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The fintech revolution is here

Fintech is completely reshaping global finance – and, with a regulatory sandbox approach, Abu Dhabi is fast-tracking fintech innovation.

How we do business with each other, how money moves around the world, and how we ensure we’re complying with regulations are all being transformed by technological breakthroughs. Traders and brokerages, banking and payments, financial management, financing and insurance – all sorts of institutions, customers and finance sectors rely on fintech for the smooth running of the system and the flow of capital. And today, technological solutions, increasingly built upon blockchain technology, are driving financial growth as well as facilitating it.

Abu Dhabi’s ability to fast track changes and ring-fence experimental areas within its regulatory environment is allowing the world’s most innovative fintech companies to reshape the future of finance. These changes won’t just benefit those at the top; they will empower a values-based approach to smart finance that has the potential to improve the lives of many.

Abu Dhabi Global Market (ADGM) on Abu Dhabi’s Al Maryah Island offers platforms to support the cutting edge of fintech, including its RegLab, which provides a safe regulatory framework for innovators to trial their products. Fintech startup applicants have their ideas assessed by Abu Dhabi’s Financial Services Regulatory Authority, and if their concept is accepted, the FSRA tailors a specific set of regulations to test it. The innovative fintech companies then have two years within the RegLab environment to prove their idea and its commercial viability. RegLab has turned Abu Dhabi into the world’s second most active fintech “sandbox”, behind London.

Every year, ADGM also stages FinTech Abu Dhabi – MENA’s leading FinTech festival. This assembles leading fintech innovators from around the world, with a particular focus on the UAE and MENA. And it hosts the FinTech Abu Dhabi Innovation Challenge, which sets real world problems and challenges startups and disruptors to build solutions, through to proof of concept or prototype stage.


Making the most of Blockchain

The UAE has become a global leader in the development of Blockchain technologies since adopting the Emirates Blockchain Strategy 2021. The goal is to have 50 percent of federal government transactions on a blockchain platform.

At the heart of Blockchain is Distributed Ledger Technology. A distributed ledger is essentially a database. But rather than being housed in one central location, such as a bank’s servers, it is distributed – or decentralised – across multiple sites. “Blocks” of information are spread across a “chain”: a network of synchronised computers, so whenever a change is made in the database, it is instantly replicated across the whole network. The uses for this extraordinarily secure technology are seemingly endless.

Blockchain is also at the heart of Abu Dhabi Global Market’s (ADGM) fintech scene. The company Azakaw has created a cloud-based regulatory compliance platform using Blockchain in combination with AI. Distichain has created a B2B e-commerce platform using Blockchain that enables businesses to create their own trading communities. Because Blockchain was originally designed to trade cryptocurrency, it also enables the secure trading of digital assets of all kinds. ADGM is the first jurisdiction in the world to create a regulatory framework for the trading of digital assets.

Machine support – AI’s potential to de-risk decision making

As we’ve seen with many booms and crashes, all markets are vulnerable to human emotions and error. One solution is the increasing automation of trading. But human beings will always be vitally important to financial markets – to spotting buying opportunities or knowing when to sell.

One of the most promising applications of financial AI is in the fields of risk management and compliance – carrying out checks, generating trade reports, and spotting suspicious patterns of behaviour. A successful example is the UAE-based company RISQ, which won the 2019 FinTech Abu Dhabi Innovation Challenge. It provides a suite of AI tools, covering everything from compliance to credit evaluation.

All of these AI tools reduce risk, error, and operational expenditure. But they also hold the promise of helping more people, such as first-time borrowers, gain access to credit. Conventional credit scoring can make this difficult to access finance, particularly in developing countries where applicants may not have the kinds of digital and financial trails most lenders rely on to make decisions. But AI tools can process much wider data sets to assess the risks of lending to particular borrowers.

Fintech for a sustainable world

A key part of Abu Dhabi Global Market’s mandate is to build a better and more sustainable future for finance. This ties to wider ambitions in the UAE: in late 2019, 25 public and private entities signed the Abu Dhabi Sustainable Finance Declaration, which is in line with the UN’s Sustainable Development Goals.

The growth of sustainable investing has been exponential in recent years. Between 2012 and 2018, “ESG” investment – which stands for Environmental, Social and Governance – in the United States increased almost four-fold. In the wake of Covid-19, it’s expected that this rate will increase even more quickly, as companies focus their R&D efforts on sustainable innovation, rather than legacy technologies.

However, sustainable investing relies on completely different data sets from conventional finance – annual reports and profit projections just aren’t enough to guarantee you’re investing ethically. This has stimulated enormous fintech innovation. Satellite imagery can help to measure the carbon outputs of particular company assets and improve supply chain traceability. Modelling different climate-change scenarios can provide useful stress-tests. And artificial intelligence is providing real-time analysis of unstructured data sets, sifting through millions of data points to help investors make sustainable decisions.

Sustainable finance is also about increasing the prosperity of all. Smartphone technologies are already reducing banking costs and providing access to capital for the underbanked and unbanked. Remittances are a vital source of income for developing nations. ADGM recently licensed the remittance innovator TransferWise to operate in Abu Dhabi. The company’s co-founder Kristo Kaarmann told The National that the UAE is one of the most important remittance markets in the world, and that TransferWise is able to deliver 25 percent of its payments in just 20 seconds.

Fintech’s role in the future of Islamic Finance

Sharia-compliant banking is one of the fastest growing sectors in the global financial industry. Today, there are more than 1,400 Islamic financial institutions around the world, in over 80 countries. The Sukuk system (based on Islamic financial certificates, similar to bonds in Western finance) is growing in popularity, even outside the Muslim world, with companies in the UK and Europe offering products to both retail and institutional investors. Companies like the US-based Wahed Invest offer Sharia-compliant investment and tracker funds. Such funds often align neatly with sustainability objectives, because of the “do no harm” principle at the heart of Islamic Finance.

Fintech is playing a vital role in this growth. Abu Dhabi Islamic Bank (ADIB) has set up SimpleLab – an innovation programme to develop Sharia-compliant digital products. ADIB was also the first Islamic bank to successfully execute trade finance distribution transactions using Blockchain technology. And new regulation technologies are enabling Islamic banks to comply more easily with conventional and Sharia banking regulations. This also frees up Islamic scholars to focus on new innovations for the sector.

But this isn’t just about big finance and institutional investment: Islamic Finance is also about ensuring all Muslims have access to safe financial products that can improve their lives. In some parts of the Islamic world, this is about a combination of education and fintech solutions. For example, in wealthy Islamic countries, opening bank accounts is accepted practice. But in many poorer countries, it’s either too expensive, or there is religious resistance to opening an account. Blockchain ledgers allow the poor to open digital wallets on their phones, so they can still participate in financial transactions at a fraction of the cost. And phone-based biometry can give them exceptional security, at no cost.

The result of new technologies like these is a brighter, fairer, more sustainable future for finance: one where more people around the world can participate in, and benefit from, global markets.

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