Central banks can adopt blockchain to drive digital currencies and inclusion – Intelligent CIO Middle East

Central bank digital currencies, can enhance financial inclusion and reduce cost of remittances, and according to recent research, these payments are projected to surge from $100 million this year to $200 billion by 2030, says Dr Ullas Rao at Heriot-Watt University Dubai.

Financial inclusion, a cornerstone of economic development, has long been a global challenge. In the Middle East, where economic landscapes are diverse and dynamic, the quest for financial inclusion has taken an innovative turn with the rise of financial technology, or fintech. The intersection of technology and finance is transforming the banking sector and, more importantly, providing unprecedented opportunities for financial inclusion in the region.

According to the latest MENA Financial Inclusion Report, the financial inclusion rate in the region was 20% by the close of 2019. The UAE boasted the highest financial inclusion rate at 46%, with Bahrain following closely at 39% and Saudi Arabia at 31%.

Fintech innovations are reshaping the banking and finance landscape across the Middle East. Mobile banking, digital payments, and blockchain technology are at the forefront of this transformation. Mobile penetration rates in the region are impressive, exceeding 100% in some countries, providing a fertile ground for the adoption of mobile-based financial services.

Notably, the UAE leads the way with a robust fintech ecosystem and significant investments in digital infrastructure. Statista report states that the UAE boasts a smartphone penetration rate surpassing 96%.

Central bank digital currencies

The rise of digital wallets and mobile banking applications has enabled previously excluded populations to access financial services conveniently. According to ACI Worldwide’s 2023 Prime Time for Real-Time report, transaction volumes in the Middle East are expected to surge from $675 million in 2022 to $2.6 billion by 2027, demonstrating a compounded annual growth rate, CAGR of 30.6%.

Technological advancements are not merely altering how traditional banking operates; they are crucial in promoting financial inclusion. One noteworthy example is the use of blockchain technology for remittances. The Middle East is a hub for migrant workers, and remittances constitute a substantial part of the region’s financial flows.

Blockchain-powered platforms have streamlined the remittance process, reduced costs and increasing the speed of transactions. This is particularly beneficial for low-income individuals who rely on remittances for their livelihoods.

The International Monetary Fund, IMF is developing a platform for cross-border transactions using central bank digital currencies, CBDCs. CBDCs can enhance financial inclusion and reduce the cost of remittances. According to recent research by Juniper, payments conducted through CBDCs are projected to surge from $100 million this year to $200 billion by 2030, marking a remarkable 260,000% increase over the next seven years.

Professionals in the industry also view Fintech as a significant factor in broadening business prospects for small and medium enterprises, SMEs. This is achieved by facilitating access to credit at competitive rates through established financial markets.

The establishment of formal inclusion, coupled with a well-established and resilient Fintech ecosystem, would also open avenues for cross-border market entry. This, in turn, would be supported by a credit rating that enhances the credibility and legitimacy of businesses in the global markets.

The amalgamation of technological advantages, market accessibility, and credit ratings plays a pivotal role in achieving a competitive cost of capital, which is crucial for success in the SME sector.

Medium term challenges

Despite the promising trajectory, the fintech revolution in the Middle East has its challenges. Cybersecurity concerns, regulatory hurdles, and a digital skills gap pose significant obstacles to adopting fintech solutions. Cybersecurity threats are particularly pressing, with the Gulf region experiencing a surge in cyberattacks.

Securing sensitive financial information is paramount as financial services become more reliant on digital platforms. Policymakers and industry stakeholders must collaborate to develop robust regulatory frameworks and invest in cybersecurity infrastructure to safeguard the financial ecosystem.

Regulatory frameworks, while necessary, must strike a delicate balance. Overly stringent regulations can stifle innovation, hindering the growth of the fintech sector. Policymakers should focus on creating an enabling environment that fosters innovation while ensuring consumer protection and financial stability.

Governments have introduced diverse initiatives in the Middle East to enhance financial inclusion within their nations. Saudi Arabia, for instance, is executing the Financial Sector Development Program, which strives to fortify financial institutions to bolster support for the private sector. The programme seeks to elevate the proportion of non-cash transactions from 36% in 2019 to 70% by 2025.

One of the goals outlined in Saudi Vision 2030 is to diminish reliance on physical currency within the country. This involves enhancing the national financial infrastructure to facilitate a shift towards electronic payment methods. Conversely, Egypt’s Financial Inclusion Strategy concentrates on collaborating with governmental bodies to furnish practical and cost-effective banking services for all sectors of society.

Addressing the digital skills gap is crucial for the sustainable growth of the fintech sector. As technology evolves, there is a pressing need for a skilled workforce capable of navigating the complexities of digital finance. This can be done by streamlining Know Your Customer, KYC processes and establishing transparent regulations.

Cross-border partnerships

Collaborative efforts between governments, educational institutions, and industry players can bridge this gap by implementing training programmes and promoting STEM education. Policymakers can further foster a more inclusive financial ecosystem by promoting public-private partnerships.

The government’s role extends beyond regulation to actively supporting fintech initiatives that prioritise financial inclusion. Collaboration with industry stakeholders can lead to the development of innovative solutions that address specific challenges faced by marginalised communities. Education and awareness campaigns are also pivotal in promoting financial literacy and encouraging the adoption of digital financial services.

The fintech revolution in the Middle East holds immense promise for advancing financial inclusion. As digital technologies reshape the banking and finance landscape, the unbanked and underbanked populations are gaining access to essential financial services.

In collaboration with industry stakeholders, policymakers must navigate challenges and leverage opportunities to ensure that the benefits of fintech are realised across all strata of society.

By fostering innovation, implementing effective regulations, and promoting education, the Middle East can usher in a new era of financial inclusion, unlocking the economic potential of millions and driving sustainable development.

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