The Middle East emerging as an oasis for tech and fintech

In the battle between East and West for tech dominance , the Middle East is emerging as a tech hub – with its sights set on becoming an oasis for the world’s most innovative fintech companies. The region has been attracting capital and talent from Europe, the US and Asia and fintech innovation hubs in the Gulf have multiplied in recent years.  

Government led investment and initiatives, including favourable regimes for start-ups and SMEs are contributing to this transformation. Many Gulf Cooperation Council (GCC) countries have embraced the digital revolution by setting ambitious goals to diversify their economies away from oil and gas, and focussing on the potential of tech and digital services. Fintech has been a particular area of focus in the region where only 17 percent of consumers use digital banking, compared with almost 60 percent in the United States.

Key drivers of fintech innovation in the Middle East  

According to McKinsey fintech revenues are expected to increase from $1.5 billion in 2022 to $3.5–$4.5 billion by 2025 in the Middle East, North Africa, and Pakistan region as fintech in the banking sector grows from less than 1 percent to 2–2.5 percent. There are several factors behind the uptake in fintech activity in the region. These include: 

• Increased consumer demand: The region is characterised by a young and mobile first consumer base, which has pushed demand for digital financial products. 
• Digital transformation: High levels of internet penetration, growing number of digital consumers and investments in digital infrastructure, such as data centres and communication networks, have created favourable conditions for fintechs to grow and thrive. 
• Public - private funding: Sovereign wealth funds have historically been at the top of the list when it comes to fintech investments in the region, but VCs are picking up pace. 
• Supportive regulation: Several GCC countries have introduced comprehensive regulatory frameworks fostering innovation. The United Arab Emirates (UAE) recently issued Sandbox and Open Finance regulations represent an example of the region’s efforts to foster an investor friendly fintech ecosystem. 

AI investment 

GCC countries have joined the global race for AI dominance and are increasing investments in an effort to build infrastructure and attract talent. The two stand out countries in the region are: 

• The Kingdom of Saudi Arabia: which has created a $40 billion fund to invest in AI and other technologies, in support of the Vision 2030 goal to develop the digital economy and promote the development of technology-based financial services and solutions. Big Tech have also set their eyes on the country, closing partnerships and announcing investments in data centres and artificial intelligence, feeding into its ambitions to create an AI hub and establish Riyadh as a global fintech hub. 
• The UAE: which has similar ambitions, and where the local government is strengthening its partnership with the US announcing future joint investments in the AI space. The country has also seen important investments in its AI startups.  

The GCC’s data centre market, which is crucial for the development of AI, is also thriving creating new opportunities for new and established data centre providers to provide the infrastructure to support AI uptake. 

AI and data regulation 

AI was also one of the main themes of the recent Dubai Fintech Summit 2024, which focused on digital transformation in the financial sector. Participants shared examples of how they are leveraging machine learning for customer service and fraud detection and prevention, which has unlocked new levels of efficiency. They also highlighted regulatory fragmentation and how institutions can mitigate compliance risks whilst driving innovation and growth. 

An example of this is recently issued data protection legislation in the GCC region (learn more about the KSA regime). Although these are largely modelled after the EU’s GDPR – which has set the global bench mark for personal data protection – there have been some concerns raised by industry commentators that the compliance burden could hamper the development of AI and Open Finance. More specifically the lack of a harmonised regulatory approach across the region creates compliance complexities for businesses.

AI regulatory developments outside the region might also impact the development of AI in the GCC. EU’s newly adopted AI Act could potentially capture many international organisations with a tangential connection with the EU who may end up taking the view that it is easier to meet EU standards as global standard. 

Crypto and payments supportive regulation 

Favourable crypto regulations have helped the MENA region to become the 6^th largest crypto economy in the world (Chainalysis) and payment companies are dominating the scene with 26 entries in the Forbes Middle East’s Fintech 50. 

Among the GCC countries, the UAE has introduced a number regulatory regimes for virtual assets across all of the UAE regulators, including the Central Bank of the UAE, the Securities and Commodities Authority, the DFSA and the FSRA.  The UAE is one of the first places to have a separate regulator for the regulatory supervision of virtual asset services providers.  The forward-thinking approach within the UAE  have attracted much attention from the crypto industry, which has found fertile ground to grow thanks to increased regulatory certainty and favourable market conditions.  

In recent years, governments across the Middle East region have also introduced supportive fintech regulations as part of their fintech strategies. For example, the UAE, Qatar and Saudi Arabia have all launched instant payment platforms improving transactions’ speed benefiting both individual and businesses.  

As part of its vision to create and foster a mature fintech ecosystem, the UAE Central Bank has recently issued two new regulations to support innovation. First, the Sandbox Regulation creates a controlled regulatory test environment for fintech innovation. Not the first of its kind, the newly issued regulation aims to create a controlled environment for fintech startups and established companies to test new and innovative products, services and business models. 

Secondly, the UAE has also regulated to create an open finance framework that goes further than existing open banking initiatives in European jurisdictions. Issued as part of the UAE Central Bank’s open finance vision, the framework seeks to use customers’ consented financial data to empower greater customer choice and control over their information whilst facilitating competition amongst financial products and services.

Looking ahead 

Legal and regulatory frameworks in the region are changing, predominantly in line with regional and global developments. The pace of change in the UAE and Saudi Arabia is rapid, as they look to shape legal regimes and builds confidence in a predictable legal environment for fintech participants, businesses and individuals. This momentum looks set to continue.

The fintech legal landscape in the UAE is multi-faceted, due to the presence of different fintech regulators and regimes at Federal level (across the seven emirates), in the Emirate of Dubai and in the DIFC and ADGM, the self-legislating financial free zones in Dubai and Abu Dhabi. 

Fintech participants need to work with a law firm that can help navigate this complex and increasingly sophisticated landscape. Our teams in the region blend deep knowledge of the legal regimes with a sensitive understanding of customs and culture in business practices. 

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