Bahrain’s Bet On Fintech

Bahrain aims to make itself both a fintech incubator and a destination for providers based elsewhere to develop and launch their solutions.

Developing a thriving fintech sector is a key component of Bahrain’s broader plan to move away from its traditional reliance on oil revenues. Earlier this year, this ambition received a boost in the form of a new partnership with FinTech Aviv, Israel’s fintech networking community, following moves toward the normalization of relations between the two countries.

Moreover, encouraging fintech companies and entrepreneurs to locate in Bahrain has the support of Crown Prince Salman bin Hamad Al Khalifa, who took over as prime minister last November following the death of his deeply conservative great uncle.

Prince Salman, 51, was previously seen as favoring political reforms and has called for greater economic diversification. The tiny island kingdom is aiming to become the region’s most cost-efficient trade and distribution center; this year’s budget earmarked $3.5 million for new infrastructure projects.

But to finance these investments, along with generous social welfare provision and high levels of government employment, the government has had to run large deficits. As Ali Al-Eyd, head of a recent International Monetary Fund (IMF) mission to Bahrain noted in a virtual consultation in early February, “Public debt increased to 133% of GDP, the current account deficit widened to 9.6% of GDP and international reserves declined to about 1.4 months of prospective non-oil imports.”

With its dwindling hydrocarbon reserves and high government spending, Bahrain would not be able to invest in its future without the help of its neighbors in the Gulf Cooperation Council (GCC), notably Saudi Arabia, the United Arab Emirates and Kuwait. In 2018, Bahrain committed $10 billion of financial support. Since then, Bahrain’s ongoing budget deficits—exacerbated by the Covid-19 pandemic, which the IMF estimates contributed to a 7% contraction in non-oil economic activity last year—suggest that further GCC support will be needed in future.

Given Bahrain’s strategic importance as a bulwark against Shiite Iran and its hosting the US Fifth Fleet, such support is likely to be forthcoming. Even as they seek to build up their own credentials as financial centers, then, Saudi Arabia and other GCC members are likely to continue supporting Bahrain, including its targeted fintech ambitions.

Nimble and Supportive

The island kingdom has first-mover advantage. “Bahrain is the longest-established financial center in the region and is home to more than 380 financial institutions,” observes Dalal Buhejji, executive director of Investment Origination at the Bahrain Economic Development Board (EDB), “or third-party providers offering new solutions, there is a large pool of banks to test them locally.”

Crucially, the Central Bank of Bahrain (CBB) was the first in the region to introduce a framework for licensing fintech companies. In 2017, the CBB established the sandbox as a regulatory test bed for fintechs launching new digital solutions and products. After trialing for nine months, which can be extended to one year, successful candidates can emerge with a fully-fledged license, if their businesses require one to operate.

“Our regulatory environment has been nimble and supportive of innovation,” says Buhejji, “creating a robust environment in which fintech companies can launch new concepts and test them both through the regulatory sandbox and from the interest they attract from local banks and financial institutions before moving on to expand to the wider region.”

Another key government-led initiative is Bahrain Fintech Bay, launched in 2018. It’s an early-stage incubator run as a joint venture by the EDB and Fintech Consortium, a global incubator specialist. So far, more than 42 nascent projects or companies have participated in the program before enter the marketplace; major international banks including Standard Chartered are now partnering with Bahrain Fintech Bay to encourage further innovation.

This willingness to adapt regulation to address emerging technologies and assist startups has enabled Bahrain to become the first country in the region to embrace open banking. “The central bank developed appropriate regulations covering the aggregation of payments and standardization of open banking standards,” says Buhejji.

Bahrain mandated open banking in 2018, positioning the kingdom “as an attractive destination for fintechs based elsewhere to test, build and execute their solution,” says Prashant Shrivastava, executive director of Tarabut Gateway in Bahrain. The only licensed open-banking platform in the Middle East North Africa (MENA) region, Tarabut Gateway graduated from the regulatory sandbox and now provides access to a global network of banks and financial institutions.

Shrivasasta notes that the CBB was the first central bank in the region to mandate that all banks to use their APIs to accelerate innovation within the region.

Help or Hindrance?

Although well-adapted regulations can support acceleration of open banking, prescriptive regulations can hinder growth.

“From the models we’ve seen globally,” says Shrivastava, “what is even more important than regulations is the availability of standardized frameworks across multiple jurisdictions in MENA to support collaboration between financial institutions and fintechs. Ultimately, this could transform the role of regulators from being operators to really becoming enablers.”

Local and regional banks are increasingly engaged with fintech as they seek to upgrade their digital offerings in response to changes in customer demand accelerated by Covid-19. But “many banks had realized the importance of fintech and had strategies in place long before the pandemic hit,” says Buhejji. In late 2019, Bahrain-based lender Arab Banking Corporation launched its digital-only ila Bank, and National Bank of Bahrain became the first in the region to embrace open banking.

“While there was hesitation within the financial sector initially on how open banking can unfold new opportunities,” says Shrivastava, “banks are increasingly recognizing how it provides them with the ability to not only enhance customer experiences but also explore new revenue streams. So there is huge interest from banks across the MENA region.”

Tarabut Gateway raised $13 million in February in what is to date the largest fintech seed fundraising round ever sealed in the MENA countries. Berlin-based Target Global led the deal, which drew backing from international venture capitalists as well as local funds.

“As the number of startups in Bahrain is growing,” says Shrivastava, “the venture capital landscape is also maturing and supporting these fintech startups to scale further beyond Bahrain. Given VC’s experience within the region, there is a lot of support offered to promising fintechs on how best to expand and how to sustain growth.”

Tarabut Gateway was the first company to graduate from the sandbox, Buhejji notes. Another graduate, Rain Financial, was one of two licensed cryptocurrency trading platforms based in Bahrain, obtaining its license from the regulator in 2019.

Given that the domestic market is relatively small, most fintechs see Bahrain as a launchpad for the broader Middle East market. With only a single onshore regulator to report to—most GCC financial centers are located in free zones—fintechs already licensed by the CBB have a relatively straightforward pathway to apply for licenses elsewhere in the region.

Potential demand for a fintech ecosystem able to meet local needs is huge, especially in light of the annual $150 billion flow of remittances from migrant workers in Bahrain and the shift in preference from traditional cash payment mechanisms to remote channels since the pandemic.

“The central bank encouraged all merchants to go cashless,” says Buhejii, and increased the limits for contactless payments. Volume of remittances made through the Fawri+ service of the national electronic wallet, Benefitpay, surged by 1,273% after the pandemic hit in March of last year, according to the EDB.

The switch to contactless payments appears to be a long-term behavioral shift for MENA consumers, based on a recent Mastercard regional survey. Seventy percent said they now use contactless, of whom 81% say they will continue doing so after the pandemic is over. Bahrain’s growing fintech sector is positioning itself to be the go-to for regional banks looking to meet that demand