ADGM-RFI fintech partnership to boost financial inclusion through Islamic finance

Photo: Brian Ochieng waits for M-Pesa customers at his second hand clothing shop in Kibera in Kenya's capital Nairobi December 31, 2014. Safaricom, Kenya's biggest telecoms firm, is a model of how technology can be used to financially include millions of people with mobile telephones but without access to traditional infrastructure such as the banks that are available to the wealthy or those living in cities. Safaricom in 2007 pioneered its M-Pesa mobile money transfer technology, now used across Africa, Asia and Europe. It proved that money can be made from people who earn a few dollars a day. REUTERS/Noor Khamis

A partnership signed this week between Abu Dhabi Global Market (ADGM) and UK-based Responsible Finance and Investment Foundation (RFI) will link their expertise and networks to push out deployment of solutions for financial inclusion through ethical, responsible, and Islamic finance practices.

ADGM executive director for capital markets Wai-Lum Kwok and RFI chief executive officer Blake Goud told Salaam Gateway their collaboration will initially triangulate UK, the Middle East, and Africa.

“We want to connect innovators across the relevant markets. In this case, RFI being domiciled in the UK and us in the Gulf Cooperation Council (GCC), it makes sense for a start to support the innovators that are within these two markets,” said Kwok.

“It can then be a three-way [collaboration] in the sense that the innovators that are introduced by RFI coming to our platform to develop their solutions, can be used to deploy and service the region, which includes Africa,” he added.

In November last year Abu Dhabi became the first jurisdiction in the GCC and Middle East to launch a fintech legislative framework. ADGM’s RegLab has authorised participants of its regulatory sandbox up to two years to develop and test their fintech solutions.

This regulated environment was a draw for the RFI, which was introduced to ADGM after the thinktank’s inaugural Support Disruption for Good Challenge in Zurich in May. “The challenge surpassed our expectations in terms of the number and quality of fintech start-ups with an explicit ethical, responsible or Islamic approach and we wanted to find an appropriate partner to make the efforts in this area ongoing,” Goud told Salaam Gateway.

The challenge was won by Tez Financial Services whose mobile app provides financial access to the unbanked and under-banked. Tez is based in Pakistan where only 13 percent of adults had at least one bank account and 3 percent had any type of formal savings in 2014, according to most recent data from the World Bank.

MIDDLE EAST, AFRICA

The neighbouring regions outside the GCC are seen as both innovators and key recipients of fintech efforts in financial inclusion.

As part of its overall wider regional ecosystem-building, ADGM has made two key connections in Africa. It signed an agreement with Lagos-based social impact organisation TechPreneur Africa in June and another with Kenya’s Capital Markets Authority more recently in August.

“The focus on the wider Middle East and Africa is important because of the high concentration of Islamic finance in these markets but still significant financial exclusion,” said Goud.

The World Bank estimates that in 2014, only 14 percent of adults had at least one bank account in Egypt, the Middle East’s largest Muslim-majority consumer market, where Islamic banking holds around 9 percent market share.

Financial inclusion is a much higher 44 percent in Nigeria, which is home to the largest Muslim population in Sub-Saharan Africa. A report from the central bank of Nigeria in 2013 said its introduction of an Islamic banking framework, which granted two preliminary licences in 2011, was to bring into the banking sector “a large number of the country’s population” that had avoided interest-based finance.

The agreement with Kenya’s CMA was the first fintech bridge between UAE and an African financial regulator. While Kenya has a far smaller Muslim population than Nigeria, its regulators are keen to develop Islamic finance as a means to diversify its debt and investor portfolios and the country now has the belief that it can lead East Africa in Islamic finance. In April this year the Kenyan government proposed tax and legislative amendments in its budget to pave the way for Islamic finance. In Kenya, 75 percent of adults had at least one bank account in 2014.

Leveraging RFI’s expertise in ethical and Islamic finance, Kwok believes ADGM can boost Shariah-compliant fintech in the wider region. “With these types of connections we are able to move innovators across markets beyond just bilateral arrangements between RFI and ourselves,” he said.

Beyond its core work as a regulator, ADGM reaches out to stakeholders to build out the regional fintech ecosystem, according to Kwok. “Our forte is about setting standards and regulations that can facilitate and promote financial innovation. But there are a lot of other things that are beyond our expertise or core areas of focus, for example accelerators, co-working spaces, financial institutions’ deployment, universities that deploy and develop the talent pipeline,” he said. 

It plans to hold a regional regulators roundtable during the Fintech Abu Dhabi Summit in October to explore opportunities for collaboration in the sector. “We are starting with the GCC first, and then from there the wider region could include countries like Jordan, Lebanon, Egypt, South Africa, and India,” said Kwok.

INVESTMENTS

The regulator has no KPIs or timelines to channel capital to innovations but sets the necessary stable ground for financial players. It recently launched a dedicated venture capital manager regulatory framework to make it easier for VCs to anchor their activities at the ADGM, according to Kwok. The framework went live in May and already has its first licensed firm, Digital Spring Ventures that announced a $120 million fund to support emerging market technology companies.

To put this in context, fintech start-ups in the Middle East and North Africa (MENA) raised around $100 million in funding in the last decade, according to Wamda Research Lab and Payfort.

“When we go out to organise and create the ecosystem around innovation challenges (its first, with KPMG, is slated for October), for example, we are bringing together innovators as well as the incumbent financial institutions and investors,” said Kwok.

“For investors, they see it as a value add to them because they see the potential and the possibilities, which gives a platform for them to explore investment opportunities,” he added.

“We are speaking to various fundraisers here as well as investors and fund managers. They appreciate it as it helps them get into the world of fintech and understand fintech. Conventionally, they focus on other sectors like health or manufacturing.”

FUTURE PLANS

There are currently no concrete initiatives in place between ADGM and RFI. “We’re still finalising the operational details of the collaboration,” said RFI’s Goud.

“The approach we are taking is centered around the idea that fintech can be a force for good in society, but it needs to be an explicit focus on developing an ethical, responsible and Islamic approach to do the most good for the most people.”

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