How digital currency adoption in the GCC can drive financial inclusion

When FinTech companies team up with banks, they have the potential to create new business models that support the financial ecosystem

With a well-educated population and a high level of mobile penetration, GCC countries are well placed to achieve their cashless objectives. Photo:
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The unexpected rapid growth of the digital economy and the subsequent surge in financial inclusion, particularly in poor and middle-income countries, has been a major outcome of the Covid-19 pandemic.

According to World Bank analysis, 40 per cent of those who made a digital payment during the pandemic in the developing world were first-time users.

This rapid evolution has propelled the journey towards building cashless societies, with countries in the GCC leading the charge.

Digital payments in the UAE grew at a compound annual growth rate of 9 per cent between 2014 and 2019 — nearly double the European average of 4 per cent to 5 per cent, a report by McKinsey found.

And according to financial analysts at Strategy&, the UAE is on course to join advanced nations such as Finland, Sweden and the UK to become fully cashless by 2030.

So, what does this mean for the UAE and its GCC neighbours?

Cashless benefits

For millions of people across the Mena region, the primary benefit of a cashless society is financial inclusion, which is a crucial enabler of personal independence, social mobility and economic development.

For citizens, financial inclusion means being able to participate in the digital economy, enjoy fast and affordable financial services and build a scalable business.

For governments, it provides a platform for gross domestic product growth, security, tax transparency and international competitiveness.

Right across the region, governments are creating initiatives to hasten the move towards a cashless society.

The UAE Central Bank launched the Financial Infrastructure Transformation (Fit) programme in February to accelerate the transformation of digital payments with a new domestic card initiative, an instant payments platform, a financial cloud and supervisory technology.

We have seen significant steps towards the development of a regional payment system, with the GCC Real Time Gross Settlement System that connects the individual domestic digital payment systems of each of the six countries.

This would mean, for example, that a UAE dirham payment originating in Saudi Arabia and destined for the UAE would transpire over the domestic Saudi and UAE payment systems.

This removes the reliance on bilateral correspondent banking frameworks, in turn driving efficiency, reducing costs and creating regionwide standardisation.

Banks and FinTechs

With well-educated demographics and a high level of mobile penetration, GCC countries are exceptionally well-placed to achieve these cashless objectives.

Furthermore, their tech-savvy citizens are enthusiastic adopters of new digital payment solutions that are being developed by leading banks and a network of FinTech ecosystems designed to unleash cashless solutions.

Thanks to the emergence of a vibrant FinTech sector in our region, major banks have the opportunity to collaborate with other financial institutions and technology companies to drive innovation in the payments industry and promote the adoption of cashless payment platforms.

Many FinTechs are good at solving a narrow range of problems for clients but may not be able to scale up easily beyond that.

When FinTech companies team up with banks, they have the potential to create new business models that help both the FinTech and partner banks.

Mashreq, for example, has linked up with dozens of FinTech players in the payments and lending space, with recent examples including a new partnership with US-based payment and banking solutions provider i2c.

The collaboration, which was announced in March, will result in Mashreq using i2c’s Software as a Service platform to offer digital payment experiences to its consumers, merchants and FinTech clients.

The partnership makes it possible for Mashreq to accelerate its own cashless solutions by creating numerous digital solutions such as custom payment programmes, virtual and physical cards, multicurrency virtual wallets and digital IBANs.

Central bank digital currencies

Such solutions rely, of course, on the provision of an enabling regulatory framework. The good news is that most GCC countries are on the front foot — and the latest regulatory innovations relate to central bank digital currencies (CBDCs).

The UAE Central Bank unveiled its CBDC strategy in March, detailing its intentions to begin the first phase of the “digital Dirham” over the next 12 to 15 months.

The strategy is one of the nine initiatives within the Fit programme and follows a series of successful CBDC initiatives, including Project “Aber” with the Saudi Central Bank in 2020, which confirmed the possibility of using a digital currency issued by two central banks to settle cross-border payments.

We have seen significant steps towards the development of a regional payment system
Kartik Taneja, head of payments at Mashreq

Over time, there is the potential for the development of a wholesale and retail CBDC, which can enable the digitalisation of the entire trade finance process.

In turn, this could lay the foundations for innovations such as “programmable money”, for example — money that can be directed to a single purpose or for a limited period. It may also enable greater control over money supply by the central bank.

These outcomes mirror the stability of a wider cashless society — as explained in a new analysis by the International Monetary Fund. It shows that in developing and emerging economies, CBDCs have the potential to support large unbanked populations and boost financial inclusion.

CBDCs could also increase deposits, incentivise lending, reduce credit risk, hasten small and medium enterprise development and help households to build credit profiles.

Collectively, these dynamics have the potential to eliminate financial exclusion and help to ensure that cashless societies serve all citizens in a way that is inclusive, safe and resilient.

Kartik Taneja is head of payments at Mashreq

Updated: April 20, 2023, 3:09 AM