Navigating growth in MENA: prospects and pitfalls
There have been significant developments in the MENA region in recent years, particularly in the financial sector.
This article is part of the 2023 MENA Finance Guide, which can be accessed here.
The commodities market, specifically the energy sector, has seen growth due to the region being a major producer and exporter of oil and gas. To wean from its dependence these commodities, the region has ramped up renewable energy initiatives, and there has been a rise in large investments in solar energy projects in the UAE, Saudi Arabia and Egypt. A UAE-based solar power plant, Noor Abu Dhabi, is one of the largest single-site solar projects in the world.
Another sector experiencing growth in recent years is the e-commerce sector which rapidly grew during the pandemic. Evidence of that growth can be seen in the rise of the market shares of companies such as Souq.com, Noon.com and Jumia.
The financial market has also been on the receiving end of significant interest and investment. Data platform known as Magnitt stated in a report that the fintech sector grew positively both in funding deployed into the industry and the number of deals closed by fintech startups which saw a rise of 550% and 56% YoY in 2021, respectively, breaking records. Network International, a Dubai-based payment provider, and UAE-based buy-now-pay- later platform, Tabby have also witnessed an influx in investments.
An area to highlight is the derivatives market in the MENA region which has expanded in recent years. Dubai and Qatar have emerged as major players in the region by yielding significant investments in the financial sector. Islamic finance products, compliant with Sharia law and structured to avoid interest-based transactions, have also seen a spike in demand. The equity derivatives market has seen growth as well with the introduction of exchange-traded funds (ETFs) and index futures contracts.
However, a significant amount of work is yet to be done on regulatory frameworks and infrastructure developments. Several initiatives to boost growth and development in the derivatives market have been implemented. For instance, the establishment of the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC) not only provide an infrastructure to promote growth but also a regulatory framework for the financial sector. These new financial centres form a favourable environment to attract investment through their tax incentives and streamlined business registration processes.
Another example is Saudi Arabia’s 2019 legal framework for derivatives trading and the UAE introducing new regulations to promote the growth of fintech. With such a focus on fintech, multiple countries have also worked in fintech incubators and accelerators. One such example is the Bahrain Fintech Bay which provides support and resources to fintech startups in the region through its co-working space and innovation hub.
Moving the focus towards innovation, the demand for Sharia law compliant products has risen to meet the unique needs of investors in the region. The Dubai Gold and Commodities Exchange (DGCX) launched new contracts which includes the region’s first Sharia-compliant gold futures contract. Investors are able to hedge against fluctuations in the price of gold while adhering to Islamic finance principles.
Certain companies have identified the need for greater financial literacy both among businesses and consumers resulting in the introduction of financial education programs in schools and universities, as well as the development of online resources and training programs for professionals in the financial sector.
In fact, various MENA governments have invested in education and training to develop the skills needed to support the growth of the derivatives and financial sector space. For example, the Abu Dhabi Global Market (ADGM) Academy provides training in financial services, fintech, and legal and regulatory compliance.
Governments and corporations in the region are collaborating to continue the growth identified in the derivatives and financial sector space. The UAE and Saudi Arabia have launched a joint initiative to develop a digital currency that can be used for cross-border transactions.
All these factors have contributed to the growth of the capital markets in the region which has allowed companies the opportunity to raise capital via IPOs and debt issuance. For example, one of the largest exchanges in the MENA region, the Dubai Financial Market (DFM), has also helped facilitate capital formation by providing companies with access to capital.
Increased investment, economic diversification, job creation and the rise of the region’s competitive advantage has been observed due to the development of the financial sector. It’s safe to say the derivatives and financial sector has had a significant impact on the growth of the MENA region.
One potential hurdle is the region’s fragmented regulatory and legal frameworks, lack of transparency, and overall market fragmentation.
Other threats to growth is limited transparency in financial reporting and cloudy ownership structures which can create significant challenges for investors. Due to limited liquidity and increased transaction costs due to market fragmentation, the growth of the derivatives market is potentially hindered.
Lack of awareness of derivatives trading in the region has also impacted the adoption of ETFs. Another issue is limited liquidity. An example would be of the Qatar stock market which has relatively low trading volumes making it difficult for investors to trade effectively which can lead to wider bid-ask spreads, impacting trading costs.
However, the MENA region has significant potential for growth along with multiple areas of improvement which can uplift the derivatives and financial sector. Certain improvements include regulatory reforms which enable transparency, standardisation and compliance; improving financial literacy, creating robust technology infrastructure and strengthening investor protection mechanisms. Once the region caters to these challenges, it can attract more investment resulting in higher contribution to the growth of the derivatives market.
Overall, there is great scope for continued growth and development in the MENA region’s financial sector, but it will require ongoing effort and investments to realise the potential.
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