIMA that managed to become the global leader in providing insurance to millions of low-income consumers across Africa and Asia through mobile phone technology. In fact, around 75 per cent of BIMA’s customer base is comprised of first-time insurance holders who have been overlooked by the traditional players in the insurance industry.
Certainly, the common denominator between M-Pesa, Fawry, Liwwa and BIMA is their ability to help unleash new avenues of economic progress for low-income individuals and small businesses by focusing on reaping the benefits of greater financial inclusion. Therefore, what Palestinian startups, corporates and regulators can learn from these examples is the need to focus on harnessing digital solutions to address development challenges. Additionally, many of these challenges are not unique to Palestine and they could be seen in various countries across the emerging world, thus offering an opportunity to create scalable solutions that tailor to the needs of larger segments of potential consumers. In short, rather than seeing it as a challenge, targeting the financially excluded and underserved population can provide unprecedented opportunities to ignite and promote impact-driven and scalable fintech innovation in Palestine and across the entire Mena region.