Economic Research Forum (ERF)

Financial systems in MENA: time to embrace digital technologies

1205
The growing use of digital technologies in financial services provision holds promise for MENA countries to improve their financial systems and promote greater financial inclusion. This column explores the potential of such innovations as mobile money platforms and crowdfunding to help unleash the region’s economic potential.

In a nutshell

Embracing digital technologies in MENA financial systems is important to expand financial inclusion, to enhance access to finance and to improve the efficiency of traditional financial intermediaries.

Peer-to-peer platforms, crowdfunding and distributed ledger technology could help to unleash the economic potential of the region.

Governments need to build the right environment in terms of legal and regulatory frameworks, institutions, incentives and capacity-building.

MENA countries have improved their financial systems in recent decades, but most of them are still distant from best practices at the international level. Bearing in mind that financial development encompasses not only the effectiveness of financial intermediation and markets but also the degree of accessibility to capital and financial services, the Global Competitiveness Index ranking gives a good indication of the situation in the region. Figures 1a and 1b distinguish two groups of countries:

  • The first group – which includes Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) – is in the top half of the 155 assessed countries.
  • The second group – which includes Algeria, Egypt, Iran, Morocco, Tunisia, Turkey and Yemen – is poorly ranked according to most sub-pillars – ‘affordability of financial services’, ‘financial market development’, ‘soundness of banks’, ‘financing through local equity market’, ‘ease of access to loans’ and ‘venture capital availability’.

Digital technologies in the financial arena

In many countries, the emergence of new digital channels of financial services provision is increasingly disrupting the financial system. Indeed, the application of digital technologies in the financial arena is covering the whole spectrum of services that have previously been offered solely by financial intermediaries.

Payments, savings, insurance, financing, asset management and advice are all now possible through innovative digital channels, automated processes and decentralised networks enabled by the conjunction of advances in distributed computing, artificial intelligence, cryptography and a mature mobile money infrastructure (He et al, 2017).

The World Bank (2014) report for the G20 emphasises the opportunities offered by the digital financial channels: ‘rapid development and extension of digital platforms and digital payments can pro¬vide the speed, security, transparency, and cost efficiency needed to increase financial inclusion at the scale required to achieve G20 goals’.

CGAP (2015) argues that these innovative financial channels are driving down transaction costs, expanding customer choice, increasing customer engagement and helping financial services providers to develop a better understanding of the risk profile of potential customers.

The study adds that the growth of smartphone penetration and the maturing of the mobile money infrastructure will support access to finance for the poor in developing economies in the near term. To catalyse these channels, the study recommends increased commitment by stakeholders, new partnership models, deeper customer understanding and better regulatory environments to enable mobile money platforms and to expand the use of new technologies.

Crowdfunding: an innovative financial channel

Crowdfunding is an internet-enabled channel to raise funds for artisans, entrepreneurs and early-stage enterprises. It emerged during the financial crisis of 2008 in reaction to the credit crunch. The large-scale adoption of information and communication technologies and the development of social networks enabled the online collection of funds in the form of donations or investment by numerous people.

In 2014, it is estimated that US$16.2 billion was raised globally by crowdfunding. In 2015, the equivalent figure was US$34 billion, comprising P2P (peer-to-peer) lending (US$25 billion), reward and donation crowdfunding (US$5.5 billion) and equity crowdfunding (US$2.5 billion).

The InfoDev (2013) report notes that crowdfunding could help developing countries to alleviate the constraints on entrepreneurial finance by facilitating access to capital for small and medium-sized enterprises, cultivating high-growth entrepreneurs, supporting access to export markets and catalysing flows of capital within and between communities.

Financial systems and digital technologies

To develop their financial systems further, the MENA countries should leverage the benefits of the digital technologies while mitigating potential risks.

The strong relationship between the availability of the latest technologies and the development of financial markets in MENA is illustrated in Figure 2. It is clear that the first group of countries, which is endowed with a more developed financial system (here captured through the indicators ‘financial market development’ and ‘ease of access to loans’) performs better in terms of the availability of the latest digital technologies.

Figure 3 shows that better availability of the latest digital technologies is also strongly positively correlated with efficiency in the use of public funds and reduced scope for irregular payments and bribes.

Table 1 presents the intensity of use of mobile money operations in 16 MENA countries and some other regions. Unfortunately, with the exception of a few countries, this digital channel is still underdeveloped in the MENA region compared with other regions, including sub-Saharan Africa. MENA governments could rapidly benefit from these mature technologies to improve financial inclusion and to target subsidies and social transfers (and thereby improve the efficiency of public expenditure and reduce public deficits).

Embracing digital technologies to unleash MENA’s economic potential

Embracing digital technologies in the financial systems of MENA countries is important to expand financial inclusion, to enhance access to finance and to improve the efficiency of traditional financial intermediaries. P2P platforms, crowdfunding (equity and donation-based), smart contracts and distributed ledger technology (such as blockchain) could help to unleash the economic potential of these countries.

To catalyse this potential, to ensure its sustainability and to mitigate the various risks associated with digital financial channels, the governments should build the right environment in terms of legal and regulatory frameworks, institutions, incentives and capacity-building.

In addition, without fair competition and incentives for continuous innovation, the positive disruption effects will be difficult to realise. Fortunately, there are positive signals emerging since 2017 in the region with countries trying to develop the right ecosystem for the ‘fintech’ (financial technology) industry.

For example, in 2017, the Dubai International Financial Centre of the UAE launched the Middle East’s first fintech accelerator; and Bahrain joined a partnership with the incubator Singapore Fintech Consortium to create a fintech ecosystem and a regulatory framework.

Another promising development in the region is the conjunction of the growth of the Islamic finance industry with emerging fintech start-ups. Indeed, the growth of Islamic finance has been rapid at 10-12% annually over the past two decades. By 2015, the industry had surpassed US$1.88 trillion in size.

Finally, MENA central banks should embrace the digital technologies and initiate pilot projects based on distributed ledger technology at the level of their national interbank money market. In the medium term, it might be beneficial to create a ‘central bank digital currency’ to improve peer-to-peer exchanges, couple it with mobile banking and microfinance services, and unleash the potential of fintech products.

One ambitious project is the creation of a cryptocurrency at the MENA or Organization of Islamic Cooperation (OIC) regional level by a multilateral development institution with the objective of promoting South-South cooperation in trade and investment. More details about this proposal are in Nabi et al (2014), which suggests the creation of a cryptocurrency based on intra-OIC trade and investment.

Further reading

CGAP (2015) ‘Global Landscape of Innovations in Digital Finance’.

Demirguc-Kunt, A, and L Klapper (2018) ‘Measuring Financial Inclusion: The Global Findex Database’, World Bank.

He, D, R. Leckow, V Haksar, T Mancini-Griffoli, N Jenkinson, M Kashima, T Khiaonarong, C Rochon and H Tourpe (2017), ‘Fintech and Financial Services: Initial Considerations,’ IMF Staff Discussion Note SDN/17/05.

InfoDev (2013) ‘Crowdfunding’s Potential for the Developing World’, Finance and Private Sector Development Department, World Bank.

Nabi, MS, R Abdelkafi, I Drine and S Al-Suwailem (2014) ‘Enhancing Intra-trade in OIC Member Countries through T-SDRs’, Islamic Economic Studies 23(1): 101-24.

World Bank (2014) ‘The Opportunities of Digitizing Payments’, report by L Klapper and D Singer, World Bank Development Research Group.

World Economic Forum (2017a) ‘Global Competitiveness Index Historical Dataset 2007-2016’.

World Economic Forum (2017b) ‘Networked Readiness Index Historical Dataset 2012-2016’.

Figure 1a:
The financial development ranking of MENA countries (best performing group)

Figure 1b:
The financial development ranking of the MENA countries (worst performing group)

Source: World Economic Forum, 2017a

Figure 2:
Availability of latest technologies, development of financial markets and access loans

Figure 3:

Misuse of public funds, irregular payments and bribes

Sources: World Economic Forum 2017a, 2017b

Table 1:
Intensity of use of mobile money operations in MENA and other regions

Source: Demirguc-Kunt and Klapper, 2018

Most read

Social insurance in Egypt: between costly formality and legal informality

The rates of participation of Egyptian workers in contributory social insurance has continued to decline, even during times when the country has had positive annual growth rates. This column discusses key institutional elements in the design of the current social insurance scheme that have contributed to the growing gap in coverage, particularly the scheme’s cost and eligibility requirements.

Making trade agreements more environmentally friendly in the MENA region

Trade policy can play a significant role in efforts to decarbonise the global economy. But as this column explains, there need to be more environmental provisions in trade agreements in which developing countries participate – and stronger legal enforcement of those provisions at the international level. The MENA region would benefit substantially from such changes.

Jordan: navigating through multiple crises

Jordan’s real GDP per capita is today no higher than it was 40 years ago. While external factors have undoubtedly had an adverse effect on the country’s economic outcomes, weak macroeconomic management and low public spending on investment and the social sectors have also played a substantial role. This column explores what can be done to reduce high public debt, accelerate private sector development and enhance social outcomes.

Iran’s globalisation and Saudi Arabia’s defence budget

How might Saudi Arabia react to Iran's renewed participation in global trade and investment? This column explores whether the expanding economic globalisation of Iran, following the lifting of nuclear sanctions, could yield a peace dividend for Saudi Arabia, consequently dampening the Middle East arms competition. These issues have attracted increased attention in recent times, notably after a pivotal agreement between the two countries in March 2023, marking the resumption of their political ties after a seven-year conflict.

Egypt and Iraq: amenities, environmental quality and taste for revolution

The Middle East and North Africa is a region marked by significant political turbulence. This column explores a novel dimension of these upheavals: the relationship between people’s satisfaction with, on one hand, the amenities to which they have access and the environmental quality they experience, and, on the other hand, their inclination towards revolutionary actions. The data come from the World Value Survey collected in 2018 in Egypt and Iraq.

Global value chains and domestic innovation: evidence from MENA firms

Global interlinkages play a significant role in enhancing innovation by firms in developing countries. In particular, as this column explains, participation in global value chains fosters a variety of innovation activities. Since some countries in the Middle East and North Africa display a downward trend on measures of global innovation, facilitating the GVC participation of firms in the region is a prospective channel for stimulating underperforming innovation.

Labour market effects of robots: evidence from Turkey

Evidence from developed countries on the impact of automation on labour markets suggests that there can be negative effects on manufacturing jobs, but also mechanisms for workers to move into the services sector. But this narrative may not apply in developing economies. This column reports new evidence from Turkey on the effects of robots on labour displacement and job reallocation.

Food insecurity in Tunisia during and after the Covid-19 pandemic

Labour market instability, rising unemployment rates and soaring food prices due to Covid-19 are among the reasons for severe food insecurity across the world. This grim picture is evident in Tunisia, where the government continues to provide financial and food aid to vulnerable households after the pandemic. But as this column explains, the inadequacy of some public policies is another important factors causing food insecurity.

Do capital inflows cause industrialisation or de-industrialisation?

There is a clear appeal for emerging and developing economies, including those in MENA, to finance investment in manufacturing industry at home with capital inflows from overseas. But as the evidence reported in this column indicates, this is a potentially risky strategy: rather than promoting industrialisation, capital flows can actually lead to lower manufacturing value added and/or a reallocation of resources towards industries with lower technology intensity.

Manufacturing firms in Egypt: trade participation and outcomes for workers

International trade can play a large and positive role in boosting economic growth, reducing poverty and making progress towards gender equality. These effects result in part from the extent to which trade is associated with favourable labour market outcomes. This column presents evidence of the effects of Egyptian manufacturing firms’ participation in exporting and importing on their workers’ productivity and average wages, and on women’s employment share.