Dubai is home to a nascent fintech sector, driven resolutely by the government’s aggressive goals to position itself as a centre for innovation. But because the region lacks the scale of its global financial centre rivals, is it punching above its weight in terms of what it hopes to achieve? Shannon Manders reports.

 

The Dubai government – like its counterparts in financial centres across the world – is taking the rise of the fintech sector very seriously. Its aim: to become the UAE’s fintech hub.

“A lot of effort has been made in the last 12 months to establish a landscape in the UAE that supports fintech and generally encourages tech start-ups and innovation. We’re now starting to see those efforts bear fruit,” says Paul Allen, head of intellectual property and technology, Middle East, at law firm DLA Piper in Dubai.

One of the most recent endeavours was the announcement by the Dubai International Financial Centre (DIFC) in January that it would be launching the region’s first fintech accelerator in Dubai in Q1 this year.

Fintech Hive at DIFC will bring “cutting-edge financial services technology” to the region. “Its goal is to increase access to, and improve customer experience and drive operational efficiencies in the financial services sector,” reads a statement issued by the DIFC and Accenture, which will be setting up and operating the accelerator.

According to the DIFC, the global fintech sector has attracted over US$50bn of investment since 2010 – but the Mena region only received about 1% of that. It intends to use the accelerator to bridge that gap, and has cited trade finance, alternative finance such as peer-to-peer payments, and sharia-based services as areas in which it intends to catalyse growth and efficiency.

Fintech Hive will start with a 12-week accelerator programme, and DIFC has identified an initial group of local and international financial institutions to join it, including Emirates NBD, Mashreq, HSBC and Visa.

 

Big push for blockchain

The Dubai government has taken a hardline stance on becoming a leader in blockchain technology in particular, and initiatives in this space are slowly seeing the light of day.

Towards the end of last year, the crown prince of Dubai, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, announced the emirate’s blockchain strategy, which has three key aims: to have all government documents secured on a blockchain network by 2020; to create 1,000 new work examples based on the use of the blockchain network; and to focus on achieving Dubai’s global leadership in the development and application of blockchain networks.

The strategy is a joint project between the Dubai Future Foundation and Dubai Smart City Office.

Dubai is “constantly working to foresee the future and keep up with the fourth industrial revolution and all the prospects of increased efficiency that come along with it”, Sheikh Mohammed said in his announcement of the strategy.

Other moves by the government include the launch of the Global Blockchain Council (GBC) which marked its one-year anniversary this February.

The GBC is a 30-plus member-strong public-private initiative between government agencies, local business and start-ups. Founding members include the Dubai Multi Commodities Centre (DMCC), IBM and telecom operator du, all of which are involved in the various proofs-of-concept (PoCs) that the council is currently engaged in.
Among these projects is a DMCC initiative that explores the use of blockchain technology to help enhance security measures in the diamond trade. By digitising and transferring Kimberley certificates, physical documents that aim to curtail the trade of conflict diamonds, the DMCC hopes to reduce document duplication and stamp out manual errors.

The DMCC is committed to keeping ahead of the curve when it comes to identifying how blockchain can add value.

“At the moment we are looking at how trade links in general can be improved in terms of speed, safety and reliability, be it payments, transportation documents, letters of credit, etc,” says James Bernard, business development director at DMCC Free Zone, adding that this could include looking at how DMCC’s Tradeflow, its online platform for registering possession and ownership of commodities stored in UAE-based facilities, could benefit from being on a blockchain network.

The DMCC has recently also set up its own Blockchain Innovation Group: an internal committee that looks at the different parts of the business and addresses how blockchain – and other innovation – can make a difference.

IBM, another one of Dubai’s GBC co-founders, has big plans for the application of blockchain in trade and trade finance. After first announcing scant details on a shipment-related PoC in May last year, it recently divulged it has taken its collaboration with stakeholders in Dubai a step further: it is now working with Dubai Customs, Dubai Trade, Emirates NBD and Santander, among others, to explore the use of blockchain for a trade finance and logistics solution that uses smart contracts to track the import and export of goods in the city.

The solution will use Hyperledger’s Fabric platform and IBM Cloud to transmit shipment data, allowing all involved parties to receive real-time information about the state of goods and the status of shipment.

“Taking the example of a shipment of fruit, stakeholders involved in the process will receive timely updates as the fruit is exported from India to Dubai by sea, manufactured into juice in Dubai, and then exported as juice from Dubai to Spain by air,” says IBM in a statement.

According to a recent study by the IBM Institute for Business Value entitled Building trust in governments, nine out of 10 government executives in the Middle East and Africa surveyed see contract management as the greatest potential new business model. “By using blockchains for contract management, issues such as the failure of any party to meet a deadline or complete a task, for example, could be more immediately visible,” reads the study. The resulting transparency could improve performance management, it says.

IBM’s CEO Ginni Rometty told delegates at a fintech conference in January that the firm currently has between 300 and 500 blockchain projects on the boil.

 

Getting banks involved

Whereas banks in financial centres elsewhere in the world have been boldly throwing money at blockchain initiatives in various guises, those in the UAE have been generally more sluggish – despite the recent flurry of activity in the space.

“In the UAE, the banks are talking about it, but we haven’t seen a lot of activity,” says a source close to the GBC, speaking to GTR on condition of anonymity.

The DMCC’s Bernard suggests that this may be a calculated move on the banks’ behalf.

“You want to be at the forefront at the right time. You don’t necessarily want to invest all your money right now, because it’s a real innovative technology that keeps changing and getting better – and new things keep coming along,” he says, noting that the banks are “definitely paying attention”.

There are exceptions: the National Bank of Abu Dhabi (NBAD) in February became the first Middle Eastern bank to go live on Ripple’s blockchain platform. The bank is using the technology to transmit cross-border payments in real time, making them easier, faster and more secure for its customers across the region.

For its part, the Central Bank of the UAE has taken measures to support innovation in fintech, albeit seemingly with some inconsistencies. It recently “clarified” a new regulation relating to digital payment service providers, which stipulated in January that virtual currencies, and virtual currency transactions, would be prohibited. In a statement issued a month later it said that the new regulations do not outlaw virtual currencies, such as bitcoin.

The central bank’s regulatory framework for electronic payment systems came into effect on January 1 and introduced a range of new rules relating to licensing, data protection and outsourcing.

“We are seeing a trend, both regionally across the Gulf and globally, towards greater regulation in the digital economy space. Fintech is a key part of this,” says DLA Piper’s Allen.

In a statement to Gulf News, central bank governor Mubarak Rashid Khamis Al Mansouri recently clarified the new regulations, saying: “These regulations do not cover ‘virtual currency’, which is defined as any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value. In this context, these regulations do not apply to bitcoin or other cryptocurrencies, currency exchanges, or underlying technology such as blockchain.” (The original regulation contained the phrase “all virtual currencies [and transactions thereof] re prohibited”.)

Just how far away the payoff is for all of the UAE’s endeavours in the fintech space remains equally ambiguous.

“It’s a little bit of time away yet,” says Allen. “If you look at this space three or four years from now, I’d expect we’ll see a lot more activity. What is important now, however, is that the investment is being made to put in place the right legal and regulatory structures to support a future that allows for, and indeed encourages, digital innovation in financial services.”

Others, like the DMCC’s Bernard, believe that benefits will arise sooner than that. “You’ll see a lot more happening this year than last year: last year was an exploratory period. This year people will invest a bit more time and funds into it,” he muses.

 

 

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