Building Open Finance Frameworks for the Arab Region

Building Open Finance Frameworks for the Arab Region

A “unified open finance framework” holds significance in the Arab region, according to the latest from the MENA FinTech Association (MFTA).

A new report on open finance by the MFTA highlighted what different countries were doing to encourage open finance innovation regionally. For instance, Bahrain has an open finance framework in the works, while the UAE’s Abu Dhabi Global Market (ADGM) has broader the scope of open banking into insurance and investments.

The benefits of open finance lies in the ability to layer enhanced functionality on top data capabilities through a shared framework, the report said.

Building Open Finance Frameworks for the Arab Region 1

Source: MFTA

Hakan Eroglu, MFTA Open Banking Working Group Lead and Advisor to the MFTA Chairman

Hakan Eroglu

“Whether looking to improve financial inclusion, boost liquidity for small businesses, or facilitate know-your-customer (KYC) verifications, open finance is poised to lay the foundation for the future of finance across the Arab region.

That’s both an opportunity and a challenge for banks. It’s also a development that chimes well with the economic diversification agendas and relatively youthful workforces of Arab countries,”


Where can open finance be applied?

The three areas ripe with opportunities for open finance include financial management and pension planning, credit provisioning, and KYC, the report said.

It noted that most financial management apps relied on limited payments data. This has a direct impact in the Arab region, where personal financial management with account aggregation was the most important use case for open banking according to a previous survey by the Arab Monetary Fund (AMF).

Further, access to credit was a major constraint for a third of SMEs in the Arab region, as well as Afghanistan and Pakistan. This was despite GDP contributions of 45% by SMEs. Traditional credit scoring approaches are unable to fully represent the financial situation of underbanked or unbanked groups, the report said.

Thirdly, APIs for KYC were amongst the most important APIs for open banking innovation in the Arab region, according to the AMF survey. eKYC initiatives in the region include an eKYC platform in Bahrain, the UAE Pass in the UAE, and other solutions in cash-dependent countries such as Jordan and Morocco as well.

How to regulate open finance solutions?

The MFTA report suggests that high levels of regulation could be detrimental to growth, whereas limited intervention could lead to anti-competitive behaviour. Regulators would need to find the right balance between the two, with a consistent baseline for intervention based on market structure and technological maturity.

The number of financial entities per capita is high in several Arab countries, including Bahrain (about 30 retail bank brands for a population of 1.7 million) and the UAE (nearly 400 active fintech companies). More relationships between customers and financial service providers will need more centralised intervention, the report suggested.

Building Open Finance Frameworks for the Arab Region

Source: MFTA

The report also highlighted the UAE’s approach to regulation in this space.

The ADGM’s Financial Services Regulatory Authority (FSRA), for instance, issued a regulatory framework for third-party financial technology services this year. It provided a basis for open finance by permitting the expansion of specified information types as the demand for new third-party services grows.

Elsewhere, the Dubai Financial Services Authority (DFSA) issued a regulatory framework for money services last year. Its definitions of account information service provider (AISP) and payment initiation service provider (PISP) went beyond just the payment accounts of open banking so as to enable open finance applications.

What are the other considerations to watch out for?

From a tech standpoint, the degree and scale of integration brought about by open finance requires a higher level of infrastructural soundness. This includes the need for a proper licensing structure, data protections laws, consistency in user experience, and operational standards ensuring system responsiveness and availability.

Beyond this, however, the report noted that the adoption of open finance, and its success, depends on a cultural shift in the region as well. This means creating a level playing field for smaller providers, embracing all-party data sharing, and adopting the lens of an ecosystem landscape, the report said.

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