Bahrain follows Singapore's footsteps to become regional fintech hub in the Middle East

The first Middle East and Africa Fintech Forum is but a start to its fintech plans.

If there's one country which Bahrain is taking inspiration from as it builds its own financial technology hub, it is Singapore.

In the first Middle East and Africa FinTech Forum organised by the Arab Financial Services, one of the key discussions was on how Bahrain is following the footsteps of the lion city in being a regional hub for fintech and innovation. David Parker, Bahrain Economic Development Board’s (EDB) executive director, noted how the Monetary Authority of Singapore has been at the forefront of innovation when it comes to the financial services sector.

"We have seen over the last two to three years, as Singapore become a recognised global hub, an innovator within the fintech space. MAS is at the heart of that. So for us, it is a natural partnership to go with Singapore. We believe that it is a great model to follow," Parker explained.

Building its own sandbox

To recall, MAS managing director Ravi Menon announced the creation of a regulatory sandbox in Singapore during the week-long fintech festival last year. MAS also unveiled the Looking Glass, an innovation lab that would enable players to experiment with fintech solutions and provide consultation to start ups. Prior to this, Singapore's central bank released 12 Application Programming Interfaces for developers and financial institutions to use in their products and services.

Bahrain is doing just the same. Rasheed Mohammed Al Maraj, governor of The Central Bank of Bahrain, announced the issuance of a white paper on their own Regulatory Sandbox for FinTech.

"At the Central Bank of Bahrain (CBB) we understand the disruptive nature of fintech to business models and jobs but we have made a conscious decision to adopt it. The pace of innovation is not reversible, so the only choice we have is how well we prepare ourselves for the disruption," he said.

For Khalid Al Rumaihi, EDB’s chief executive, the white paper consultation is a big step in putting in place the ecosystem that will turn the country’s ambition of creating a fintech hub into a reality.

“We’re very excited to see how fintech companies innovate and grow as part of this initiative and we’re looking forward to feedback from the industry about the white paper,” he said.

The CBB is also looking to issue the draft rules for consultation on crowdfunding platforms for both conventional and Shari'a-compliant services. This will come with new directives on cloud computing are in the pipeline.

"These new initiatives are a continuation of our efforts to provide the right mix of policies and products to develop and enhance the quality and competitiveness of services in the financial sector," the governor said.

In the past years, the CBB has taken a number of initiatives geared towards a proactive adoption of new technology, including the introduction of a new license of Payment Service Provision and allowing Payment Service Providers to issue prepaid cards to allow the unbankable segment access to affordable payment services including remittances.

There was also the introduction of Electronic Funds Transfer System commercially known as fawri and fawri+ as mandatory for all retail banks.

This is not surprising, as Bahrain has led the Gulf region in financial services. Thanks to its early efforts to diversify its economy away from the oil and gas industry, it had put into place a thriving financial sector, building on its legacy for the past four decades. Currently, Bahrain is home to over 400 financial institutions. Bahrain's banking sector comprises of both conventional and Islamic Banking. It is the largest segment within the Kingdom's finance sector. The sector has an asset value of over US$192.7b as of September last year.

The EDB chief noted Bahrain’s financial services sector was more impacted than any other sector by the global economic turmoil over the past decade, in terms of financial impact and in terms of reputation. He said that fintech has the potential to offer a positive force for disruption of the financial services industry – one that benefits stakeholders across the value chain.

“It can reshape the way companies and consumers engage by altering how, when and where financial services and products are provided - success is driven by the ability to improve customer experience and meet changing customer needs, but also by reducing costs, simplifying processes and improving efficiencies,” he said.

However, he noted that the road that would lead to Bahrain’s fintech dreams would not be easy. He said the overall amount invested in fintech globally dropped from US$46.7b in 2015 to US$24.7b in 2016. And although this is still historically robust, the chief said this is a considerable decline.

Ties with Singapore

In line with its goal to nurture a fintech space in Bahrain, the EDB signed a partnership with fintech incubator and ecosystem builder Singapore Fintech Consortium (SFC) to establish a fintech ecosystem and regulatory framework.

Dubai-based asset management and advisory firm Trucial Investment Partners is also part of the agreement. Together with the SFC, Trucial will support Bahrain in developing related commercial and legal infrastructure required to initiate, nurture and sustain Bahrain’s fintech ecosystem.

"We have a long-standing relationship with SFC and Bahrain. We bring our investment experience and background to assist in many of the ventures and try to build the ecosystem within Bahrain by bridging it to other parts of the world," Trucial Investment Partners executive director Wael Al Hashimi said.

SFC co-founder Gerben Visser said the consortium wants to assist Bahrain just as how it did with Singapore for the past three years. Visser noted that SFC has helped on the corporate incubation with large financial institutions, making them understand how they can come into the fintech space even at its infancy. He enumerated three key phenomena they are focussing on: insurtech, regulatory technology, and blockchain.

"On one hand we work here to see how we can set up a dedicated fintech hub, which is a platform neutral space not just for start ups locally, but also for companies outside to come to Bahrain and soft launch, and to have a place they can call home. This is also for incumbents and larger players here in Bahrain to have their innovation teams to sit and collaborate with early stage companies," he noted.

Visser pointed out that Bahrain can position itself globally as a fintech hub in relation to Islamic Finance. In the mid-1970s, Bahrain was the first to put emphasis on Islamic Banking to nurture the concepts, rules, and common standards of Shari'a compliance. This has led to the Kingdom being the most developed Islamic Finance centre in the GCC region. The said industry is expected to more than double this year to US$2.6t, making it a vibrant spot for fintech.

EDB's Parker agrees that Islamic fintech is becoming an interest. "Islamic fintech is not just a marketing play, there is a real need to find solutions in muslim-dominated countries. When it comes to Shari'a compliance, regtech would be helpful. Shari'a compliant products are much more expensive. That puts the industry out of disadvantage. But with the adoption of Fintech, you will see a lot of Islamic financial institution will be competitive moving on in the future," Parker explained.

He also concurred that insurtech should be one of the main focus. He called the insurance sector in Bahrain "saturated" and in need of disruption.

In the entire GCC region, the insurance sector is growing quickly. It is expected to reach US$62.1b by 2020. In Bahrain, retail insurance has already gained momentum in recent years to meet demand from Western expatriates. It has also boomed with the growing middle-class population.

Parker said Bahrain EDB expects significant changes in the coming 12 months. He said they have already started building a calendar of events for players to collaborate with regulators.

Asked if Bahrain is competing with other key markets in the Middle East like Dubai, Parker said, "We want to be the leader in the fintech space for this region. It's not to say that these markets are not important, as they are important in building bridges, in terms of investment flows and opportunities. But we want Bahrain to be very much at the forefront in what's happening in the fintech sector in the region."