How Bahrain is driving Islamic fintech forward

Islamic Business & Finance’s exclusive conversation with Khalid Saad, CEO, Bahrain Fintech Bay on developing Bahrain into the region’s fintech hub

What was the vision behind the Bahrain FinTech Bay? The concept of the FinTech Bay in Bahrain was a vision of how we can meaningfully develop the fintech ecosystem so that it becomes sustainable, forward looking, and embracing the latest innovations. We wanted it to become the place where local regional, international institutions could collaborate, and together call Bahrain home.

This initiative included different pieces. One was the regulatory piece, the funding piece, and how can we create a platform which combines both the physical and the non-physical elements and making it a catalyst to drive the FinTech Bay and drives it as Bahrain’s first dedicated fintech space in the region. At the start had three possible ways to move forward with the concept.

First, it could have become a government-backed initiative, but we weren’t sure about whether, in a few years, the government would be dedicated to it or the funding would run out. We could also have gone to a private institution, but then it could become too focused on one entity, which could prevent others from participating. Instead, we decided on having a multitude of institutions buying into a collective vision of together being a part of the fintech ecosystem as a part of the FinTech Bay.

At that time, we had 31 partners supporting the FinTech Bay, which had never happened in this part of the world, certainly for fintech. These are the ones that are financially contributing, if we include nonfinancial partners, it’s 45. Included amongst these players, we have banks such as Baraka Bank and Kuwait Finance House, Ark Capital for investment, and Bahrain Islamic Bank. What we’re doing with these players, and where these players are going, are working towards taking Islamic finance to the next level and Islamic finance 2.0 to be really based in technology.

A lot of these banks have already embarked on digital initiatives to push the boundaries of Islamic fintech. Bahrain Islamic Bank has already announced they’ll invest $10 million in digital infrastructure to become a leader in Islamic fintech. Al Baraka Bank has already been looking at a digital bank at their Turkish subsidiary to tap into the German market. Kuwait Finance House has created something called ALGO, a consortium of Islamic banks that can look at digital solutions, focused on research and development looking at how to take Islamic fintech to the next level.

We have these players alongside conventional players that are looking at pushing the envelope and pushing the development of the Islamic fintech ecosystem forward. Islamic fintech is a key component, and we want to build upon Bahrain’s inherent advantages and expertise in this area to push our way into that space, but also be an internationally recognised hub.

Where do you see innovation coming in the Islamic fintech space? Many aspects can apply to both conventional and Islamic institutions. Both are looking at how they can be digitally savvy in the way they develop their products. The way that we see innovation is in the regulatory technology space, which is still a fresh space, where new companies will be able to develop better compliant structuring, and that’s a place that Islamic fintechs can play a significant role.

Another component that fintech is helping spread Islamic finance, a significant sum of the people that are unbanked are predominantly Muslim countries. This a huge sum—hundreds of millions of people that could potentially be serviced by Islamic banks.

In Bahrain, we have Baraka Banking Group, which is in 15 countries globally, including some of the largest unbanked populations such as Egypt, Pakistan and more. How can Baraka Banking Group and KFH tap into these markets to deploy solutions where the unbanked population can be banked? That’s a part of financial inclusion, and that’s going to expand the net for Islamic finance. Islamic finance has reached a maturity stage where they need to take a leap forward using technology. A lot of the players are looking at existing technologies, but they’re also looking at new innovative technology to help them with Shari’ah governance, structuring of products, and so forth.

That’s an area where Bahrain can play a meaningful role. AAOIFI and CIBAFI are both headquartered in Bahrain and are looking at standards. How can we take these standards to be integrated with technology help in the delivery and maintenance of these standards? Can the Central Bank of Bahrain also utilise these standards using fintech? We’re in the early days of having specifically but there are a lot of potential on all fronts.

What innovations have you seen outside of the banks coming from the fintech space? Over the last few years, people have started being aware of blockchain, roboadvisory services, digital wallets and so forth. What has happened, or helped even further, is the fact that the Central Bank has done a few things. One thing they developed a dedicated fintech innovation unit. From a regulatory perspective, they see it as a top priority that these innovations need to be based in Bahrian. They want to be both the champion of these initiatives and mandate players to embrace things.

Some of these include crowdfunding innovations, both in equity and debt, in both conventional and Islamic. These are the first regulations to do this in a dedicated Shari’ah-compliant way. A lot of people are also moving to the cloud and starting to look at deployment solutions in the cloud. The game changer has been Bahrain’s regulatory sandbox, the only on-shore regulatory sandbox in the region, where new innovations such as cryptocurrency are being trialled, as well as Shari’ah-compliant global advisory.

These partners want to ideate a lot in both the market and to push them out into other markets. We’re doing a lot to truly accelerate the adoption of fintech. Another thing that is happening on the ground is that we are moving into the financial inclusion phase including a wage protection system. A lot of the players that are in Bahrain are also looking at very creative digital solutions of banking the unbanked, giving them microinsurance, how to utilise the blockchain to lower prices, and bring these people on board. We think that is going to happen, and a lot of these players are adopting existing technologies or working with partners to get different pieces of the jigsaw to complete this goal.

We’re also seeing the prevalence of digital wallets, where I can give you a examples. We have something called the bWallet, a collaboration between Arab Financial Services and the Bahrain Telecommunications Company (Batelco), who have partnered to allow peer-to-peer payments and QR code payments to give you cash back. They want to encourage people to start using digital, and they’re incentivising this with cash back.

Viva Cash with the Saudi telco has also popped up. The benefit is one which could possibly change the market, because they don’t force you to prepay your wallet, but only attach your card with benefit pay and do peer-to-peer payment switching between any bank in the country, they also want to be the central utility for EKYC for central communications. There’s a move now to open up this infrastructure for others to adopt.

A few noteworthy things that are happening also are that we are working with GIB to launch a digital bank called Reem. Bank ABC announced they’re going to develop a Neobank, and we’ve got the likes of Bahrain Islamic Bank (BisB) announcing that they’re spending a lot of money in terms of digital transformation, so we’re seeing a prevalence of payment service providers who want to pen their KPIs to take care of small businesses.

There is a growing awareness of blockchain and the utilisation of blockchain, and this will revolutionise the way that business is done. Bank ABC was the first to join a blockchain consortium, and others are already looking at how they can be involved as well.

What is the overall message that the Bahrain FinTech Bay is trying to get across to fintechs worldwide? The message we have, for people both on the ground or external, Bahrain is a nicely-sized jurisdiction with a regulatory framework for fintech, and institutions that are readily seeking to digitalise who are keen to speak to fintechs, whether local, regional, or international. We are creating a mix of players that are really trying to take things forward. We’re just at the early stages, but in the next few weeks a few other banks are going to push out digital.

Are Islamic banks leading the way in terms of fintech innovation in Bahrain, or is it equal or less than what conventional banks are doing? If I look at Islamic banks that are locally headquartered, they have taken a march on conventional banks. Bahrain Islamic bank, KFH, and Baraka Bank have gone out and done projects and pushed out significant announcements. A smaller bank is looking at the process of digitalisation. The Islamic banks have been much more active in terms of embracing digitalisation.

From a purely Bahraini focus, Islamic banks are active in the space, but the conventional banks are pushing ahead with their digitalisation and we are going to see a lot of changes in the next year or so. What I can tell you is that there is a lot of interest in fintech, and there are others that are more advanced on this journey of embracing fintech, and there are a lot of others who are just at the beginning. This is not a Bahrain phenomenon, you can see it throughout the region and globally, where institutions have an interest but have not yet figured out what they want to do.

You still have some institutions that are still trying to figure out if this is a temporary phenomenon or if its’ the new norm, and they’re coming to the realisation that this is the new norm and change has to happen. I’ve travelled around the world and I’ve seen it in so many different places, but this bucket is shrinking slowly—people have recognised that the modus operandi has significant changed, and this is not going to subside. It boils down to awareness and the demystification of what fintech is.

We’re seeing a lot of people in Bahrain marching towards a unified definition of what fintech is. They are seeing it as shift that a lot of banks that are completely overhauling their banking systems and are significantly moving towards customer-centric core banking systems, which, in my opinion, will significantly accelerate the adoption of new technologies. To sum it up, there is activity on the conventional side, but if I look it as a percentage of Islamic bank versus conventional, Islamic banks have taken a leading role, but the conventional side is certainly catching up.

I think Islamic banks need this to go to the next level of their journey, but they’ve also been pro-fintech, which is very refreshing. I think this is genuinely going to help develop Islamic fintech.

What are the biggest challenges facing Islamic fintechs? One of the things that we do in Bahrain, and we’re doing with Bahrain FinTech Bay and our partners, is we want to understand what their needs are, but we also want to understand what our network of local, regional, and international fintechs.

Let’s say there’s a fintech from Singapore, Switzerland or the United States that is interested in the region. We can go to them and show them how we can put them in front of a number of players who would have interest in working with these fintechs, and that has proven to be a real benefit to both sides. We can tell them that we will be committed to plugging them into the ecosystem from day one. For a lot of these fintechs, it’s daunting to try to understand a local ecosystem and establish themselves within one, so with our service, everyone wins. We can accelerate that and we’re seeing interest, and it’s going to be great.

The biggest challenge is always awareness. How can fintech really benefit me as an institution? I think some of them are still soul searching on that respect. Fintech adoption doesn’t always need to be radical; it can be incremental changes that provide tremendous value. The moment that institutions, and individuals, understand why they should be embracing fintech is key. To be on the cutting edge, we have to be running quickly, and we have to be pushing the envelope. I think these are the challenges and at the same time these are the opportunities to do that.

What we’ve done at FinTech Bay, and if you go to our website you’ll see the different partners, a lot of people could win by collaborating, so the message that we’re pushing out to a lot of people is that sometimes you need to collaborate to develop the ecosystem to address the friction points that don’t add to competitiveness, but instead create a meaningful industry sandbox where you bring players together. The more people talk to each other, whether here in the ecosystem or in other ecosystems, the more people can potentially win. We’re also accelerating the demystification of fintechs.

How are you overcoming the challenge of sourcing human capital for fintech in Bahrain? In terms of talent, Bahrain is a small place, and one of the things that we pride ourselves on is human capital. I’m not just saying this because I’m Bahraini. If you look at the financial services sector, 65 per cent are locals. In terms of fintech, a lot of work has gone into helping universities equip their students with the right skills, and we have a pool of good people in the tech space, but this is a pool we’ll need to grow over the next few years of that this pool of local talent also grows.

For us, one of the ways that we’re looking at is how these fintechs and other innovators can also call Bahrain home, and how can the talent develop alongside these innovators and entrepreneurs. There is talent, but when we’re talking about fintech engineers and scientists, there’s a lot of specific skill sets that are going to have to be developed more extensively over the next few years, and that’s not just Bahrain-centric. To us, these are challenges, but also opportunities. We’re looking to address these things in a very meaningful way.

There are tangible things happening on the ground. The University of Bahrain has recently announced a programme to work with 3000 female students to help them with coding, embracing technology, with the ultimate aim to create 30 start ups from there. Bahrain Polytechnic has partnered with Microsoft to roll out a competition for artificial intelligence and they’ve seen a really good response. We are committed to seeing students get involved with things that are relevant to the future.

What is your main goal? For the Islamic finance industry, Bahrain is the global hub of it. We’re genuinely pushing ahead, whether that’s the Bahrain EBD, the Central Bank, The FinTech Bay, AAOIFI or CIBAFI. We want Bahrain to be known as a leading Fintech Hub globally, and we’re taking fintech very seriously and I think the developments from the Central Bank show that from a regulatory perspective. If you’re a fintech, Islamic or conventional, that wants to incubate or ideate, Bahrain is welcoming to you.

We are a neutral platform where we want to bring the ecocysytem together to be a catalyst to drive fintech forward, bringing together start-ups, global institutions, local institutions and more to collectively push together but also individually help start-ups to develop. We want this to be a catalyst to drive fintech forward. If you’re looking for a home in fintech in the region, we would be more than happy to talk to you.