Greece is one of Europe’s fastest growing economies today, which stands in stark contrast to where it was a decade ago, when it held a significant amount of debt it could not pay back. Recognising how far Greece has come since the 2008 financial crisis, credit ratings agencies have been steadily upgrading their appraisals of Greece’s debt. Furthermore, its unemployment rate is the lowest it has been since then, now at 11% from a high of nearly a third of all Greeks unemployed after 2008.
The Greek turnaround is reflected in recent changes in investment ratings. For example, in September 2023 DBRS Morningstar, a major international agency, updated Greece’s credit rating to investment grade to BBB (low) from BB (high). The sovereign credit rating upgrade was its most significant since its upgrade out of junk. Most sovereign nations that experience sovereign default never get close to investment-grade; Greece, on the other hand, was upgraded eight rating levels within six years.
While DBRS Morningstar raised Greece’s debt rating to investment grade, Moody’s recently raised Greece’s rating by two notches, short of investment grade. Corporate investors have naturally followed the credit rating agencies’ confidence in Greece’s economy and invested heavily in Greece – Pfizer is currently constructing a €650m research hub and Microsoft is constructing a €1bn data centre, for example. Despite a series of wildfires that have decimated Greece’s countryside, over ten million tourists still entered Greece in 2023, bringing in revenues estimated at €12bn.
There are also key features in Greece that make it a seductive country for international investment, such as its strategic location; well-established maritime infrastructure and transport; relatively low labour cost; and its beneficiary of the Next Generation EU recovery fund, set to receive €33bn (almost one fifth of Greece’s GDP). Additionally, future developments in the energy and infrastructure sectors are indicative of Greece’s rebound. Recently, the energy sector received major investments from Spain, France, and China. According to Eurobank, investments valued at €32bn in infrastructure and real estate, energy and decarbonisation, telecoms and digital upgrades, and tourism and manufacturing. Additional assets that should pique the interest of international investors are that Greece is a member of the European Union and European Monetary Union, its strategic links with several major markets, its high level of tourism, and major market reforms since the 2008 financial crisis. The numbers speak for themselves: UNCTAD’s 2022 World Investment Report measures FDI inflows to Greece as US$5.7bn in 2021, compared to $3.1bn a year earlier. The Bank of Greece shows the countries holding the most FDI stock as of 2021 were Germany (18.3%), Luxembourg (17.7%), the Netherlands (16.7%) and Switzerland (8%). Furthermore, Greece remains one of the most attractive investment destinations in Europe, with the UK taking up 43% (although this number has likely dropped in recent years due to the fallout of Brexit), France at 31%, Germany at 28%, Italy at 26%, Spain at 20%, and The Netherlands and Belgium at 11%. Greece follows closely at 10%.
While there have been numerous improvements, not everything in Greece is on track: its debt may have shrunk, but at 166% of its economy, it is one of the world’s highest; its banks still hold nonperforming loans slightly larger than the European average; the consequences of austerity’s effects are still felt by Greek citizens. Additionally, consumer confidence remains relatively low, there are comparatively weak industrial and banking sectors, and investment in R&D could see additional funding. And yet, Greece’s impressive rebound indicates that for a set of individuals with the capital in hand, it is one of the best places in the EU for foreign direct investment (FDI).
Corporate crises have long called for General Counsel (GC) to apply their legal expertise and judgement.
But, with the rise of cyberattacks and data breaches, a greater focus on environmental, social and governance issues, class actions and the emergence of more powerful artificial intelligence, GCs are contending with more frequent and varied crises.
GCs are also playing a larger role in helping businesses navigate such events. Instead of simply being asked for legal opinions, they find themselves and their offices leading the coordination of internal response teams. They are also being asked to have a view about the ‘right’ path forward for the company – one that considers both ‘hard’ and ‘soft’ law standards and wider community and stakeholder expectations.
To explore how companies are approaching these issues, the Ashurst Leadership Centre convened a roundtable in partnership with The Legal 500 in Sydney in November 2023. The event was attended by 15 GCs from Australia’s largest companies and Ashurst partners and communications experts.
The discussion was facilitated by Lea Constantine, Partner, Head of Region – Australia.
The term energy transition originally referred to prospective solutions against the 1970s energy crisis. The 1973 Yom Kippur War and the 1979 Iranian Revolution led to several consecutive interruptions in exports from the Middle East to the Western world, causing oil shortages and soaring prices.
This concept progressively fell into neglect until the early-2000s, when the climate crisis started to attract more attention, first from the media, and then from the public. In the meantime, its acceptation had changed, however, to express the need to transform ‘the global energy sector from fossil-based to zero-carbon’ and particularly to ‘reduce energy-related CO2 emissions to limit climate change,’ as outlined by the International Renewable Energy Agency (IRENA).
A more institutionalised definition emerged from the Sustainable Development Goals (SDGs) formulated by the UN General Assembly in 2015, and throughout the successive United Nations Climate Change Conferences such as the COP 21 (Paris Agreement) or the recent COP 26 held in Glasgow in October and November 2021.
This global shift has already had and will continue to have an impact on countries whose economy has traditionally been based on fossil fuel production, as this is the case for Gulf Cooperation Council (GCC) countries.
Indeed, the energy sector has become subject to major uncertainty. If the International Energy Agency (IEA) anticipates a colossal increase in global energy demands due to the rise of emerging markets, it has also observed that energy use has declined in advanced economies. In addition, in a deeply interconnected world, global crises can have a critical and lasting effect on the consumption of fossil fuels. The Covid-19 crisis is emblematic of this risk. Finally, the push towards green and renewable energies from major economic poles, like the EU, opens the field of possibilities and leads to a lesser demand and a more efficient use of energy in the medium and long term, although some, like Philippe Sébille-Lopez, Founding Director of geopolitical and energy consultancy Géopolia, anticipate an increase in EU’s electricity needs.
The Middle East countries have long initiated a pivot from fossil fuels and started to diversify their main activities. Notably, they have included the modern acceptation of energy transition in governmental green papers and strategic frameworks, such as the Saudi Green Initiative (part of Saudi Vision 2030) or the UAE Energy Strategy 2050. As Philippe Sébille-Lopez states, ‘GCC countries compete with others in a globalised world. They have a history of attracting foreign entrepreneurs into the energy sector but attracting elite and specialised companies as well as the largest investors is vital for them if they want to transition successfully.’
Russia’s military invasion of Ukraine, which started on 24 February 2022, might affect the region’s transition, though. Following the international imposition of sanctions against Russian assets, imports and exports, several European leaders have initiated energy talks with GCC countries – particularly with Saudi Arabia and the UAE – to escape their reliance on Russian gas. The situation is likely to prompt EU-members to develop their renewable energy solutions further, but short-term, they are likely to demand more oil and natural gas from the Gulf and other producers.
In any case, the conflict is goading governments around the world to deepen or establish their energy independence, which should induce GCC governments to withdraw – at least partially – from intensive fossil fuel extraction.
Auspiciously, the region swarms with ideas and projects, and, as Sébille-Lopez explains, because of the ‘peculiarity of their economies, social contracts and even extreme weather conditions, they can hold immense opportunities if they build the right business ecosystem.’
THE LEGAL 500 and BSA AHMAD BIN HEZEEM & ASSOCIATES LLP (‘BSA’) join forces to investigate the Gulf renewable energy industry and its regulatory environment. Since 2001, BSA has grown to be one of the top Middle Eastern law firms, with nine offices across five countries. Their diverse team of 150 lawyers are from 35 different cultural backgrounds and speak 22 languages. BSA is the market leader in new and evolving sectors, and partners with their clients towards a sustainable and progressive future.
Foreword – BSA
The United Arab Emirates (UAE) and the Middle East as a whole are undergoing a remarkable transformation in their energy sector, reflecting the sustainable energy goals of the global energy industry. This report investigates the Gulf’s renewable energy industry and its regulatory environment through the eyes of various experts in the field. In a region …
A tour d’horizon of the Middle East as a jurisdiction from an energy perspective
With time, other emission-free energies have been included in the list of renewables. That is the case for green hydrogen. In addition to being the most abundant element on the planet, hydrogen can be efficiently stored and transported. The element is now considered as having immense potential to reduce carbon emissions worldwide and was endorsed …
Regulatory framework and market accessibility in the GCC
‘Even in the most liberal economies, some strategic sectors remain under governmental control. Energy – whether renewable or not – is one of them,’ says Philippe Sébille-Lopez (Géopolia). ‘Each sovereign country can administer the industry freely within the limits of international law and of potential self-binding commitments; the EU being a specific case due to …
Clean Energy Regulations in the GCC – where we are today & what changes need to be made for NetZero plans for the future
In line with the UAE’s strong commitment to comply with the 2016 Paris Agreement and the United Nations Sustainable Development Goals, the UAE is progressing towards implementing its Energy Plan 2050. The aim is to reduce carbon emissions by 70% and rely on 50% renewable energy by 2050. Solar power is a particular focus area …
Smart Mobility: The Case of Electric Vehicle Chargers (EVCs)
The soaring energy demand, owing to the rise of population and the economic growth in the region, challenges the dependency on conventional fossil fuel reserves of GCC countries. The region’s annual energy consumption has rocketed, recording an average growth rate of 6.8 % from 2004 to 2014, which is about 5 % above the global …
Trends, trials, and tribulations in sustainable financing
‘There have been multiple announcements with regards to sustainable financing,’ Marthinus Vermeulen (OilSERV) highlights. ‘They illustrate the fact that regional governments are willing and able to steer investments towards renewables, clean energy and ESG objectives.’ For the first time in the history of COP events, finance was one of the major topics discussed at the …
GCs and entrepreneurs on potential regulatory improvements
So far, GCC countries, remaining faithful to their international commitments, have made important steps towards transitioning their energy sectors and are committing further to the pivot. However, with their ample fossil fuel reserves – Kuwait, Saudi Arabia, and the UAE are in the top ten countries with the largest proven oil reserves, with the latter …
Focus on Géopolia: Consultancy created in 1995, Géopolia provides insights and solutions based on a geopolitical and geoeconomics approach to prominent stakeholders of the energy industry. Géopolia’s founder and CEO, Philippe Sébille-Lopez, is the author of a well-received book on the geopolitics of oil …
DLA Piper and The Legal 500 have collaborated to launch the first WIN Insights Report focusing on Africa.
Looking at the changes in-house lawyers are living through, the challenges they face and the future of the in-house legal function, the report focuses on four key themes: the changing role of the GC in Africa; how to structure legal teams for success; recruiting and retaining talent within the legal function and the use of technology as the driver of innovation and change.
We also jointly hosted a webinar touching on the key themes highlighted in our report featuring some of the general counsel who contributed to the findings.
The digitalisation of finance and the opportunities for fintech
The Covid-19 pandemic disruption has brought a sea of change to the global financial services industry. Firms have had to keep pace with rapid developments in modern digital technologies, as well as grapple with ever-changing consumer expectations and preferences. As we head into 2022, it is expected that the continued rise of the Digital Economy will further reshape the financial services landscape.
The ongoing pandemic has proven to be an extreme stress test for the finance industry which has responded with a wave of innovation. A key driver behind this has been “the great unbundling of financial services”, and its rebundling around a digital infrastructure, to foster the development of an inclusive digital economy and encourage seamless cross-border transactions around the world. This has placed fintech at the heart of the industry. Fuelled by the 26th UN Climate Change Conference of the Parties, the prioritisation of sustainability and transition to net zero has further generated new opportunities for fintech solutions to the climate change challenge.
As financial services are unbundled and repackaged around a digital infrastructure, market competition has intensified, with a marked power shift from service providers to consumers. The line between tradfi and fintech has also blurred given that traditional financial services are now embedded on non-financial platforms and financial institutions are becoming digital ecosystem players.
Record levels of fintech investment and funding
Global fintech funding (USD)
The digital shift has also precipitated record levels of investment – including venture capital – into digital assets, payments and fintech generally. By the end of Q3 2021, global fintech funding reached US$94.7billion, almost double the 2020 year total.
Asia is a particular hot spot for fintech deals which reached a record high of 307 deals totaling US$5.9B in Q3 2021. The region has seen consecutive quarterly deal growth since Q2 2020, and funding growth since Q3 2020. Fintech has also been credited with the birth of 200 new unicorns in the first three quarters of 2021.
We expect these trends to continue to accelerate into 2022 and to drive more transformational deals in the fintech space. That said, it remains to be seen if the heat in the market can be sustained as the impact of regulatory efforts, such as the suppression of so-called “killer acquisitions” in tech, antitrust attention on control of data, and new or enhanced foreign investment regimes focused on investments in tech, start to bite.
The global regulatory reset – and its impact on investment
China has implemented a major regulatory reset across financial services, antitrust and data – focusing on some big tech business models and crypto. The China clampdown is impacting domestic investment but also creating opportunities in India and South East Asia particularly Singapore, for growth as a fintech ‘hub’.
The US is also experiencing a reset – regulating by enforcement, with more anti-tech Biden regulatory appointees and changing tides of sentiment against US tech giants. The EU and the UK post Brexit are keen to catch up with their large rivals: focusing on fostering safe and trustworthy innovation, building on more established frameworks and putting out bold new proposals with more to come in 2022.
Blurring lines between crypto and mainstream financial markets
The range and complexity of digital assets continue to expand, with the rapid growth of the DeFi and NFT markets and broadening development of digital assets pegged to traditional assets (so called “stablecoins”). Institutional exposure to digital assets as a distinct asset class is expected to increase significantly while deployment of novel technologies in traditional financial markets gain momentum.
The crossover between decentralised and traditional markets and related contagion risks is becoming a particular concern for policymakers. A key challenge is to determine how policies should evolve to address both novel and traditional market activities deploying novel technology in a manner that fosters innovation while managing risks effectively.
Payments and the future of money
Fintech deals (Q3 2021) (USD)
Cross-border payments are also a hot topic, as Asian regulators explore central bank digital currencies (CBDCs) and cross-jurisdictional linkages of real-time payment systems as a means of faster, cheaper, and more inclusive cross-border payments.
The payments industry has boomed during the pandemic but still rests on a patchwork of products and regulatory frameworks globally. Greater harmonisation is needed both in the approach to products and services and in respect of regulation of the industry. One big question is how CBDCs will change the payment markets, both in terms of providing a digital solution to the future of money – where it will be battling it out with stablecoins – and reducing friction in cross-border payments. Regulators are also taking interest in the proliferation of Buy Now Pay Later schemes as part of their central focus on consumer protection.
Data governance, AI and cybersecurity – an increasingly complex matrix
Regulators in major markets are adopting divergent approaches as they seek to strike the right balance between incentivising effective risk management and encouraging innovation. The EU’s first mover proposals for an AI specific regulation have provided a benchmark for a comprehensive, risk-based approach, while the UK is considering deviations from EU standards for both data protection and AI. China has responded to GDPR with a similar, but sometimes more stringent, data protection regime, as well as making its own proposals on global standards for AI. Data protection and cyber rules are proliferating in the US, as well as increasing enforcement against digital platforms.
Several markets are also following the lead of the UK and EU in issuing wide-ranging operational resilience requirements. This broad range of unharmonised international requirements will place increasing pressure on financial institutions to focus resources on the increasingly complex interactions between technology, risk, compliance and procurement functions.
Innovation leading to increasing enforcement and litigation risk
Novel products and services don’t always fit easily into legal frameworks and may pose greater inherent risks (such as volatility, vulnerability to market manipulation and data breach, scams/financial crime). The increase in their uptake has focused regulators even further on mitigating consumer harm. Where provided by start-ups/scale-ups with relatively immature compliance frameworks, there is a recipe for future investigations and litigation.
Regulators’ expectations have heightened in relation to the prevention of financial crime, transparency, and fair processing of personal data. Now, more than ever, there is urgent pressure on firms to act in the interests of the consumer and to be accountable for ESG as well as diversity and inclusion agendas. The risk of civil claims – including class actions – is also increasing due to the availability of litigation funding in many jurisdictions.
Singapore and financial technologies
What do societies do when change is inevitably imposed upon them? What are the ways in which they choose to adapt – or not adapt, as the case may be – to their surroundings? There are endless examples of adaptation behaviours throughout history: mass migrations, change in lifestyle, diet, among others (Dutch land reclamation efforts are an often-used example). For those that choose not to adapt though, all that is left is stagnation or decline. This is not the path that Singapore has resolved to go down.
Singapore’s financial sector now bears witness to the transformative powers of innovation, and shines as a beacon of financial forward-thinking. The bustling island city-state’s fintech story highlights, among other things, how big a role government, and other traditional institutions such as banks, can play even when a tidal wave of technological change is coming to challenge the ways of old. At heart, it is a story of change: of maintaining momentum when others are standing rigidly still, of embracing technology when others remain reticent or sceptical towards innovative solutions. At a time
when most countries cannot seem to decide on how to regulate financial technologies, or, worse still, when countries impose restrictions on new trends and seem to turn inwards, Singapore on the other hand treats their emergence as an opportunity. An opportunity to cement its status as a leading financial hub not only in the wider region, but the world.
40% of fintech companies in Asia are based in Singapore
Singapore is Southeast Asia’s leading fintech hub. Approximately 40% of fintech companies in Asia are based in Singapore, with the full gamut of fintech products represented in this already established and rapidly growing sector. This is no
accident, and the development of fintech is one of the key pillars the Singapore government has targeted as necessary to achieve the ambitious goal of becoming a “Smart Nation” over the next few years. This programme, launched by Prime Minister Lee Hsien Loong in 2014, envisages the Singapore of the near future as a city-state that is interconnected by technology at every level of daily life, with financial technology playing one of the major roles in this. A key stage of the Smart Nation strategy came in 2016, when the Monetary Authority of Singapore (MAS) published the Singapore Payments Roadmap. An integral pledge as part of this was to create a Smart Financial Centre, where, in the MAS’s own words, ‘innovation is pervasive, and fintech is used widely’. This has been achieved successfully, borne out by the fact that the flagship digital payments service, PayNow, has achieved almost total uptake from its intended audience. The platform, which allows users to make payments effortlessly to businesses or individuals using a mobile number, Singapore NRIC/FIN, or Virtual Payment Address rather than full bank details, is now used by around 90% of active businesses and adult Singapore residents.
Sensing the opportunities, venture capitalists both overseas and domestic have been ramping up their funding of Singapore-based fintech companies. This dynamic proved remarkably resilient during the Covid-19 pandemic; while funding fell during those opening chaotic weeks, it soon rebounded. Fintech firms in Singapore received US$725m funding in the first half of 2021, significantly more than the US$468m they received throughout the whole of 2020; many companies found increased demand for their products thanks to remote working and a corresponding increased reliance on technology that the pandemic heralded. Clearly investors have confidence in Singapore and its fintech sector and expect it to play a crucial role in the future transformation of the financial landscape.
Figures show that this has been the case for some time, and while the pandemic may have caused some panic, it was a matter of when investments returned to Singapore’s fintech community, rather than if. The period between 2015 to 2019 saw around 65% of fintech across the entirety of Southeast Asia land in Singapore.
The period between 2015-2019 saw around 65% of fintech across the entirety of Southeast Asia land in Singapore
But it is not just the money that makes Singapore so attractive for start-ups. As a jurisdiction, it is also widely lauded by those who have chosen to operate there, with start-ups and established companies alike praising the city-state for, among other things, its welcoming business culture, a spirit of innovation and ‘East-meets-West’ location and environment. Interviewees who spoke with us during this research project attested to the positive atmosphere in the fintech sector and high morale of those working in it, boosted by regular industry events including November’s Singapore Fintech Festival, the largest of its kind in the world.
An extremely broad-brush term, fintech is, at heart, any sort of digital innovation in the financial sector. While virtually every type of financial software and technology imaginable have found a home in Singapore, there is a definable split between fintech types and how these are represented in Singapore. Research shows that the most popular fintech segment over recent years has been the capital markets and wealth management space, followed by payments, credit, regtech and insurtech outfits. The large variety of more niche providers make up the rest of the pack. In 2021 specifically, digital payments received the highest amount of funding, indicating a shift towards this segment, while cryptocurrency companies made up the greatest number of those to receive funding. Clearly, while cryptocurrencies are of great interest to investors, they are hedging their bets. Matthew Lovatt, Executive Committee member at the Singapore Fintech Association and financial services tax partner at Deloitte Singapore, summed up the situation on the ground in the following terms: ‘The Singapore fintech community covers the full spectrum of stakeholders. There are, for example, software developers and enterprise blockchain developers headquartered locally, right through to digital asset fund managers, payment services providers, decentralised finance, and regtech, wealthtech, and insuretech. There’s a very strong ecosystem in Singapore, which creates an innovative environment and various synergies, and from engaging with the community, it’s clear that stakeholders are attracted to Singapore from all over the world, to establish locally and take up fintech sector jobs. Investors in particular look at Singapore as an enticing investment jurisdiction in the fintech space, given the range of opportunity and activities here’.
Fintech firms in Singapore received a 54% increase in funding in the first half of 2021, compared to what they received throughout the whole of 2020
Despite the breadth of the sector, general trends that the fintech space is gravitating towards over recent months can be identified. The first is that of interoperability and connectedness in payments, both in terms of different payment services domestically, and interconnectedness with payment services across jurisdictions. For example, in a move that is the first of its kind globally, 2021 saw the linkage of Singapore’s PayNow and Thailand’s PromptPay, real-time retail payment systems. This will allow consumers to transfer funds of up to S$1,000 or THB25,000, daily, across the two countries.
The second trend is that of collaboration, in which state entities, industry bodies, major players in the financial world and fintech start-ups work together to share, test and eventually roll out promising ideas and concepts to the market proper. The 2017 establishment by the MAS of the Payments Council is a fine example of this, in which payment users and providers came together through the council to roll out the SGQR, PayNow and PayNow Corporate payments services.
The third general trend is one of innovation in the areas of embedded finance (the integration of financial services by non-financial companies) and blockchain-based decentralised finance (DeFi). Of the eventual culmination of the work around embedded finance, Jo Yeo, head of the payments development and data connectivity office at the Monetary Authority of Singapore (MAS), explains that ‘Financial services will increasingly be provided invisibly at point of need through non-financial services channels, built on a dense network of APIs – the backbone of the digital economy. Users will place greater value on seamlessness and convenience. Data infrastructure to support data flows is important to support innovation and risk management’. Decentralised finance also has extremely exciting applications, as Yeo outlines: ‘Digitalisation may lead us to a scenario where finance is increasingly decentralised, built on open, resilient, and distributed networks, which accord greater transparency and efficiencies. DeFi has the potential to transform every financial transaction and reach individuals and businesses traditionally excluded from the financial system.’
Leading the pack
Why has Singapore got it so right? A cursory glance at Singapore compared to its competitors in Southeast Asia would suggest that this is simply due to its level of economic and human development. When excluding the microstate Brunei, Singapore dwarfs its nearest ASEAN competitor Malaysia in both nominal GDP per capita (approximately US$64,000 to US$11,000 as per 2021 IMF data) and by its human development index (Singapore ranks 11th as per the HDI’s 2020 report, while Malaysia comes in at number 62). The arithmetic appears irresistible: higher development and greater wealth means higher salaries, which means a superior calibre of talent will be drawn to the wealthy city-state. Case closed. But this is only a small part of the picture.
Hong Kong, for instance, has been making similar efforts to establish itself as a global centre of fintech innovation but has had notably less impressive results than Singapore. A 2016 report evaluating fintech markets around the world placed Singapore as the fourth best fintech jurisdiction globally based on the benchmarks of talent, capital, policy and demand; Hong Kong placed seventh in the list, despite almost identical funding levels at this point. The follow-up 2020 report indicates that Singapore has pulled away from its main Asian fintech competitor and Singapore is now listed as a ‘core’ global
fintech jurisdiction, alongside the likes of the United Kingdom and the United States, and boasts investment around 36% more than Hong Kong.
GPD per capita (IMF Data 2021)
So, what are some of the core advantages of Singapore that allow it to thrive at fostering an agile, advanced sector like fintech? Ironically, some of Singapore’s willingness to adapt and embrace technological change could stem from its own colonial past under British rule. But even as similarities between Singapore and Britain today in the context of financial technologies are relevant, Singapore has no doubt forged its own unique path since achieving independence, taking full advantage of its geography, its unique position both as a shipping and trading post, and as an open, welcoming society that embraces diversity. As David Lee Kuo Chuen, professor of finance at the Singapore University of Social Sciences (SUSS) says, ‘Being a place that really understands both the Western and Eastern culture is a lot easier to do business in – and it’s not a bad place to live for food as well!’ In short, Singapore is a place that understands that combining Eastern and Western cultures can provide dividends in overall quality of life.
Lee believes that it is the groundwork that has been laid over several years, and the progressive outlook of those in charge of growing the business sector in fostering this, is a key factor in Singapore’s fintech success. ‘Digital infrastructure for trade, logistics and other areas has been key in establishing a sovereign digital identity. If a government looks to improve financial technology adoption without owning the digital infrastructure, it ceases to be relevant’, he explains. ‘Singapore’s priority is in building digital infrastructure’. This is just one example of the holistic approach to fintech innovation in Singapore which has characterised it, enabled by a motivated, practical and well-resourced state sector backed up by trusted and effective institutions. One extremely important example of this is the Monetary Authority of Singapore (MAS), which is a uniquely powerful tool at the hands of the government. A complex and multi-faceted organisation, the MAS is both regulator and central bank; and this integration contributes to achieving Singapore’s financial sector strategy, as does the MAS’s function as financial sector promoter and champion. The MAS commonly interacts with industry bodies, including to help contribute and support grass roots-level development. Peiying Chua, a Singapore-based Partner and financial regulatory specialist at Linklaters, commends the MAS as a ‘collaborative and open-minded regulator, who has taken on industry feedback and adjusted their rules in response to their findings.’
In this, it regularly cooperates with other industry bodies to achieve its aims, regularly getting stuck in to building the grassroots of Singapore. ‘We’re very lucky in Singapore to have the MAS as a very proactive and engaged regulator’, says Matthew Lovatt when discussing the Singapore fintech Association’s interactions and collaboration with the MAS. ‘The SFA recently worked with the MAS to develop a payments-specific industry consultation group, to facilitate community engagement and regulatory consultation.’ When commenting on further initiatives, Lovatt noted that, ‘The MAS’s regulatory sandbox (modelled on a UK model) has provided for impactful, real-time interaction with stakeholders from relatively early stages in their development, to identify regulatory challenges and work through them collaboratively in a way that facilitates innovation and development.’ Lovatt believes that to be an excellent example of Singapore’s and the MAS’s desire and commitment to financial services innovation. ‘Traditionally, financial services regulation has been perceived to be paternalistic, and often a barrier to market entry. However, a more principles-based, real-time and proactive approach can not only facilitate financial services innovation and market access, but also equip regulators with what they need to respond to material developments and pervasive new operating models.’ Commenting on the MAS’s wider support and contributions to the sector, Lovatt noted initiatives like APIX, an open architecture API marketplace and sandbox platform to facilitate collaboration between fintechs and financial institutions, and its contribution to support measures, like the fintech Solidity Grant to help Covid-19 affected fintech stakeholders.
Human development index (HDI 2020 Report)
The Singapore Fintech Association (SFA) is an excellent example of a non-profit organisation that has had a tangible effect on the sector it looks to promote. Drawing from a cross-industry pool of partners in order to encourage collaboration between everyone holding a stake in the Singapore fintech ecosystem (and beyond, via memoranda of understanding with fintech associations around the world), the SFA has achieved an enviable level of penetration into Singapore’s fintech world. ‘The SFA currently has approximately 900 corporate members and over 1,000 individual members’, says Lovatt. ‘In terms of the spread, our membership spans the entire ecosystem. This has allowed the SFA to play an important role in community growth and development’. A recurring theme in our research was that of the effectiveness and business-centricity of regulation in Singapore, especially on the part of the MAS. Matthew Lovatt commented that under the leadership of its three respective Executive Committees, the Singapore fintech Association has sought to contribute to that. ‘I originally began interacting with stakeholders through the SFA as I found that, during my day-to-day practise in professional services, one of the practical issues frequently encountered was that laws and regulations affecting the fintech space had never been designed to apply to the new types of business models that we were seeing. As such, there can often be some legal and/or regulatory friction which affects operations, and I felt that being part of the SFA meant I could be more active in trying to help address this by working with key people and organisations more proactively’. One of the main ways in which the SFA has sought to do this has been through stakeholder engagement, educational initiatives and through promoting cross-sector collaboration.
The SFA also has a key aim of helping attract talent to Singapore and putting it in touch with the right organisations. ‘Singapore has a relatively small population, which means that access to talent is absolutely key,’ explains Lovatt. ‘This in part means that continued development of Singapore’s fintech sector means attracting talent from across the region and also more widely’. The SFA also seeks to support promising companies’ access to capital as well. ‘We seek to facilitate networking between our members and regional venture capital and investment management associations, through hosting joint events, and also aim to facilitate our members’ access to platforms like the MAS’s Deal Fridays fundraising platform’.
It is by no means the case that the majority of heavy lifting required for the evolution of the Singapore fintech scene has come from non-profits, though. Governmental schemes aimed at assisting the fintech entrepreneurs to get set up in Singapore have been well-received by those on the ground. Founded in 2018, Merkle Science is a predictive cryptocurrency risk and intelligence platform that has found success in Singapore. Associate director and founding member Ian Lee spoke highly of his own firm’s experiences with state-sponsored schemes. As he explains, these can make Singapore a far more comfortable jurisdiction to get set up and start trading in than many others. ‘As you might guess, if you’re a start-up that wants to offer financial products, you have to pay a lot of money for all kinds of compliance services in order to operate in a given market. This is one of the main barriers to entry. And the wonderful thing is that the Singapore government has offered a lot of grants that go a long way in offsetting that. In the case I mentioned, where compliance costs are becoming expensive, you could take a digital acceleration grant, which allows you to claim up to $120,000 for any digital services subscribed to, including compliance software’.
Lee also commends the sheer variety of help available to up-and-coming tech entrepreneurs, especially of those which put them in touch with contemporaries and established financial operators. ‘There are a lot of government-led incubators and sandboxes in which established institutions, major banks, law firms and the like, will be involved and will network with the up-and-coming fintech firms. It’s a terrific way for companies to get started with relatively minimal risk. My company Merkle Science started out via one of these incubators, which are so valuable for the way in which they bring entrepreneurs together with potential funding sources’. For Lee, it is the range of options available for prospective fintechs that sets Singapore apart in the region, with so many options available that anyone with a promising idea can find the right fit for them. ‘All in all, it’s not just the government grants but the incubators, the sandboxes and other networking opportunities that have created space for founders to get their businesses off the ground at relatively low cost’.
And it is not just getting these firms off the ground that Singapore excels at; through the MAS, it looks after its fintech ecosystem as well. April 2020 saw a $125m support package launched to mitigate the most negative effects of the pandemic, and to place the sector in the best possible position to recover and return to growth. As we have seen, with the record funding levels achieved by Singapore’s fintech sector in the first half of 2021, this has paid dividends.
A regulator with a difference – The MAS in focus
The understanding and business-friendly nature of regulation in the fintech sector in Singapore is one of the most well-liked aspects of operating there. As sole regulator, the MAS can take much of the credit for this positive state of affairs, and is an institution that is mentioned time and again both by industry observers and those we spoke to in this report as being perhaps the major factor in Singapore’s fintech success. Mark Hwang, former head of legal and compliance at ARA Asset Management (since this interview, Hwang has now moved on to be group head of legal for ESR), for instance, credited the rapid expansion of Singapore’s fintech scene to ‘the very commercial minded and open environment that the MAS has created’. So, what makes it so special?
Jo Yeo | Head of the payments development and data connectivity office | Monetary Authority of Singapore (MAS)
One answer is that, alongside its primary roles as regulator and central bank, the MAS also works closely with major players in the financial sector both at home and abroad, to champion Singapore as a financial sector, and looks to
up-skill the capabilities of those within the industry. Of course, fintech innovation features heavily within this demanding brief.
Jo Yeo speaks about the challenges the MAS faces in ensuring compliance with the 2019 Payment Services Act (PS Act) when it comes to fintech start-ups. ‘Licensees that transitioned from the old regime to the Payment Services Act generally have a good grasp of the MAS’s expectations, and can more quickly get up to speed since they are used to being regulated. But, we can see from applications that there is a varying level of understanding of the PS Act’. An example of this can be seen from the fact that 18% of prospective digital payment token service providers withdrew or had their application refused after engaging with the MAS. ‘MAS will only grant licences to those which are able to meet our regulatory requirements including ones concerning anti-money laundering and combating financial terrorism’, says Yeo.
With that said, MAS is making significant efforts working with the financial industry to level up compliance and regulatory standards in the payments sector. ‘One example is the formation of the Payments Group in association with the Singapore fintech Association (SFA)’, Yeo explains. ‘This comprises payments institutions from across the value chain, and the objective is to create a community in payments in which they can share best practices with each other and feedback to MAS on common regulatory issues. The Payments Council is also another avenue where we build partnerships to address issues in the industry to safeguard e-payments. For instance, in this forum the MAS is working with the industry to establish a framework to provide greater clarity on the responsibilities and liabilities of financial institutions and customers in the case of fraudulent payment transactions’.
Another much-heralded initiative spearheaded by the MAS aimed at growing Singapore’s fintech scene culminated in December 2020 with the announcement that four institutions had been awarded Digital Banking Licences. This programme, launched in 2019, planned to allow non-financial players such as technology and e-commerce companies to offer banking services. Eligible applicants were assessed on the value proposition of their business models, their ability to manage a prudent and sustainable digital banking business, and their growth prospects and other contributions to Singapore’s financial centre.
Criteria were applied stringently. The MAS’s original announcement made provisions for two digital full bank (DFB) licences and three digital wholesale bank (DWB) licences; in the event only two DFBs and two DWBs were awarded. As for future plans for further digital banking licences, Yeo is clear that the books are closed for the moment, but this may change in the future: ‘In the immediate term, our focus is on the operations of the new digital banks. We are currently not reviewing any applications for additional digital bank licences. As the digital wholesale banks were introduced as a pilot, we will review whether to grant more DWB licences in the future, once we have reviewed the effects of the current batch, which are expected to begin operations in 2022’.
But the MAS is looking forward even further than this. It launched Project Ubin in 2016, a collaborative program in which Blockchain and Distributed Ledger Technology (DLT) were examined for their potential use in clearing and settlement of payments and securities. This five-stage plan which concluded in 2020 saw the MAS partner with the largest banks and financial institutions in the country including BAML, Credit Suisse and HSBC, as well as the Bank of England and Bank of Canada.
Clearly, the project was a wide-ranging one, and the resources and expertise expended on it have further cemented Singapore’s status as one of the main fintech innovators worldwide. Describing Project Ubin as a ‘resounding success’ on its own terms, Yeo nevertheless sees Project Ubin as necessary for the establishment of truly game-changing payment systems: ‘After five
phases, including studying trade-offs, advantages and limitations, MAS has issued accompanying reports and source codes covering everything from design to use-cases, and has amassed a great deal of invaluable data and experience. The learnings from the experiment have allowed the industry to build upon the work of Ubin and advance towards production grade implementation’.
As a catalyst for change, Project Ubin is already bearing fruit. State investment firm Temasek has partnered with JP Morgan and DBS to build on the findings of the project and establish a company called Partior to provide better FX, multi-currency settlement processes across borders. ‘The experiment has provided a sound foundation to accelerate plans for this exciting endeavour’, says Yeo.
The MAS is a uniquely valuable tool in the creation and maintenance of Singapore’s first-class financial infrastructure. As combination central bank and regulator, it combines the two most important national financial functions under one roof, making it a dominant force in the Singapore financial scene. This, along with a steadfast desire to shape and build the finance sector – and cooperate with partners in doing so – makes it a crucial factor in Singapore’s success in nurturing fintech.
The regulator’s commitment to enabling new forms of business is not unlimited, however. January 2022 saw the MAS issues guidelines on cryptocurrencies (or Digital Payment Token (DPT) Services as they are known in the Payment Services Act 2019). The aim of the guidelines, in short, is to discourage cryptocurrency trading among the general public, in order to shield them from the perceived high risk that such activity entails.
Among other precepts, these new rules limit cryptocurrency trading service providers from promoting their services to the general public. In practice, this means that DPT Service Providers will be unable to advertise in public areas such as on public transport or on social media platforms, and will limit the behaviour of third parties such as social media influencers to promote DPT services. Cryptocurrency traders will only be able to market or advertise on their own corporate websites, mobile applications or official social media accounts.
At the very least, the MAS has taken the position that cryptocurrency trading is risky enough that the general public should be shielded from anything that might convince them to engage with it, which is a shock to DPT Service Providers that may previously have felt Singapore would be at the vanguard of the financial revolution. How much this will affect new startups from entering the Singapore fintech ecosystem remains to be seen.
Cryptocurrencies: A brief overview
Kwong Weng Wan | Group chief corporate officer and group general counsel | Mapletree Investments
‘Singapore has been building its status as a cryptocurrency technology hub, which forms the backbone for a number of financial activities. And the MAS is of the view that, while there is a place for cryptocurrency in Singapore, it should be subject to appropriate regulation’, says Chua. One of the most high-profile developments in financial technology, and one that even excites laypeople for its truly transformative potential, cryptocurrencies are one of the fastest growing sectors of Singapore’s fintech scene, achieving large investments from a variety of sources. But how do they work, and what are some of the main ways they can disrupt the established financial order?
Simply put, cryptocurrencies are digital currencies that can be securely exchanged online for goods and services. There is a substantial number of cryptocurrencies today, and their number is growing as companies and individuals seek to develop their own. The most well-known examples of cryptocurrencies currently are Bitcoin and Ethereum, and these are by far the most established and the most valuable.
Generally speaking, the value of cryptocurrencies is volatile and fluctuates at a pace that leaves many investors uncomfortable. For example, in November 2021, the value of Bitcoin reached stratospheric levels, its highest ever, only to come crashing down a few days later as people sought to cash out straight away. However, as a general trend, the number of businesses worldwide that accept them as legitimate forms of payment keeps increasing. They are now accepted as legitimate payment not only in internet companies such as Wikipedia and Microsoft, but also brick-and-mortar outlets such as Burger King, Subway and KFC.
Since we are dealing with digital assets that hold no value in the analogue world, it is important to look into what gives cryptocurrencies their value and how they are generated. In order to do that, we have to look into what technologies make cryptocurrencies possible in the first place. For anyone wanting to learn more about cryptocurrencies today, one of the very first things they are bound to come across – besides of course stories from people who “made it big” by investing in cryptocurrencies early on – are terms such as DLT and blockchain. So what are DLTs, and what is blockchain?
Making cryptocurrencies possible: DLT technologies and blockchain
Invariably, cryptocurrencies rely on blockchain technology, which is a form of digital archiving that effectively keeps track of all transactions – a currency wouldn’t hold any value unless everyone can agree on how many coins there are around. A quick way to visualise a ledger might be something akin to a giant excel sheet, multiple identical copies of which exist in every single computer that deals with cryptocurrencies. We will examine how this works in more detail below, but one of the first things to note is that it makes fraud exceedingly difficult, or even near impossible. This is because computers communicate with each other in a way that is, for all intents and purposes, instantaneous. Discrepancies between a copy of the ledger in one computer and different copies in every other machine would make cases of fraud apparent. This decentralised database is referred to as Distributed Ledger Technology (DLT) and is the first element in a structure that allows things like cryptocurrencies to emerge. Without DLTs, cryptocurrencies in their current form would not be possible.
David Lee Kuo Chuen | Professor of finance | Singapore University of Social Sciences
Blockchain is one type of DLT – again, a distributed ledger that exists simultaneously in multiple computers running the same software – which updates data in “blocks” (a list of data, in this case transactions), and a string of “blocks” form a “chain” (a stack of blocks of data that is updated serially over time). Therefore, any information about a potential transaction gets implanted into the blockchain (this series of data) that is stored simultaneously on many different computers, so that it becomes exceedingly difficult for anyone to fabricate transactions that did not take place. The process plays out like this: each transaction is “packaged up” online as a block, then that block is communicated to the entirety of the network. Then, the network will either approve or decline the transaction (in case of anomalies). If approved, the block will get added to the tail end of the blockchain, and will become forever embedded in the history of transactions.
We have seen the underlying structures that allow cryptocurrencies to form. The important thing to note before we go into more detail is that blockchains have no central administrator. The ledger does not actually “belong” to any single user, nor can any single user make unwarranted changes to the blockchain on their own, since identical copies of the ledger exist in multiple computers. Once something has been “locked in” in the chain, it is almost impossible to change. This reliable form of decentralised structure is called a “peer-to-peer” (or P2P) network. As David Lee of SUSS says, ‘Cryptocurrency brings to the mind of governments, corporations, and the community that it is the peer-to-peer exchange of value that is important, as is peer-to-peer communication and messaging. The fourth industrial revolution is all about peer-to-peer communication and value exchange’.
It is only possible to develop these groundbreaking technologies, or “the fourth industrial revolution” as Lee calls them, at places where there is a free exchange of information and ideas. Where ideas are allowed to form and be communicated freely, invariably they will be refined and allowed to grow.
Benefits of cryptocurrencies and the role of Singapore
That explains the underlying structure of blockchains, but what is so special about cryptocurrencies in the first place? What are the benefits of cryptocurrencies over conventional currencies? In short, cryptocurrencies allow users to bypass traditional institutions, such as banks, that may be adding barriers to transactions. For example, the simple act of transferring £10 to an account belonging to someone overseas would involve two different banks and a clearing house, all of which is time-consuming and can potentially incur extra charges. Cryptocurrencies allow users to go around these barriers and transact with each other with no time delays or extra charges.
Ian Lee | CBC – Founding team, Director | Merkle Science
A common misconception around cryptocurrencies is that they are anonymous and untraceable. As Ian Lee of Merkle Science explains, this is not the case: ‘Crypto is not untraceable. While I do want to caveat that by saying that there are some privacy blockchains available that are designed to be
untraceable, most of the blockchains out there, like Bitcoin or Ethereum, are traceable. In fact, these are blockchains where every single transaction that a person does is publicly recorded and anybody can analyse. For many years, when people first heard about crypto, there was a misconception that crypto is not just untraceable but also anonymous. And, strictly speaking, that’s not true. Cryptocurrencies are not anonymous. In fact, it’s what we call pseudo-anonymous. Anonymous means that you have totally no idea who’s doing it and there’s no way for you to find any links to who is responsible. Pseudo-anonymous, means that, while you might not be able to tell which person an account belongs to initially, you can monitor that account and see multiple transactions which, along with external information, allows us to try and identify the individual behind the transactions’.
Not only that, but blockchain allows for much more in-depth analyses of public databases. In essence, all this information about transactions is, by its very definition, part of the blockchain, which can never be removed from public view. This readily available information can play a crucial role in many areas of public life, such as combating crime in the real world. Ian Lee expands on this: ‘When analysing public databases, we have teams that build a log of addresses which are linked to, let’s say, terrorist organizations, darknet addresses or scam exchanges. We leverage on this, so that whenever transactions are being conducted that appear to be malicious, we can go onto the blockchain and let them know that funds are coming from an address which we know is linked to a particular criminal organisation or entity’. In fact, blockchain-based currencies are a potential boon for security services trying to build a case against malicious actors. ‘In the traditional transaction monitoring space, where you might go into a bank and deposit funds from, for example, wallet
A to wallet B, the bank would only know that your funds in wallet B came from wallet A. Whereas with blockchain, when a deposit is being done, not only can we see that wallet A sent funds to B, we can see that B sent funds to C, C sent funds to D and so on. So, it’s really bringing transaction monitoring to the next level, where you’re not just limited to analysing direct counterparties, you can go as far back as you want. The example that I always give people is this: Bitcoin has been around for ten years, and because of that we can tell you every single Bitcoin in existence, where they are currently sitting, and who’s held them throughout those ten years. We can see your trail’.
The role of state-issued digital currencies and the Monetary Authority of Singapore
One of the defining characteristics of cryptocurrencies is that they rely on blockchain, which ensures an exceptionally reliable, almost completely hack-proof, way of operating. One of the other unique characteristics of cryptocurrencies is the decentralised nature of the blockchain on which they rely, which means that it is nigh-on impossible for individuals to change the balance sheets. That is because blockchain relies on a consensus of what the history of transactions is, and as we have seen, once a block of transactions becomes a part of the permanent record, it cannot be altered. This provides a lot of trust in the system, as people who invest in cryptocurrencies relying on blockchain have the necessary minimum level of assurance without which all currencies, digital or not, become worthless.
The security and level of trust of digital currencies have opened the window for traditional, centralised institutions to get in on the act. Central banks and monetary authorities around the world seem to be coming around to the simple reality that they risk being left behind or, worse still, slipping into irrelevancy. For those central banks and authorities interested in issuing digital currencies, and it should be noted that the number by no means includes all of them, the answer seems simple: use the existing blockchain technology to issue digital versions of fiat currencies already in circulation. Those digital versions are called Central Bank Digital Currencies, or CBDCs for short.
We have seen that digital currencies rely on DLTs which are decentralised. So how would a decentralised system like DLTs work with a central regulatory authority? The idea is that central banks would issue CBDCs using private blockchain technology so that they get the best of both worlds: the security that blockchain systems provide, but also the ability to control the overall supply of the CBDCs, similar to the way those institutions would control the supply of physical currencies as well.
This means that CBDCs would not only enjoy the benefits of other cryptocurrencies, such as easy, fast, secure international transactions, as well as provide vital information on transactions that would in turn limit or curb activities such as money-laundering (due to the information the database would be able to provide), but crucially would prevent some of the volatility that plagues many digital currencies, such as Bitcoin. This provides a real incentive to governments and monetary authorities worldwide, and some central banks have already issued their digital versions of physical currencies.
The Monetary Authority of Singapore is experimenting with a CBDC version of the Singapore Dollar, while other monetary authorities, such as the Bank of England, have yet to decide on whether to issue their own CBDCs. This gives the MAS a potentially pivotal head-start as an organisation that recognises the value of being a key player in the financial landscape of the future. SUSS’s David Lee highlights the importance of peer-to-peer communication in designing a truly practical CBDC: ‘If there’s anything that authorities in Singapore, China and Europe all agree on, it is that you cannot have corporations dictating to government, as once you have corporations above the government, they will lose their tax revenue and monetary policy. Hence the appetite for CBDCs. Peer-to-peer communication and a peer-to-peer exchange of value is accepted by the government in the design of their CBDCs, as are all the other techniques used in Bitcoin or other cryptocurrencies including offline communications and unspent transaction output analysis. That’s the well-designed ones, anyway. For cross-border transactions, what is needed is a multiple Central Bank Digital Currency, or M-CBDC, which harmonises different nations’ systems. ‘But’, Lee goes on, ‘multiple CBDCs work well using a distributed ledger, which potentially comes with all sorts of privacy protections, censorship, resistance and so on. In Europe, there is a resistance to this, which means there cannot be collaboration efficiency between traditional institutions and the new payment companies. In the case of multiple CBDCs, it doesn’t matter whether you are a bank, an insurance company, or a start-up, everyone is welcome to join the CBDC network. That is the main difference – innovation comes and peer-to-peer exchange of information through communication’. This is one area in
which Asia, and Singapore in particular, has shown itself to
be ahead of the curve.
November 2021 saw the announcement of retail CBDC initiative Project Orchid to build the technology infrastructure and technical competencies necessary to issue a digital Singapore dollar should Singapore decide to do so in future. In addition to this, a cross-border payment test, dubbed Project Dunbar, will research the creation of an M-CBDC payments network with South Africa, Singapore, Malaysia, and Australia. Project Bakong of Cambodia, a pseudo-CBDC as it is not a liability on the balance sheet of the central bank, has been successful in corporate inclusion using a blockchain architecture.
Artificial intelligence
The term Artificial Intelligence (AI) still conjures up notions of high science fiction, so much so that it is easy to overlook the truly transformative effects that AI has had on the finance world already, to say nothing of the developments currently in the planning stage and yet to be rolled out. Facial recognition software and chatbots are some technologies that banking customers and other financial service consumers will be familiar with, but behind the scenes the novel use of AI-powered data analytics has revolutionised such areas as risk analysis and the evaluation of insurance claims.
Matthew Lovatt | Executive committee member | Singapore Fintech Association
With that said, AI is somewhat of a double-edged sword, and some concerns regarding fraud and privacy risks are causing sleepless nights for compliance teams at large and small financial institutions alike: ‘There’s a constant struggle between criminals using AI for criminal activities or other illegal purposes and real people trying to protect their privacy. The use of AI and machine learning means that it is now possible to generate videos and images that appear to be of real people. That is very interesting – you can generate a human who has never existed. If you’re not sure whether an image or a person is fake, and if it is trivially easy for criminals to create a fake address and photos, then that makes the job of compliance extremely difficult’, says David Lee of SUSS. To fight cutting-edge AI used by criminals, then, what is needed is a robust response from AI-fuelled compliance platforms. Fortunately, many such fintech outfits are dedicated to exactly this purpose, with concepts such as artificial neural networks and deep-learning models being deployed to the Anti-Money Laundering and anti-terrorist financing initiatives. As the pandemic leads to a greater emphasis on digital versus in-person communication, this dynamic has the potential to crystallise into a real and present threat to all financial service users, especially in the metaverse.
But increased use of AI by financial institutions also brings up profound ethical questions around privacy issues. Consider its potential applications in the health insurance world. ‘AI is extremely good at scanning the data to pick up certain patterns that you can use to achieve your goals – pattern recognition for clustering, or classification, or other tracking methods’, says Lee. ‘Given the power of this technology, it would be useful for an insurance company to know everything about you from a health standpoint – life expectancy, medical records, things like that – before they show you pricings or insurance products. It might mean giving up personal data to get the best insurance, or might make it even harder for people with underlying health conditions to get insurance coverage’. As this technology becomes more widespread, it becomes more likely that it could be used for nefarious ends.
It can also be a powerful tool for law enforcement as well, as Peiying Chua explains. ‘Regulators have been using network analysis techniques to supplement the data collected from financial institutions and intelligence from law enforcement, which has helped them to identify networks of suspicious activity across the entire financial sector. They continue to work on adding transaction information to this data set. They have also launched a national program to deepen AI capabilities in financial services and are currently consulting on introducing a regulatory framework and secure digital platform for financial institutions to share risk information with each other to prevent money laundering and terrorism financing’.
Citizens of Singapore or other developed nations are fortunate. Their government is a well-trusted one by global standards and there is confidence in its institutions, but that is not the case in most of the world. Regardless, Singapore regulators must stay watchful of developments in AI, lest they inadvertently create a situation in which civil liberties and the sanctity of personal data become threatened or hacked.
Fintech in the in-house legal world
If we move away from the theoretical side and return to terra firma to see how in-house lawyers are using financial technology at the coalface, a complex picture becomes apparent. Lisa Mather, via her previous vice president, legal and business affairs position at PayPal (since this interview, Mather has now moved on to be general counsel of Mars Wrigley), was at the forefront of payments technology in Singapore: ‘The first thing to say, which is a general point about the ASEAN region, is that you really cannot underestimate the pace at which new technologies and technological offerings are being adopted. It is now so rapid that making sure you stay up to date with the latest developments is a key challenge, especially as the pandemic undoubtedly accelerated digitisation for businesses and the adoption of new digital offerings.’ From Mather’s perspective, it means that every day – and every client – is different: ‘We may be dealing with organisations which are digitising payments to expand their online or their mobile business, but within that every partner is different. While we have certain agreements with templates and boilerplate clauses there will always be customer preferences and business objectives; we want to make sure that we are always as customer centric and frictionless as possible. As we continue to partner with new customers around the globe, we are involved in a complex and evolving ecosystem that, nevertheless, has many exciting new business opportunities that are yet untapped.’
Mark Hwang | Head of legal and compliance | ARA Asset Management
Mark Hwang’s ARA Asset Management (ARA) was recently acquired for US$5.2bn by logistics real estate platform ESR in a move which will create Asia Pacific’s largest real estate and real asset manager and the third largest listed real estate asset manager in the world. He shared that ARA invested in Singapore digital investment platform Minterest in early 2020, which merged with licensed digital asset exchange Digiassets Exchange (SDAX) in September 2021 to create SDAX Financial Group. Hwang explains that combining these two entities to form a digital distribution and trading platform has major benefits: ‘One of the main ideas behind combining Minterest and SDAX is to give the investors liquidity in the investments that they make through Minterest. Previously, there was no secondary market in Minterest products and investors simply had to hold their investments to maturity, in some cases for as long as 18 to 24 months. Now, Minterest has the ability to take the loans, equity and debt instruments it originates, tokenise them and list them on the SDAX Digital Asset Exchange, which creates potential liquidity for investors’. This episode provides an instructive demonstration of how cutting-edge fintech developments can open up entirely new avenues for established companies to expand into. In this case, it can potentially allow a whole new class of investors to work with ARA.
‘When we look back at why ARA invested into Minterest in the first place’, says Hwang, ‘what we’ve achieved so far validates the original thesis that Minterest would help us to create new products and reach new classes of investors. ARA’s traditional investor base comprises pension funds, sovereign wealth funds, insurance firms and other institutional investors. Access to new sources of capital, such as high net worth individuals and affluent retail investors, was significantly enhanced through Minterest, and the addition of the SDAX Digital Assets Exchange enabled secondary trading and liquidity’.
Hwang is bullish about the prospects of fintech advancements to rapidly revolutionise the way even legacy financial institutions operate, but he is under no misapprehensions about ARA being the only player in the sector to appreciate the opportunities offered by technological developments, such as the digitalisation of assets: ‘I don’t know which of our peers are also exploring how fintech can benefit their businesses, but this is not a secret known only to a select few. I recently read commentary that Wall Street will be fully tokenised in five years. While you can quibble about the timeframe of that prediction, the point it illustrates is just how much interest and excitement there is around tokenisation. If you think about it, there’s no reason why any asset class cannot be tokenised’.
Kwong Weng Wan, group chief corporate officer and group general counsel of real estate developer-fund manager Mapletree Investments, is clear that their projects now have to be capable of handling the digital revolution which everyone is aware is currently in progress. ‘When we look at new target buildings, we do a lot of due diligence into whether they are future proof in terms of service – are there sufficient server rooms and so on, because that would allow us to market the building more effectively’. As well as this, Wan spoke highly of the level of financial technology adoption by the general population. ‘The adoption rate for the use of electronic payments is very advanced. When you look at the variety of ride-hailing services, and how rare it is to buy from the supermarket or in a restaurant without using relatively new financial technology this becomes clear. PayNow is a highly simplified and practical payment method – you just need to know the mobile phone number or unique entity number of whoever you’re paying or scan a QR Code which does away with having to know the bank account details of whoever you’re paying. It’s used by virtually everyone in Singapore’.
The long and short of it
We have made the case over the course of this report that the Singapore fintech scene has a great deal of strengths which not only set it apart from its regional rivals, but provide it with a level of resilience that was amply demonstrated by the impressive bounceback in investment it achieved following the Covid-19 pandemic in the first half of 2021.
Singapore’s fundamental strengths as a place to do business are often noted, and include its high human development index, a generally wealthy and well-educated population, ‘East-meets-West’ business culture along with high English proficiency, and its non-partisan business innovation-friendly politics. Specifically in relation to the fintech market, Singapore has had several factors which have contributed to its success. The first of these to mention would be the MAS, which has shown itself to be highly effective in growing and maintaining Singapore’s fintech ecosystem. Part regulator, part central bank, it allows for a truly harmonious application of the government’s long-term strategy for building financial technology in Singapore, in line with its Smart Nation plans. Contributors roundly praised the MAS for its efforts and foresight, especially in getting established financial institutions on board with helping fintech companies through sandboxes and other initiatives, and for taking the best ideas from other successful fintech jurisdictions around the world and applying them to Singapore. Throughout this, industry bodies, like the Singapore Fintech Association, have helped to marshal the troops and build a strong network throughout the entire fintech ecosystem. Having a roadmap managed from the top that takes into account the advice of those at the grassroots has allowed Singaporean fintech to thrive, and a strong foundation for future development has also been laid.
So, the prognosis for Singaporean fintech is rosy. But that is not to say that there are no weaknesses to be mindful of, or even threats to take into account. At the macro level, while Singapore’s population is tailor-made to thrive in an advanced economy, it simply is not as large as most of its other main fintech competitors on the world stage, and must rely on other nations to supply much of the talent. This means that it is at the mercy of wider geopolitical events to a greater extent than some of its rivals. While its non-partisan political environment and good diplomatic relations with most nations mean its exposure is as minimal as possible, regional conflicts or crises could lead to this talent pool drying up abruptly.
While Singapore has made a highly promising head-start, new challengers are desperate to take some of the fintech market share away from it. The Gulf states, while in the opening stages of their fintech journey, have huge potential to disrupt the sector, given their vast wealth and appetite for grand projects. The Middle East is already one to watch in the fintech space, and predictions are that over 800 fintech companies will find a home there by 2022, but it is just one example of up-and-coming regions that may look to undercut Singapore in order to steal market share.
The best course to mitigate some of these threats is to maximise the positive aspects of Singapore as a jurisdiction. The laissez-faire but sensible regulatory regime and policies that Singapore is famous for must be preserved and perhaps even expanded on in the future. The most common request from those we spoke to in the report was that regulations be relaxed further to allow new businesses opportunities. This could certainly be a consideration, but it is a double-edged sword. Fly too close to the sun with relaxing regulation and it could lead to untoward business practices or economic issues – the worst possible outcome for a nation that trades on its good governance. Stick to the core competences of what makes Singapore so respected worldwide as a place of business, and the fintech space should be set to continue its progress towards being the number one global financial technology centre.
In recent years, the governments of the Gulf Cooperation Council (GCC) have moved to reduce their reliance on hydrocarbons, designing ambitious strategic plans to develop into innovation-led economies within a 15- to 30-year horizon. One aspect of these policies has been to promote technology-backed and data-driven industries, particularly in the financial services sector.
Early results of this success can be seen in the resilience of The Dubai International Financial Center (DIFC) – the region’s flagship offshore business hub – to the economic slowdown during the pandemic. DIFC saw a 20% increase in the number of firms operating there during 2020, with fintech among the leading growth sectors. In the past financial year, the number of fintech businesses registered with the DIFC more than doubled to over 300 – roughly 10% of all businesses registered at the centre and around a third of all financial businesses.
The success of the region’s fintech sector has been the result of careful strategic planning on the part of GCC governments, many of which are offering financial, regulatory and other incentives to the world’s fintech community. In particular, the GCC is now home to a dense concentration of market-leading fintech accelerators offering financial and regulatory support along with unparalleled networking opportunities and a range of other benefits. These accelerators are already among the most sophisticated and vibrant spaces for fintech innovation on Earth, and all the signs point to even stronger support for the fintech industry from the GCC’s regulatory and governmental authorities in the coming years.
The GCC was a relatively late arrival to the fintech scene. The region’s first significant regulatory framework directed specifically at the sector emerged in January 2017 when the Central Bank of the UAE launched new licensing programmes for digital payment services. A little over four years since that time and the region has become one of the fastest growing markets for fintech innovation in the world.
The Dubai International Financial Centre (DIFC) anticipates that Middle Eastern-based fintech companies will raise nearly US$3bn in venture capital funding by 2022, just under a third of a projected global market funding of US$10bn. While much remains to be done for the region to become the epicentre of the global fintech industry, a closer look at the regional ecosystem reveals a considerable growth potential.
To investigate the rise of the fintech industry in the Gulf, The Legal 500 has partnered with Dubai-headquartered BSA AHMAD BIN HEZEEM & ASSOCIATES LLP (‘BSA’). Since 2001, BSA has grown to be one of the top Middle Eastern law firms, with nine offices across five countries. Their diverse team of 150 lawyers are from 35 different cultural backgrounds and speak 22 languages. BSA is a market leader in new and evolving sectors, and partners with their clients towards a sustainable and progressive future.
BSA’s fintech practice
Fintech continues to be one of the driving forces of the UAE’s big bet on technology, with an expected US$3bn in investment capital funding generated by about 465 fintech firms by 2022. The last five years has seen a true revolution in the financial services industry which was felt at every level from consumers to businesses to regulators.
BSA’s fintech practice is an exciting part of our law firm offering which has continued to grow exponentially over the last four years focusing on cutting-edge fintech matters. We are particularly sought out for our expertise in the payments space, online wealth management, blockchain technology and start-up fundraising.
Nadim Bardawil | BSA’s technology, media and telecommunications partner, and head of the firm’s fintech practice
We provide services across the full spectrum of financial technology and we benefit from the ability to draw upon our extensive wider corporate, insurance, regulatory and financial experience to address the various micro-industries that form the fintech ecosystem. Our clients include financial institutions, venture capitalists and start-ups. We advise them on maximising technological innovation, enhancing and safeguarding their trade secrets and tech, and ensuring compliance with all local and international laws.
We are frequently asked by our clients to provide answers and insights as to the legislative deviations between multiple Middle Eastern jurisdictions. Consequently, we have vast experience in providing expert legal and practical business advice to start-ups and established players, regarding regulatory variations across the region and globally.
At BSA, we are also conscious that working within an ever-changing regulatory ecosystem, both from a regulatory and technological perspective, requires us to be in touch with various stakeholders. We regularly interact with regulators in various capacities: (1) when providing comments on draft legislation when and if we are brought on board in a consultatory capacity, (2) when approaching regulators on behalf of clients to enquire on the applicability and malleability of the current regulatory framework, and (3) when attempting to match new products and services to existing legislation.
While the UAE leads the way when it comes to fintech start-ups, the Middle East region as a whole is following this growth story with Saudi Arabia and Egypt boasting rich and growing industries of their own. This growth is further bolstered by a swath of new regulations in many Middle Eastern countries addressing payment regulations, stored values and digital financial services.
Several factors help position the Middle East as a hotbed for fintech activity. The Middle East presents one of the youngest populations with an estimated 28% of the population aged between 15 and 29. In addition to this, a large portion of society is deemed to be underbanked or outside of the current financial system. Governments are continuing to prioritise the digitisation of services, both public and private, which means that the Middle East is poised for continued growth in the fintech space.
We continue to have a positive outlook for growth, both from an economic and regulatory perspective. Growth opportunities have continued despite the Covid-19 pandemic which has definitely accelerated the adoption of new technologies. Some of our clients have been able to increase their spending runway, find new investors and increase their new product offerings due to the pandemic. The Middle East is home to a significantly large expatriate population which tends to use its spending power in their home countries. The last 18 months has seen this capital remain in the Middle East and fintechs have been able to capitalise on increased domestic spending.
App-led societies
When was the last time you walked into a bank? For anyone over the age of 30 in Europe or the US, the answer is likely to be “some time ago”. For the bulk of the world’s population, the answer is “never”.
The stability of the banking system and the soundness of the infrastructure across Europe and the US has been the source of many advantages, but when it comes to the development of financial technologies it has arguably become a barrier to change.
For Khalid Talukder, managing director at Dubai-based investment management company SH Capital, the GCC’s large migrant population makes it an ideal region for fintech providers looking to expand in the retail market.
‘In terms of demographics, the Gulf region is dominated by people who come from parts of the world that have not historically had strong fixed postal or telephony systems. That means the transition between the traditional ways of doing things and the digitisation of everything is far less pronounced than it would be for a European or American.
Mobile technology has become central to many Asian countries, where even in rural areas it is not uncommon to find better mobile phone coverage than Central London. Accessing services via phone apps is the established norm for most of these people, who had to become technology-savvy very quickly. They were early adopters of things like mobile wallets and facial recognition software – in countries that have a low adult literacy rate, biometrics is key.’
Any place where people are more worried about losing their mobile phone than their wallet is a high-potential market for fintech! – Khalid Talukder, Managing director, SH Capital
Just as important has been the level of fintech uptake among GCC natives. ‘In the Gulf, people could not access services if it were not for apps’, adds Khalid Talukder.
‘Concerns over data usage and storage do not really exist because digital technology and, in its broadest sense, fintech, is all people have ever known. It goes beyond banking and finance – in countries with small populations the quickest way to distribute government services is through technology and apps. It would be no exaggeration to say that the countries of the GCC are now app-led societies.’
For the GCC, an extremely wealthy and developed region that caters to both large migrant and digital-native populations, there are big opportunities to take a market-leading position. As Khalid Talukder concludes, ‘any place where people are more worried about losing their mobile phone than their wallet is a high-potential market for fintech!’
For Bachir Nawar, group chief legal and compliance officer at Dubai-based SHUAA Capital, it is already clear that the Gulf is taking a technological lead in a number of areas.
‘From biometric ID cards to how everything is done through an app, this region is lightyears ahead of some of the European markets. People here know how to develop and use technology, they have developed amazing solutions over the past 20 years and are constantly innovating. The rest of the world
is now slowly catching on’.
Bringing in the banks
A population ready to embrace new approaches to borrowing, saving and sending money gives the Gulf fintech scene a huge advantage, but winning the backing of the region’s banks will be essential if companies are going to compete in the international market.
When fintech started to boom in the early 2000s, many banks around the world instinctively opposed new entrants, questioning their compliance with the anti-money laundering regulations and a range of other regulations. Since then, major financial institutions have shifted their stance to embrace fintech, whether by developing their own solutions, investing in or acquiring start-ups, forming entire departments dedicated to digital transactions, or creating digital platform-led units to research blockchain, artificial intelligence (AI) and transaction monitoring technologies.
As a former banker, SH Capital managing director Khalid Talukder has long been an astute observer of the institutional response to the fintech challenge.
‘Banks are essentially credit institutions. Everything else they do is an ancillary service around this specific activity. The very nature of this business meant that, for many banks, spending time and resources on developing fintech was seen as a risky distraction.’
There are also purely economic reasons behind this hesitance. With many currencies across the Gulf pegged to the US dollar, high-street banks and other established institutions are understandably cautious when it comes to adopting fintech products. Ultimately, if things go wrong, the region’s banking system could put its dollar-clearing facilities in jeopardy.
However, the growing success of the fintech industry in addressing customers’ needs has left the banks with three options: Fight the fintech companies (fintechs); collaborate with them; or develop their own fintech solutions.
‘The key point is that banks want to participate in the fintech revolution’, notes Khalid Talukder. ‘They do not want their lunch to be eaten by the young upstarts. Fortunately for the banks, they have both the capital to acquire promising new entrants and the reputation and credibility to position their own offerings favourably in the market. Afterall, many of these banks have been around for 200 years. It is unsurprising that customers feel they know the industry better than companies created in the past ten years.’
Of course, it is not only the incumbents that had to revise their initial assumptions. ‘Fintech companies started off with the idea that they would make banks a thing of the past’, notes Ammar Afif, chief executive of Dubai-based instant credit and financing company Cashew Payments, which announced its own partnership with privately-owned Mashreq Bank earlier this year. ‘They soon realised that the heavy regulations applied to financial services mean this was easier said than done and have largely changed their tune to one of collaboration with regulated entities like banks.’
This thawing of earlier hostilities, adds Khalid Talukder, is a welcome change of tone.
‘Bank bashing was a bad start for fintech. Yes, banks have flaws, but they also operate at a much larger scale than start-ups, which usually only focus on one or two aspects of the whole industry. Technology offers a lot of opportunities, but scale can also be a great asset, and banks can scale up the volume of financial operations to complete millions of transactions in a split second.
Fintech companies started off with the idea that they would make banks a thing of the past. – Ammar Afif, Chief executive, Cashew Payments
The early marketing angle among fintechs was to denigrate banks, or that banks were not relevant anymore. This was not good start to their story. As in many other instances, a more collaborative approach may have been a lot better for both. And indeed, this kind of antagonistic language has now more or less disappeared, and fintech companies prefer to emphasise their accessibility, convenience or speed.’
Tarek Mogharbel, executive director and senior country counsel at J.P. Morgan UAE, also welcomes this evolution.
‘Established banks are heavily regulated entities. They are subject to various stringent regulatory requirements to prevent money laundering and other illegal processes. While this might make them less agile than corporates, such controls are perfectly justified. The fact that fintech companies understand they should always be taken into consideration when offering new products and services can only improve the industry.’
For Nejoud Al Mulaik, director at Fintech Saudi, this symbiotic relationship looks set to continue, with a number of banks across the Gulf establishing dedicated funds to invest in promising fintech companies. For the banks, the payoff is not simply accessing a more attractive front-end or the latest must-have app. By working with fintech providers the industry is looking to solve one of its biggest headaches: the cost of acquiring clients. The retail space in particular is looking to find ways to onboard new customers without having to incur the expense associated with branches, people, infrastructure, and other organisational costs. In short, many of the region’s banks now see it as a matter of survival to find efficient fintech products.
‘High-street banks and fintech companies now have a good working relationship. From my own experience, animosity between the two is a thing of the past. Banks have established capital funds dedicated to investing in the fintech sector. It is clear that banks and start-ups are partnering on all sorts of projects. Most of them are still at an early stage, but fintech is not exclusive to start-ups anymore. This close partnership has changed the face of the industry; they are working in collaboration to capture the market together.’
Raja Al Mazrouei, executive vice president at the Dubai International Financial Centre FinTech Hive, confirms this state of affairs.
‘Over the past few years, we have seen an increase in collaboration and co-creation between established banks and fintechs. In fact, the FinTech Hive accelerator programme operates based on the concept of collaboration. We scout for solutions our bank partners are seeking based on the priorities they would like to address. We find that they are very proactive in their participation every year and are excited to meet the start-ups to really make something happen. I would say banks are addressing this because not only has our list of partners increased over time, but we hear directly from the C-suite individuals of the importance of bridging the gap to better serve the market and operate more efficiently, especially as we face increasing socio-economic pressures.’
All of which means the region’s fintech market is likely to change over the coming years. As Khalid Talukder suggests, ‘it is possible that the creation of fintech start-ups will slow down in the next five years and that most investment will focus on strengthening existing businesses.
Simultaneously, banks will digitise as much as they can to lower their costs. Interest rates are not going to stay this low forever, and it will be interesting to see how the relationship between banks and fintech companies evolves when they eventually start to rise.’
Regulation
When technology takes off, the law often struggles to keep pace.
The growth of fintech across the Gulf has seen regulatory bodies playing catch-up in many areas. While the challenge of regulating emerging technologies is by no means unique to the Gulf, local dynamics have made it especially difficult to address, as one senior industry figure says confidentially:
‘Regulators across the region will often admit privately that they are a bit behind when it comes to new technology, but in this part of the world there is a very strong aversion to public loss of face. People in authority don’t like to be seen getting things wrong, whereas in other parts of the world there is more of a willingness to make mistakes and learn from them.
It is an operating environment that makes it difficult to get straightforward feedback, and things can potentially remain unclear as a result. Add to this a reluctance among expatriates to challenge authority or local norms and you can find a situation where widely-recognised problems are rarely given attention.’
However, GCC governments are aware of the importance of the fintech industry for the region’s economy, and they are committed, along with regulators, to build regulatory frameworks, and in fact a viable environment, for the market’s actors. As a result, each country has made remarkable advances in that respect.
The commitment of Middle Eastern states to pushing fintech innovation is perhaps best demonstrated by the extraordinary lengths the region’s regulators have gone in circumventing and testing their own financial rules. This is most evident in the proliferation of regulatory sandboxes – experimental spaces where both incumbents and challengers can test their products and services on the fringes of, or outside, the existing regulatory frameworks.
The region’s first regulatory sandbox was introduced by Abu Dhabi Global Market in November 2016. A year later the Dubai Financial Services Authority and the Central Bank of Bahrain followed suit with their own initiatives. Since then, the region has seen regulatory sandbox initiatives come from the Saudi Central Bank, the Central Bank of Kuwait, the Qatar Central Bank and, in the coming months, the Central Bank of Oman. Outside the GCC, sandbox initiatives have also been launched by the Central Bank of Jordan, the Central Bank of Tunisia and the Central Bank of Egypt.
The GCC-based regulators have also acknowledged the rise in investments in cryptocurrencies and cryptoassets. At present, such assets are permissible in free trade zones but restricted under mainland regulations, although rules have been put in place to supervise trading, including the UAE’s Securities and Commodities Authority’s regulation (2020) concerning cryptoasset activities.
Bachir Nawar has been monitoring the situation closely:
‘We continue to discuss this subject with the regulators, hoping that they will define the appropriate framework for investment in cryptoassets. Our hope is to eventually see an alignment between mainland laws and those of the free zones and the rest of the world, albeit learning and taking into account the key risks observed in different jurisdictions.
Cryptoassets are not something that can be stopped, and many investors are interested in them. We appreciate that they can represent a risk and that they can be complex, but for the region’s financial markets to remain credible, they need to be considered like any other form of security. This is still a work in progress, but everybody is being reasonable and showing goodwill. The complexity will no doubt remain in setting up the governance around the ‘crypto’ surge and the mitigation of money laundering.’
Fauzia Kehar, Middle East and North Africa divisional counsel at Citigroup, thinks the uncertain nature of the crypto space makes it unlikely that regulators will make a big move anytime soon:
‘The crypto space is another animal altogether – a lot of which is still unregulated and not widely understood by the public. As a result, many financial institutions are still sceptical about being first movers on this front. Frankly, I think that the industry is still deciphering how these translate into practical usage and deciding how they will be implemented.’
Competition within a market is always positive, it pushes companies to improve, but having to navigate between multiple jurisdictions is always a challenge. – Nejoud Al Mulaik, Director, Fintech Saudi
In the wake of their resounding success in the field, GCC countries have taken a holistic approach to fintech development in general. In addition to promulgating fintech-specific regulation, they are creating a favourable framework to ensure the sustainability of their achievements. This involves the regulation of separate but related areas, like data protection. In most cases, their data privacy and protection legislations are largely based on 1995 EU Data Protection Directive, but some jurisdictions have recently announced new GDPR-like laws that take the recent large-scale digitisation of their banking and finance industries into consideration; a new federal data protection law is anticipated to be issued by the end of 2021 in the UAE, and a Personal Data Protection Law is expected to take effect in March 2022 in Saudi Arabia, for instance.
Those we spoke to welcome these advances, but some suggest that in a following phase, reforming and simplifying existing regulatory complexity might be necessary. Take the UAE: each Emirate works independently from the others from a regulatory perspective, which restricts the ability of fintech providers who want to seamlessly cover the entire market. Even operating within a single Emirate can be a challenge: it is not uncommon for Dubai-based entities to follow guidance from the Dubai International Finance Centre (DIFC) and the Dubai Financial Services Authority (DFSA) while also paying attention to the Emirates Securities and Commodities Authority (SCA) and the Abu Dhabi Global Market Centre (ADGM).
At the regional level, countries are also competing to be recognised at the foremost hub, hoping to engage investors and develop their own companies.
‘Competition within a market is always positive, it pushes companies to improve,’ comments Nejoud Al Mulaik, ‘but having to navigate between multiple jurisdictions is always a challenge. The GCC is made of sovereign states, each of which retains all legislative power, of course, but they should be wary of imposing too many hurdles to the international expansion of successful companies. Saudi, which is the largest regional economy, has unified financial regulations across the country. Every day we see how important an asset unity and cohesion is, and we always bear this in mind.’ As such, regulatory simplification and harmonisation came out as the top item on the wish list of entrepreneurs and investors. Whether this takes the form of a Gulf equivalent to the European Single Euro Payment Area (SEPA) – a collaborative arrangement overseeing all regulation, simplifying banking transactions and harmonising financial services or passporting rules – or something more modest, a new approach to regulation is now on the policy agenda. There is a growing awareness of this need across the region’s governments. Several GCC states are reportedly in discussions over potential common regulatory standards, and developments are being closely monitored by the main market players.
However, says Bachir Nawar, all positives of the Gulf regulatory situation are often overlooked.
‘Every entrepreneur in the world will tell you that regulators are, by definition, an obstacle, but in the Gulf a productive relationship has developed between the two sides. Entrepreneurs no longer accept that the answer to an application can be a simple “no” – particularly if they believe there is benefit to the region in making a change – and regulators have created an environment that allows us to collaborate with and challenge them so that business can be improved safely and within the boundaries they have set.
Regulators understand that if you want to be pioneers, you must be flexible. Somehow, as an industry, we have mastered the delicate art of challenging the regulators when their rules become hurdles. At the same time, we support them as much as we can by providing all the necessary information for them to understand the market.
Over the years, companies have forged excellent trust with the regulators. They know that innovation is in our genes, that our purpose is to create disruptive changes, but that we will never try to bypass their rules. All the processes have now been made faster and a lot more fluid in the whole of the Middle East, and we will continue to work with the regulators on improving them.’
Nejoud Al Mulaik makes similar observations. ‘The regulatory process takes time, but it is part of the overall efforts to support the transformation of the sector. In Saudi, the regulatory framework and licensing system have continuously and efficiently been improved, thereby protecting consumers, but also creating opportunities for start-ups and opening windows to test innovative solutions.’
Citigroup’s Fauzia Kehar has also been impressed by regional regulators’ commitment to improving the business environment.
‘There is a lot of work being done in the UAE tech space in general. New regulations are being issued on things such as payment systems, money services providers, and digital licenses.
Despite the regulatory process still developing, the government, companies and sometimes consumers themselves are being very supportive. In fact, the different regulatory bodies have made great progress
in the last few years.’
Point de Vue: A lawyer’s perspective on legal and regulatory developments in the UAE and Middle East
With his expertise and experience of over ten years at BSA, Nadim Bardawil puts the recent legal developments in the UAE and the Middle East for the regulation of the fintech sector into perspective and explains the regulatory changes expected to be introduced later this year.
Fulfilling the digitisation vision of many countries in the Middle East, the fintech industry has experienced unparalleled growth over the last five years. As Middle Eastern society slowly but surely moves away from an exclusive focus on bricks-and-mortar businesses, fintech entities are capitalising by offering online and on-the-go solutions.
Banks and financial providers are doing far more of their business online, whether through apps on smartphones, or via secure portals that are accessible by users from anywhere in the world. This approach has given customers and consumers a far greater degree of freedom, making it easier to access their banking and money (no more visits to the bank manager, now you can Zoom him/her any time), and greater expectations of the accessibility of a wider range of services.
In the UAE, the rise of fintech has been phenomenal. Fitting in with the ethos of a young and vibrant population, digital finance has been embraced as part of everyday life. It’s quick, it’s easy, and it makes the consumer feel that they’re in charge of their money in a far more intimate and personalised way. The concept of an “e-wallet” appeals to a generation who have come to rely on their smart devices for everyday life, from picking up emails on the go, to accessing the internet while making the daily commute. It fits in with the rapidly developing economies of the UAE, and the region’s more prominent position on the world stage as well as a staggering young population.
Changing regulatory frameworks are impacting business growth
In tandem with the above, regulators in the region have passed several forward-thinking legislations to address the growing gamut of products and services offered by fintech providers.
In the UAE, the Central Bank issued an updated stored value framework repealing the previous legislation passed in 2017. The Central Bank also has plans to issue a stand-alone payment service provider legislation which is expected to be introduced within the coming months. In the DIFC, the provision of a money services framework by the DFSA has allowed for a new set of business ventures to launch in the
financial centre.
In Saudi Arabia, the Saudi Arabian Monetary Agency (‘SAMA’) issued the Payment Service Provider Regulations in January 2020 which was followed by SAMA announcing its Open Banking Policy in 2021. These initiatives are in line with SAMA promoting the country as a hub for fintech and encouraging the use of emerging and nascent technologies in the country. Following suit, Egypt passed new legislation in September 2020 allowing the Central Bank to issue licenses to fintech entities. This legislation has further encouraged the use of new technologies in Egypt, including the ability to provide licenses for the issuance of cryptocurrencies.
The impact of these changing regulations has yet to be fully felt with consumers, but we can already clearly see the impact with non-financial services entities such as e-commerce platforms, ride-hailing platforms and others integrating fintech services in their verticals. It is thanks to these regulations that the provision of financial services using technology has become more accessible.
Rather than creating barriers that prevent independent financial providers to enter the market, a more flexible attitude to digital financial services has opened the sector up to the next generation of money providers. Effectively, ‘old school’ banks now sit alongside fintech start-ups in the same sector. The obvious winner is the consumer, who now has a greater choice.
An international reach
While several world-class accelerators continue to encourage start-up and venture building in the Middle East, we are also seeing international players enter the market either by way of applying for licenses or by way of acquiring existing local players. The UAE in particular has been able to benefit from having the DIFC and the ADGM as financial centres which are founded on English law and boasting comprehensive applicable regulations.
The transition to fintech represents a cultural shift in the Middle East, but there are still issues to contend with. Take-up among older people for online financial apps, services and provision are still some way behind those in the younger, and especially the 18-34, age group. But fintechs are recognising that all of their customers matter and are adapting their products to suit multi-generational groups.
While clearly there is work to be done to grow the ecosystem further, this has not stopped a continued flow of global investment flooding the region. Today, an estimated one in four investment deals in the Middle East have been made in the fintech sector. Venture capital firms and institutional investors are increasingly looking to establish permanent set-ups in the region while regional sovereign-backed funds are putting more capital in play for regional ventures as they see the growth potential.
What’s next?
We are witnessing the next generation in financial provision, with money services from insurance and banking through to telecoms, to payment services and wealth management all available via apps or online portals. This has made finance more accessible for everyday users, especially those users who may have had limited or no accessibility in the past.
We continue to see regulators actively working to provide an updated legislative framework to keep up with the times. As an example, the DFSA has announced that it will be launching a consultation paper addressing the regulation of security tokens and other cryptoassets by the end of 2021. It is encouraging to see regulators take a proactive approach and consult with stakeholders to put new regulations into place early on so that the financial services sector can continue to provide a diverse and dynamic range of options that fit in with the forward-thinking ethos of the region.
Innovative ideas will always come along, and the regulatory bodies will have to adapt and change to a new era of doing business.
We expect that the coming year will see not just a surge of new licences issued by regulatory bodies, but the continued growth of the digital financial marketplace in a well-regulated and transparent way that inspires trust and greater take-up among both businesses and individual consumers.
Growing the ecosystem
The impact of nationalisation policies on the Gulf labour market has long been a hot topic among multinationals and start-ups operating across the GCC.
‘When the initiative was first introduced, it was initially difficult to meet these expectations’, comments Bachir Nawar of SHUAA Capital. ‘Many companies had very specific HR needs and were not used to the idea. Emirati business leaders and entrepreneurs also pointed out that they struggled to motivate the younger generation when it came to work. However, we all understood what the government was trying to achieve with this measure, and we all worked hard to make it a success.’
In recent years, says Bachir Nawar, the fruits of this policy have become increasingly evident.
‘SHUAA Capital has managed to attract and nurture the national talents we need. These people have been part of our success.
Today, private companies are no longer looking at this issue as a problem. In fact, because the selection of UAE nationals became so rigorous, it sparked Emiratis to get better degrees and improve their expertise. They have now exceeded all expectations. The whole business scene is changing and in the next few years we will see far more Emiratis leading in most senior corporate and technical positions.’
One good thing about this region is that people here do not want to be left behind. – Bachir Nawar, Chief legal officer, SHUAA Capital
Ammar Afif, of Cashew Payments, agrees that many of the high-skilled jobs currently occupied by expatriates will soon be filled a younger generation of domestic talent.
‘I see a lot of young people that go abroad to study, get internships, and see what is being done in other countries. They are keen technology users themselves and they want to make a difference. This all leads to them being very involved in the technology industry in the next few years. In fact, they are settling into key roles as we speak.’
At the same time, this new generation is proving to be more open to foreign influence within the region. As Bachir Nawar comments, there are already signs of this shift within the region’s free zones.
‘One good thing about this region is that people here do not want to be left behind. Governments across the Gulf have encouraged investors to focus on fintech, giving a wake-up call to the region’s strategic approach. We are heading in the right direction, and there will soon be better synergy between people who can ask the right questions and highlight the areas where things can be improved, and the people who know how things work and have the relevant networks and connections. Conditions are ripe and there are many incentives for investors to come here.’
Funding and the fintech ecosystem
In the US or European model of tech start-ups, founders typically look to venture capitalists for early-stage funding. However, the dynamic of the ecosystem is slightly different in the Gulf, in the sense that it is more targeted.
‘From my experience in the region,’ says Bachir Nawar, ‘I would say that it is more than money that dictates what kind of industry, and the discipline that needs to be followed. The growth of the fintech sector is more strategic than anywhere else; investing in the industry here has become a normal aspect of wealth management.’
Vishal Koovejee, associate general counsel at SHUAA Capital, concurs and he adds that the UAE tech-ecosystem is not only different from the Western one, but it is unique in the whole of the Middle East.
The investor-entrepreneur relationship is different here than it is in Silicon Valley or even in other neighbouring countries: the fact that investing in tech is often a way to diversify their portfolio, investors want more control over the development of the start-up that they put their money into. As a result, the SAFE (simple agreement for future equity) agreements tend to be a lot more prescriptive for the companies, as when they still are at the funding stage, they do not have much leverage to negotiate properly. This aspect of business adds yet another layer of complexity for the layman.’
Wealthy population increase in the Middle East by 2025
Ammar Afif agrees that the difference between the Western and the Middle Eastern investment strategies lies in the amount of risk taken at the early stages of start-up funding. ‘Whilst the US is years ahead in terms of investment, there is only so much money available at the beginning of a project. Most venture capitalists in the US, Europe and Australia realise that the initial bet on a company should largely be based on who the team is comprised of and what the ideas are. If it looks serious enough, then they will put some money into it, and see where it goes, but I think that they expect a certain rate of failure. I do not know what the exact numbers are, but for ten investments they make, five will probably end up failing completely, and from the other five, maybe two or three will bring a little bit of return. Only one or two, at most, will become home runs or make the return for the initial investment. This has been the concept in the West for many years now. In the Gulf, however, until recently there has been an approach with venture capitalists looking for solid projects’, says Ammar Afif. ‘The criteria for defining if a project may be a success is different, they consider deals won and revenue generated. Here, one of the best options for start-ups to get initial funding is actually looking to individual investors.’
These very specific business conditions explain why, for a long time, the Middle Eastern fintech scene was characterised by regional, if not nation-specific challenges and opportunities. However, as fintech entrepreneurs have improved their products and established their brands, they are beginning to adopt a more international approach to their development. ‘When asked about the internationalisation of the Middle Eastern tech market, I like to take Anghami, for which SHUAA recently raised funds, as an example’, explains Bachir Nawar. ‘Anghami is a direct competitor to Spotify, so not a fintech company per se, but earlier this year, it became the first Arab technology company to be listed on the Nasdaq. It was created in Beirut, then moved to Abu Dhabi, where it is now headquartered, and was supported by the Abu Dhabi Investment Office (ADIO). Another example would be Alef Education, an Abu Dhabi-based edtech (education technology) company. As to the fintech industry specifically, I am not pretending that we are as advanced as the US or any other European country, like Denmark, that has an institutionalised system that supports the fintech industry, but Middle Eastern companies are undoubtedly propelling themselves beyond the Arab world and are set to compete on the international scene.’
For Raja Al Mazrouei, GCC start-ups are destined to remain partially focused on Gulf-specific challenges and opportunities, but they are in a very favourable position to expand in the future.
‘On the one hand, our start-ups offer focused solutions – especially when it comes to Islamic fintech and regtech (regulatory technology), two areas that are specific to this region and depend on our laws, regulations, and culture. On the other hand, they also offer other fintech solutions that cut across these characteristics and are solving wider challenges across various markets and geographies. This rollout to different markets is a testament to the adaptability of the solutions but also an indicator of some common denominator challenges that the financial industry faces.’
This movement, according to Vishal Koovejee, might only be in its infancy but he anticipates further development for the regional fintech start-ups in the years to come. ‘Our companies are very successful; they are raising the interest of overseas investors, which can open doors really quickly. This is particularly noticeable in the sector of AI, where Arab start-ups are ready to compete on the international stage, and should do so in the next couple of years.’
Ammar Afif concurs and provides some perspective on this. ‘Fintech is one of the sectors that has really boomed lately. Most products have rapidly become popular with consumers, very popular with merchants internationally, and particularly in the Gulf market. The Middle East, in general, is a great market: there are talented people, internationally-recognised experts, it is becoming a very interesting place to set up a company and launch products. The UAE is formidable hub, but there are other huge markets outside of it. I cannot name them all, but Egypt is another one, with an enormous population. Nowadays, most fintech companies, including Cashew Payments, are introducing their products in the region and then adapting it for specific markets such as Saudi Arabia, Bahrain, Oman, etc.’
In this respect, much like Khalid Talukder and Ammar Afif, Bachir Nawar and Vishal Koovejee forecast a coming together of banks and fintech companies in the short term, with the objective of developing faster and further. ‘At the moment, only a few Arab companies are truly global. In the next four to five years, however, the banking and the financial sector is the first to jump on the bandwagon of our companies’ international development. To some extent, banks have been preparing for this. Many have either spun off some of their subsidiaries into specific fintech-driven industries – be it an investment management, or be it private wealth, for instance. The digital transformation in this part of the word is primarily driven by capital, therefore banks will play and pioneer every growth to come.’
The industry makes an effort to provide solutions that are always in line with the public, which explains why investments in the region’s fintech sector are on an upward trajectory. – Raja Al Mazrouei, Executive vice president, FinTech Hive
These investments are also facilitated by the legal and regulatory environment promoted by the local governments.
The Emirates are home to the Abu Dhabi Global Market (ADGM) and the DIFC respectively, two of the several UAE international financial centres and free trade zones that are particularly relevant to the fintech sector.
These two free zones operate with their own specific systems. There, start-ups have two options as to how they want to develop. They can get a partial license that allows them to continue as a normal company providing they can self-fund.
The only condition is that they are placed in a sandbox for a year and are mentored and guided until they can fly with their own wings.
Alternatively they can get a fully-fledged license and be backed by investors immediately. There are other bodies in the UAE that have technology and fintech as part of their remits, specifically – the Abu Dhabi Developmental Holding Company (ADQ) would be a good example – and their mission is to support entities and start-ups in this sector only.
According to them, this development will be encouraged by specific legal changes that are adopted in several countries in the region – especially in Kuwait, Saudi Arabia, and the UAE. ‘Governments are aware of the many opportunities that exist, and they are being proactive. They are working on very practical measures, like lowering, subsidising or delaying the payment of licensing fees for small start-ups. They are also in the process of simplifying the general bureaucratic requirements to facilitate the setting-up of a company, for instance. But they are capable of thinking on a bigger scale. Particularly, they are making it possible for anyone – providing they comply with the law – to own a license in their jurisdiction, but work remotely from any other location. In times like a pandemic, such a measure can literally save the industry. They are also relaxing the visa approval process for fintech and technology professionals. The governments are putting themselves in the best conditions possible to attract the talent their countries need. Fintech professionals are already taking advantage of these changes for the better.’
In addition, while incentivising local companies to hire nationals, ‘the authorities have relaxed the requirement for foreigners to have shareholding in most companies and even full ownership. Of course, strategic and sensitive industries such as oil and gas remain protected and managed by nationals, but overall, these measures will attract investments. Some will go directly to fintech start-ups, others will indirectly benefit the sector. In any case, the UAE and most Gulf countries in general are known for being asset management and banking hubs. The region is such an important investment, private banking and retail banking platform, that if it attracts investments, fintech will grow one way or another. The grounds for it have been paved and I think it is a fertile soil for the growth of the industry.’
The governments’ strategies to draw investors seem conclusive. ‘Studies show’, says Bachir Nawar, ‘that by 2025, the number of high-net-worth and ultra-high-net-worth individuals, will increase by an average of 12% and 26% respectively across the Middle East, with 50% of these ultra-high-net-worth individuals residing in Saudi Arabia, and 20% in the UAE.’
This influx is expected to generate even more opportunities. ‘These affluent investors are significantly underserved’, continues Bachir Nawar. ‘And because their number is growing so fast, it is virtually impossible to build all the traditional banking and finance infrastructure for them. Digitising the whole financial industry has almost become inevitable. Many people have heard of fintech, but colossal changes will happen soon. The business will change to a level where the technology will command the investment management industry, rather than just supporting it. SHUAA Capital is preparing for this, and I am sure all our competitors are as well. In June this year, we announced the appointment of a head of digital transformation, because we, as a company, must lead the trend – we are working on a digital wealth platform that is still off the record – and are prepared to handle the disruptions to come.’
Distribution of the new Middle Eastern ultra-high-net-worth-individuals by 2025
According to Bachir Nawar and Vishal Koovejee, many of these digital transformations have been accelerated by the Covid-19 pandemic, but were, in any event, ineluctable. ‘The whole finance industry is heading towards mass digitisation. In a matter of two to three years, the sector will probably be largely manless. The pandemic, regardless of how troublesome it was, was a real test, and everything went well; people have taken full advantage of digital products and relied on fintech for all sorts of operations. The very nature of the industry will change to the point that it will be able to offer incredibly innovative self-serving and self-fulfilling digitised or robotised services at a scale that was not conceivable until recently. However, manlessness does not mean that we will not need people any longer.’
Ammar Afif agrees that digitisation will progress rapidly and exponentially. ‘The push to digitisation is happening, and it is happening in new ways and in different areas. It affects banking and fintech, but not only this; it is everywhere: in healthcare, in transportation, and even in the food industry. Digitisation is happening everywhere in the world, but the GCC members and the rest of Middle East are ahead of things in terms of research and in terms of its implementation. Having an edge is very important, because digitisation draws investments, and other countries are trying to catch up, sometimes successfully. Pakistan, for example, has recently developed its fintech industry which has attracted a couple of hundred million-dollar investments in the past six to nine months. It is wonderful, because this creates a healthy rivalry which can only result in the development of better products. And that is a good thing, because technology can make a big difference in people’s lives: they can invest or manage their assets more efficiently, have better mortgage options or if they have a company, there are very good KYC (know your customer) services, for instance. Investors see that there is a demand for more fintech, and that people learn how to use new products very quickly: digital banks and crypto have boomed, lately. In the years to come, there will be a lot of competition, because fintech is a hot market, and will continue to be so for a long time.’
For Raja Al Mazrouei, ‘the industry makes an effort to provide solutions that are always in line with the public, which explains why investments in the region’s fintech sector are on an upward trajectory. Fintech start-ups from the FinTech Hive raised close to US$300m in funding, and these funding rounds continue to be led by institutional investors, venture capitals, and angels across a variety of fundraising phases.’
Fintech Saudi’s Nejoud Al Mulaik reinforces this analysis. ‘In 2020 and 2021, the Covid-19 pandemic slowed down the global economy. I understand that it harmed several verticals within the financial technology industry in Europe and North America. However, because Saudi Arabia, and in fact the Gulf in general, is still an expanding market, we have seen a spike in the number of deals, and investments kept coming in. Venture capitalists showed interest and we have attracted foreign direct investment from around the world, and there is evidence that the region will remain attractive long after the pandemic has subsided.’
In Saudi Arabia, the diversification and digitalisation of the financial sector are part of the government-led Vision 2030 programme, which aims at making the Kingdom a ‘vibrant society, a thriving economy and an ambitious nation’. The programme includes the re-thinking of the whole financial sector and its improvement through the use of financial technologies built around the market’s needs and opportunities, sparking Nejoud Al Mulaik to acknowledge that ‘the growth the fintech sector has experienced is a combination of significant investments and deliberate policies.’
Regardless of how much investment flows in the industry, however, Ammar Afif confirms that most fintech start-ups nowadays want to have a positive impact on society. ‘A lot of people see Buy Now, Pay Later (BNPL) as extending credit only. It is true that we exist to provide more credit to consumers, but one of our foundation principles is that we would like to do so in a responsible manner. We do not want this credit to be used for the consumption of material goods only. Our main focus is not on how we can help consumers to get the next iPhone or a better laptop or more expensive fashion accessories; we want to take financing to a further level. We want people to use our services to help them pay for their education, for instance. Rather than paying school fees up front, they would be able to split them over instalments. We want to help people travel and enrich themselves culturally. This entails spreading their ticket costs over payments. Healthcare is another sector we are looking at. Our goal is to work with banks and other lending entities to cover all the vital sectors that people might not have access to because of cost. Many things are still untapped. We are exploring them, but we want things to be done in a responsible way. Fortunately, all signs suggest that in the next few years, this will be possible.’
GCC Accelerators
Bahrain
Bahrain FinTech Bay (BFB) is among the leading fintech hubs in the region. Established in 2018, it aims to accelerate the development of local early-stage fintech companies while also helping international fintechs establish a presence in Bahrain.
BFB has so far incubated over 50 fintechs and has supported a number of accelerator programmes. Its successes include Rain, the first cryptocurrency platform in the MENA region and CoinMENA, a Sharia-compliant cryptocurrency exchange licenced and regulated by the Central Bank of Bahrain.
It has also partnered with the Tamkeen labour fund to develop the National FinTech Talent Programme offering promising candidates a six-month internship along with mentorship from BFB member organisations.
In early 2021, BFB signed a cooperation agreement with Israeli fintech association FinTech Aviv that will see both institutions work to strengthen and develop the regional ecosystem.
Kuwait
Home to a well-established banking and finance sector – the Kuwait Investment Authority being the world’s oldest sovereign wealth fund – Kuwait created a regulatory sandbox framework and a dedicated fintech unit in November 2018 via the country’s central bank (CBK).
In 2019, the Kuwaiti government announced the creation of a US$200m fund for technology and fintech investments, prompting the development of the industry, particularly as regards wealthtech (wealth management technology) and insurtech (insurance technology).
Oman
As part of its Vision 2040 strategy, the Sultanate of Oman has committed to supporting digital transformation across its industries. Support for fintech has come from the Oman Startup Hub (OSH), a platform for start-ups, investors, advisors, and entrepreneurs to connect, collaborate and learn about the innovation ecosystem in Oman. In 2019, Muscat Bank, the country’s largest financial institution, announced a US$100m fintech investment programme, while the Oman Technology Fund (OTF) is also likely to extend its backing to the fintech sector.
When the Central Bank of Oman (CBO) launched the Fintech Regulatory Sandbox (FRS) in December 2021, the Sultanate made a great step forward in the implementation of the financial component of its National Programme for Enhancing Economic Diversification.
Committed to offer unique fintech opportunities, CBO pledged Islamic-compliant solutions at the heart of its ecosystem.
Qatar
The most recent arrival on the GCC fintech scene has been Qatar FinTech Hub (QFTH). Founded by Qatar Development Bank, QFTH aims to support the growth of the fintech industry in Qatar. It offers a 12-week Incubator programme for entrepreneurs and early-stage fintechs and an Accelerator programme for more mature fintechs looking to expand globally.
Wave 1 of QFTH’s Incubator and Accelerator programs launched in 2020 with a focus on payments solutions, while Wave 2 launched in summer 2021 with 11 early-stage start-ups and 11 mature fintechs participating. A third wave, focusing on embedded finance and techfin (established technology companies offering financial products), will begin later this year.
While the QFTH aims to promote the fintech sector in Qatar, its support is very much open to international applicants. The first wave saw 12 internationally-headquartered fintechs join seven Qatari start-ups, while in the second wave 19 international fintechs were joined by just three Qatar-based applicants.
The QFTH’s regulator-backed programs offer access to Qatar Development Bank’s QR365m (US$100m) venture capital fund, mentorship from QFTH’s international network, and regulatory support including registration with the Qatar Financial Centre. This regulatory support will soon include access to Qatar Central Bank’s regulatory sandbox, a planned initiative that will allow fintechs a safe and controlled space to test their solutions under relaxed regulatory requirements.
Saudi Arabia
Fintech Saudi was established in April 2018 as a joint initiative between the Saudi Central Bank (SAMA) and the Capital Market Authority (CMA) to support start-ups through talent development in partnership with universities and infrastructure building. In parallel, SAMA and CMA launched several initiatives, including the Fintech Lab, to act as sandboxes and platforms for entrepreneurs to suggest regulations.
‘Fintech Saudi’s main remit is to assist start-ups in every possible way’, says Nejoud Al Mulaik. ‘We work on accelerating programmes to encourage the creation of new companies, and we keep providing support long after they can fly with their own wings. For instance, we think that the most likely scenario for the future is an increase in the number of mergers between fintech companies and start-up acquisitions by banks, and we are ready to provide counselling on this.’
Other accelerators have since been launched, like Misk 500, which is extending its influence in the Arab world, and Blossom, which focuses on female entrepreneurship in the Kingdom, for instance.
Expected to reach over US$30bn in transaction value by 2023, the Saudi fintech market has grown much faster than originally planned by SAMA and has generated interest in the UK’s financial services sector, a global reference point in the area, resulting in bilateral talks on potential cooperation opportunities.
UAE
In 2017 the Dubai International Financial Center (DIFC) cemented its position by launching FinTech Hive, the first and largest fintech accelerator in the Middle East, Africa and Southeast Asia region. Now among the ten largest fintech hubs globally, FinTech Hive offers early and growth-stage companies the chance to work with leading financial institutions and technology companies and compete for funding, including
the DIFC’s own US$100m dedicated fintech fund.
Not to be outdone, Abu Dhabi Global Market (ADGM) has also made significant moves to foster a strong fintech ecosystem through its RegLab sandbox, a specially-tailored regulatory framework that allows innovative businesses to test their offerings outside the regulatory requirements that would otherwise apply to financial services firms. It has also partnered with Plug and Play, the world’s largest early-stage investor, accelerator, and corporate innovation platform and the Abu Dhabi Investment Office to launch a fintech accelerator programme. Finally, ADGM is a key partner of Hub71, an initiative of His Highness Sheikh Khalid bin Zayed Al Nahyan, which launched in 2019 with AED1bn (around US$270m) in funding. Over 100 start-ups have so far been supported by Hub71.
Focus on
Focus on: Cashew Payments
Ammar Afif
A Buy Now Pay Later company. Buy Now Pay Later is growing in the Middle East and emerging markets.
‘Buy Now Pay Later’, says Ammar Afif, ‘gives consumers and businesses another payment option when cash, a debit or a credit card would be used. It is an alternative whereby one can pay over instalments from an existing debit card, credit card or bank account. It generally comes with no cost for the payer and enhances customer experience.’
Focus on: FinTech Hive
Raja Al Mazrouei
‘The FinTech Hive is the first and largest financial technology accelerator in the MENA region’, explains Raja Al Mazrouei. ‘It supports the development and growth of fintechs, insurtechs, regtechs, and Islamic fintechs. We enable start-ups in providing them a platform to showcase their products and solutions in front of the region’s most prominent financial institutions. The FinTech Hive is the hub for fintech talent development, incubation and acceleration programs, funding and investment, and business collaboration and co-creation opportunities for the key players in the MENA region.’
Focus on: Fintech Saudi
Nejoud Al Mulaik
Launched in April 2018 by the Saudi Central Bank to animate and organise the Kingdom’s fintech industry.
‘Saudi Arabia is very advanced in terms of digital infrastructure and our market is particularly competitive,’ comments Nejoud Al Mulaik. ‘We are keen to work in collaboration with other GCC members to improve the overall fintech industry.’
Focus on: SH Capital
Khalid Talukder
As a prime broker, SH Capital ‘aggregates the world’s largest asset management investment funds, before allowing them to be distributed to target mid-market and SME corporates that were historically looking for high yield products other than their own sort of banking account interest rates,’ explains Khalid Talukder.
Focus on: SHUAA Capital psc (DFM: SHUAA)
Bachir NawarVishal Koovejee
A leading asset management and investment banking platform, with c. US$14bn in assets under management.
Listed on the Dubai Financial Market.
The asset management segment, one of the region’s largest, manages real estate funds and projects, investment portfolios and funds in the regional equities, fixed income and credit markets. It also provides investment solutions to clients, with a focus on alternative investment strategies.
The investment banking segment provides corporate finance advisory, transaction services, private placement, public offerings of equity and debt securities, while also creating market liquidity on OTC fixed income products.
The firm is regulated as a financial investment company by the Securities and Commodities Authority.
The rise and rise of Chinese investment in Latin America
Last year marked the 40th anniversary of Deng Xiaoping’s economic reforms. The results of these reforms has not only been to grow China’s domestic economy but to transform its influence as an economic actor on the world stage.
In 2016, for the first time in modern history, China became a net overseas investor. That year, while global outbound foreign direct investment (OFDI) fell by 2% China’s investments surged by nearly 35%. The trend shows no sign of stopping. As China becomes an increasingly important source of financing globally the economic, political and legal map is being redrawn. For countries in the Latin America and the Caribbean (LAC) region, the impact has been striking.
Since 2000, annual trade between China and Latin America has grown from $12bn to over $300bn, making China the second biggest investor in the region while displacing the US as the leading trade partner to countries such as Brazil and Chile. China’s two global policy banks – the China Development Bank and the Export-Import Bank of China – have issued more than $150bn in loans issues to LAC countries and state-owned firms over the past 15 years, outstripping the combined loans issued by the World Bank, Inter-American Development Bank and the CAF Development Bank of Latin America.
The steady rise of China’s investments in Latin America may have produced some eye-catching statistics, but for Chinese lawyers working in the region there are even clearer indicators of the shifting geopolitical sands.
‘When I landed at the airport in Lima the first advertisement I saw was in Chinese’, says Charles Wu, a Beijing-based partner at Zhong Lun law firm. ‘There are quite a number of Chinese businesses here now interacting with each other and forming communities. It really feels like something big is happening.’
The density of Chinese businesses operating in Latin America means a trip across the Pacific is rarely a step into the unknown. ‘It was a bit of an eye-opener for me’, says Paul Wee of Norton Rose Fulbright’s Beijing office, recalling his first trip to Caracas. ‘I was advised to stay in the hotel, but my clients had a base there and life revolved around the expat community. I ate Chinese food and spoke Chinese. It was almost as if I hadn’t left Beijing.’
In the last decade, more than 2,000 Chinese companies have commenced operations in Latin America, generating nearly two million jobs for locals. While the community of lawyers servicing this cross-border trade has grown, it is, says Wu, ‘still small enough for those of us who work in the area to feel we know everyone’. But as the number of Chinese businesses operating in Latin America rises, firms are begging to sense the opportunity.
‘China to LatAm is extremely hot and it’s an area we are expecting to grow massively’, says Nicole Pineda, a partner at Harneys’ Cayman office specialising in inward and outward bound Latin American investments with a particular focus on structured finance and infrastructure finance transactions. ‘A lot of firms are setting up China to LatAm desks, and everyone is jumping on the bandwagon. The economic significance of it is probably still rather limited compared to other specialist desks, and until the work monetises with volume a lot of the interest is likely to be exploratory, but it is getting to a point where you could consider China to Latin America trade a real business line for lots of firms.’
From farms to fibre optic cables
Miguel Zaldivar, regional chief executive for Asia Pacific and Middle East at Hogan Lovells, has seen the rise of Chinese money in Latin America first hand. The firm has acted on over $100bn of Latin America-related infrastructure development financings in recent years, with Zaldivar closing a number of these deals, including the largest development financings in the history of Ecuador and Honduras.
‘I worked on a lot of financings for refineries and ports in the early 2000s and they were all run out of New York or London’, he recalls. ‘Around the time of the collapse of Lehman, US and European companies started getting displaced from infrastructure projects. By 2010, Chinese companies had started taking the lead on infrastructure financing. There came a point where I was spending around half of my year in Beijing to work on these matters, so I really had a front-row seat when it came to the shifting of power in terms of development financing.’
In these early years of China’s Latin America investment boom attention was directed primarily to satisfying the country’s growing demand for commodities and raw materials, with soybeans, metals and minerals and hydrocarbons accounting for 70% of its imports. A lot has changed in the last decade, but obtaining raw materials remains a key concern of Chinese investors.
‘With Latin American markets opened by the first wave of investments, private entities have found it to be an attractive destination to invest.’
‘The interest we are seeing is still focused on resources, which makes sense in the context of Chinese companies’ need to secure their supply chains’, says Lin Zhong of EY Chen & Co. ‘For example, China is the biggest manufacturer of lithium batteries and needs a lot of relatively rare metals and chemicals. Going upstream to acquire targets is a vital part of these companies’ continuity plans for the coming decade.’
However, Chinese investors are increasingly pursuing opportunities in transport, finance, electricity generation and transmission, information and communications technology, and alternative energy services. Xinyue Ma, China Research and Project Leader at the Global Development Policy Center at Boston University, has been collecting data on China’s trade with Latin America for a number of years. In recent years, she says, the focus of these investments has shifted dramatically. ‘The service market has been growing and recent figures show that services account for more than 70% of investments.’
Investment may be on the rise, but says, Charles Wu, of Zhong Lun, it must be put into perspective. ‘[Latin America] is an important market but it is not as important as North America or the EU. Law firms from the PRC are still primarily working on large infrastructure and mining projects, and most of the investor base is large state-owned enterprises or large public companies looking to expand their main business and find mineral resources in Latin America. That’s not to say that there aren’t smaller investments taking place, and we do occasionally work on matters for tech companies, but the frequency is nowhere near as high as in the US and Europe.’
Monica Sun, a partner in Herbert Smith Freehills’ Beijing office, adds: ‘While Latin America is growing in terms of Chinese interest we need to get this in perspective. Southeast Asia, for instance, sees far more interest still; [Latin America] is one market among many and is not by any means the dominant investment destination for Chinese clients.’
It is worth noting that many of the most ambitious Chinese-backed projects never got off the ground. Plans to build a canal through Nicaragua connecting the Atlantic and Pacific oceans, or a railway crossing the Amazon and Andes caught attention but have so far led to nothing.
There are also signs that the rise in Chinese investment may already be slowing. ‘The whole background of outbound investments is decreasing, says Molly Su, a Shanghai-based partner with King & Wood Mallesons who has been working on outbound financing projects for the past 13 years. ‘State-owned enterprises are more cautious, especially in the mining and thermal power sectors, policy banks have been tightening their credit lines, and foreign currency exchange controls in China mean it is becoming increasingly difficult for Chinese companies to remit money out of the country. While some specialised sectors such as hi-tech, medical or pharmaceutical investments may be seeing a rise, overall the numbers have been heading downward, particularly in terms of Latin America. However, project-based investments by large Chinese entities tend not to be one-offs. Once you release the funds and build up the personnel and infrastructure it means you are committed to the market. That means we can expect to see continued activity for the years to come.’
Following the financial crisis of 2008, China undertook a huge stimulus programme aimed at boosting its construction and infrastructure sectors. This found a political ally in the Belt and Road initiative, seeking to put this excess capacity to productive use in foreign markets. However, in recent years there has been a new policy aimed at restricting the outflow of capital.
Off the beaten track: Belt and Road in Latin America
As the number and significance of China’s projects in Latin America continues to grow, the continent is becoming an increasingly important part of the Belt and Road initiative (BRI). Launched in 2013 as a plan to create an economic corridor across Europe and Asia, BRI seeks to strengthen trade and investment between China and over 60 countries, opening up markets that are home to over 60% of the world’s population. So far 131 countries have signed up to the initiative, sharing almost $600bn of new investments between them.
China’s interest in extending the scheme more broadly is obvious. For a country that has already built high-speed railroads connecting many of its major cities, there is increasingly a sense that meeting infrastructure needs at home is not the priority it once was. For the huge number of businesses that were directed to meeting these needs, finding new markets is becoming increasingly important.
Though geographically remote from China, Latin America has been earmarked as the Pacific line of the Road. Countries across the region were formally invited to participate in the initiative during China’s meeting with the Community of Latin American and Caribbean States (CELAC) in Santiago, Chile in January 2018. Shortly after this meeting Panama established diplomatic relations with China and became the first country in the region to sign a cooperation agreement under BRI. Since then, a further six nations in the region have signed up to the initiative, including Chile and Peru, while countries such as Ecuador and Cuba have signed formal cooperation agreements with a view to joining at a later date.
Latin America’s largest economies – Argentina, Brazil and Mexico – have yet to join BRI, though there is some ambiguity over what “joining” even means. Argentina and Brazil, for example, have signed comprehensive bilateral cooperation agreements with China and continue to explore strategically significant Chinese-backed infrastructure projects.
‘Most of the investment and financing that is taking place would still be happening without the BRI’, comments Xinyue Ma of Boston University’s Global Development Policy Center. ‘While BRI is adding a certain political significance in some of the cases, the impact is more symbolic than de facto.’
But this symbolic impact could translate into real opportunities, argues Antonio Riva Palacio Lavin, counsel at Curtis, Mallet-Prevost, Colt & Mosle. ‘At least in theory, BRI will mean that participating nations receive targeted funding for new projects. It also makes it much easier for the officers of Chinese entities to justify new projects. If the government is encouraging companies to seek out new markets that China hasn’t traditionally served it makes it more likely that sales teams will use that to justify a push into those markets.’
‘Part of the significance [of BRI] is that it is politically easier for Chinese companies to engage with a country that has received the backing of the state’, agrees David Blumental, a Hong Kong-based partner at Latham & Watkins. ‘That broad influence will continue to play its part, but if you look at it deal by deal it’s a different story. The bulk of these investments are taking place because they make solid economic sense for both parties. Politics really plays a subordinate role to economics here. The impact of this on businesses in Latin America should not be discounted either. It has definitely caught the interest of companies that want to enter the Chinese markets or to secure Chinese funding for their projects.’
Countries that have signed a Memorandum of understanding
Bolivia , Chile, Costa Rica, Panama, Peru, Uruguay, Venezuela
Countries that have signed a document of cooperation or diplomatic relations
Cuba, Dominican Republic , Ecuador, El Salvador
A wave of purchases of overseas assets, particularly in the hospitality and entertainment sectors, led the Chinese leadership to put a brake on outbound investment. In part, this has been fuelled by a policy of keeping US dollar reserves stocked, though attempts to steer China’s economy toward domestic consumption have also played a big part. While this new policy has tightened the spending of SOEs and policy banks, it has not restricted private entities to the same extent. With Latin American markets opened by the first wave of investments, private entities have found it to be an attractive destination to invest.
Since 2000, state-owned companies accounted for 70% of all Chinese investments in Latin America and the Caribbean. However, the picture is changing rapidly. Foreign direct investment (FDI) from Chinese private entities looking to tap Latin America has risen from almost zero to over $100bn a year since 2005, with large sums targeted toward the acquisition of companies in the service sector.
The rise of private money tends to get overlooked, but it is the most important part of the story for China-LatAm relations. Partly this is because banks, law firms and other professional advisers have focused on SOEs as a source of revenue. ‘It’s not that they’re low-hanging fruit, but they are an attractive client’, says Antonio Riva Palacio Lavin, counsel at Curtis, Mallet-Prevost, Colt & Mosle. ‘When a firm is engaged by an SOE it has found a large, stable investor that will bring a lot of money to the region. But across the Latin America and Caribbean region there is a huge amount of private investment. Obviously, it depends how you define private, because in China there often isn’t such a clear line between state-owned and private business when you get to a certain size, but you have large banks in the Mexican market, you have airlines establishing direct flights from China to the region. There is a lot of investment going on. One of the very first things I did with a Chinese private company was to help them set up a joint venture in North West Mexico to import products from the US, finish them in Mexico and ship them to China. The trade links are much more numerous and complex than the SOEs and resources discourse that gets played out.’
‘The headline public deals that get you exposure when they close are great for publicity’, adds Nicole Pineda of Harneys, ‘but in the long term it’s the volume transactions we’re more interested in. The growth in private investments is a sign that Chinese interest in Latin America is healthy and stable for the long term.’
This rise of private money may also help to explain why the amount of investment appears to be falling. ‘There are fewer of the capital-intensive, state-backed megaprojects that formerly dominated the investment landscape, but there are in fact more investments taking place today, and these investments are coming from a wider variety of sources’, says Ma. ‘Alongside that, M&A is becoming the major type of investment as opposed to greenfield investment. More than 60% of the money that Latin America receives from China is in the form of M&A investments.’
Investments have not only diversified away from the traditional focus on raw materials. While just four countries – Venezuela, Brazil, Ecuador and Argentina – have received over 90% of the loans Chinese entities have issued to Latin America in the last 15 years, those advising Chinese clients are seeing a broader geographical interest.
‘The appetite for Latin America is still high, but it is less concentrated in certain countries’, says Hogan Lovells’ Zaldivar. ‘Interest used to be focused on Venezuela and Brazil. Now we are seeing China is reaching out to other countries in the region and investing in places like the Dominican Republic and El Salvador. That is a really interesting change.’
The battle for Latin American trade
In a region that has been long seen as the United States’ backyard, China’s growing influence has led to inevitable political reactions. In 2018, US Secretary of State Mike Pompeo warned Latin American nations to be wary of “predatory” lending by Chinese investors trapping countries in low-value chain raw material sales at the expense of building their manufacturing and services capabilities. Yet for many businesses in Latin America, the arrival of Chinese money could not have come at a better time.
The Trump administration has called for cuts in foreign aid to Latin American countries, a move that will likely push affected countries closer to China. The US has also withdrawn from the proposed Trans-Pacific Partnership (TPP), a trade agreement which was set to boost its ties with Chile, Peru and Mexico, while calling for the renegotiation of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.
‘Anecdotally, this is definitely a huge thing’, says Riva Palacio. ‘Even without looking at the hard numbers, anyone who works in this space can see that in a number of Latin American countries entrepreneurs and businesses are exploring markets beyond the US, and China is becoming increasingly attractive to them.’
Latin America is also becoming increasingly attractive to Chinese investors who face political pressure in more established markets. For example, Mexico is now working with Huawei to build out its telecoms infrastructure, while Australia and a number of European countries have faced pressure to find alternative suppliers.
‘The challenge for Chinese businesses is that markets like the US and EU are now attracting investment from other sources’, says David Blumental, a Hong Kong-based partner at Latham & Watkins. ‘At the same time, China has found it harder to acquire the things it really needs, particularly in the form of new technologies from the US. As a result of that double bind, Chinese companies are finding that the opportunity to expand into new markets across Africa and Latin America is increasingly attractive. They can sell products and acquire resources without facing the same political restrictions and competition from rival investors.’
However, says Miguel Zaldivar, it is a mistake to see China’s interest in Latin America as politically motivated. ‘I don’t see politics. What I see is Chinese companies that need to run their factories, export their goods and buy market share. If you look at the economic terms of the financings it is clear they are not subsidised. These are actually heavily negotiated transactions. And if you see the engineering, procurement and construction (EPC) agreements they are exactly like any other EPC contract. To call it politics is a distortion of the reality. Chinese investors have simply seen that there are great opportunities in Latin America, they have realised that they can compete in that market now and they are very, very aggressive and they are moving in.’
Paul Wee has worked on many of the largest outbound deals to come from China, including several in Latin America. The assumption that Chinese loans to Latin America are offered on favourable terms with political strings attached is, he says, fanciful.
‘The general assumption that financings from China Inc. come on favourable terms and with less stringent checks is a gross oversimplification that needs to be put into context. The cost of any loan will depend on the quality and source of the financing. As a renminbi financing often has a lower cost compared to a US financing, Chinese banks are likely to be a cheaper source of financing. A lot of assumptions get thrown around about Chinese loans being subsidised. Generally, they are not subsidised. From the Chinese banks’ perspective, the loans are offered at market rates. It’s just that the Chinese banks have a lower cost of funding in renminbi.’
The other prevailing assumption surrounds policy conditions. ‘Whenever you’re talking about a government borrower or a government-linked company the assumption is that China doesn’t impose any policy considerations. The facts are more or less right, but the interpretation placed on them – typically, that a policy-light approach is China’s attempt to exert influence or win new friends – is wrong. From China’s perspective it is perfectly natural to operate a non-interference policy. Even government borrowers do not have policy considerations imposed on them.’
Chinese investment to Latin America by country (US$bn), 2003-2016
(Source: Bureau van Dijk, fDi Markets)
The popular wisdom overlooks the large number of exceptions that exist. ‘Even though Chinese institutions generally wish to avoid interfering in the domestic politics of borrowers, there are an equal number of Chinese financings out there that do not conform to that logic. If you’re talking about the covenants, security packages, requirements for guarantees or whatever needs to be put in place to ensure a loan gets repaid then, believe me, Chinese banks would not give an inch. They are very stringent when it comes to the security package and guarantees.’
While loans issued by Chinese development banks typically have higher interest rates than those issued by international development banks, they do not come with the same environmental, social and governance (ESG) restrictions, meaning they can be put to use more cheaply. However, the game is not without risk to either side.
China has begun to demand Venezuela repay some $20bn in debts and last year ended a “grace period” for debt relief. Ecuador, one of the smallest countries in Latin America, has been the third biggest recipient of loans. Deals struck under President Rafael Correa have seen nearly $20bn flow into the country. In return, 90% of Ecuador’s crude oil will be sent to China for the next five years. These examples sound a note of caution about the potential for political strings to come attached to these loans. Latin American countries have run up a trade deficit with China of more than $60bn, and with the political and economic indicators taking a plunge in a number of countries, their ability to repay these debts will tested to the extreme.
‘One interesting thing I am seeing is the breach of investment contracts by host-country governments’, says Lin Zhong. ‘These nations are in financial crisis and it has led to a breach of their commitments. Some countries in the region also impose a very high tax rate, which is de facto expropriation of our [Chinese] clients and has led to law suits there. We try to protect them through bilateral arrangements between the Chinese government and local counterparts, and also through certain dispute resolution mechanisms such as the investment dispute resolution centre at the World Bank, but the practice is becoming more prevalent.’
There are signs that Latin American countries may become more wary of Chinese money, but the trend for the coming year will be one of continued China to Latin America trade, says Xinyue Ma. ‘The last 12 months have seen greater trade flows between China and Latin America and this is consistent with the antagonisms of the Trump administration. Certainly, there is a greater opportunity for China and Latin America to trade and work together. Considering the macroeconomics of many Latin American economies is not very stable it is going to be a very important but not very stable area going forwards from the Chinese perspective.’
However, there are two sides to this relationship, and for China’s trade with Latin America to continue both sides will need to show willing, concludes Zaldivar. ‘There is a lot of political change in Latin America right now. They recognise the importance of China to their countries. But they are still in the learning stage. There’s a lot of talk but there has to be more action between the parties for the trade flows to continue. The Chinese position is quite stable, but it is a learning process by new governments in Latin America.’
The (new) rules of engagement
In 1964, the year Alibaba founder Jack Ma was born, China’s annual GDP was around $60bn, meaning the then most populous nation on earth’s economy was roughly the same size as Italy’s. That same year President Goulart of Brazil was overthrown in a coup d’état. It would have seemed unlikely to anyone born in this period that the two countries would become leading trade partners.
On both sides of the Pacific, entrepreneurs and business leaders who grew up expecting to sell their product to the US market are now having to play by a new set of rules that are yet to be fully defined. It will be left to the lawyers to work out exactly what they should look like.
‘One of the most significant developments I have seen in international trade is that a large number of companies are now having to find ways of establishing rules for how they can interact with each other’, says Antonio Riva Palacio Lavin, counsel at Curtis, Mallet-Prevost, Colt & Mosle.
‘Cattle growers in Mexico are selling meat in China, Chinese honey harvesters selling their product in Mexico. In a way, that is far more interesting in terms of the legal consequences than seeing a large SOE going into Latin America to build hydroelectric plant. Those larger projects are almost too big to fail. The numbers involved are so large that everyone has an interest in it going ahead. When the numbers are smaller there is less incentives for the banks, regulators and business leaders to make a project succeed. That’s when you start to find yourself challenged as a lawyer.’
The growing demand for China to Latin America cross-border work was one of the reasons Curtis established a presence in Beijing. With offices in Mexico City and Buenos Aires, the firm found itself needing to service both a growing number of Mexican and Argentinian clients wishing to do business in China, and a steadily increasing flow of Chinese clients operating in Mexico and Argentina. Riva Palacio, a Mexican national, spent five years acting as the firm’s chief representative in Beijing, helping to build its cross-border advisory practice. He says that while Chinese clients expect their firms to have an on-the-ground presence in international markets, they do not necessarily appreciate the complexities of operating in such a radically a different legal environment.
‘The biggest cultural barriers we have seen is that Chinese clients tend to place countries and their laws into very broad categories’, he comments. ‘From this perspective, the law is either US law, European law, or something less robust that will give them much more leverage or negotiating power. To generalise massively, there can be an assumption that from a legal perspective engagements with Latin America will be much more akin to Africa than Europe or the US, which is not accurate. Part of the process we have been through with our Chinese clients is to sit down with them and explain the features of each particular system of law, which aspects of that law would help them to enter a market, and what the limits of such law is for achieving their objectives. It is important to always make it clear that there is no homogeneous body of law and that national differences matter.’
Lost in Translation
In large part these challenges stem from a lack of familiarity between Chinese and Latin American parties. Trade may be picking up, but Latin America is very far from being China’s backyard.
There are still few direct flights from China to the continent, and Chinese businesses looking to Latin America will find that relative costs are higher and networks less well-established.
Latin America’s legal and business environments also remain somewhat mysterious to Chinese buyers.
‘Adapting to the Latin American market culturally is one of the bigger barriers to Chinese investment, and this is especially the case when it comes to appreciating differences in labour relations and legal and regulatory frameworks’, comments Xinyue Ma, China Research and Project Leader at the Global Development Policy Center at Boston University. ‘Historically, Chinese businesses have moved slowly in Latin America, learning how to operate in the market through trial and error. Recent history has shown that Chinese companies take a long time to adapt to the local regulatory and market environment.’
In particular, she says, dealing with environmental and social safeguards have traditionally been problematic for Chinese outbound investments, especially in Latin America where countries are more likely to have strong regulatory mechanisms in place, even if the execution and enforcement of those mechanisms is sometimes patchy. ‘Unlike multinational banks, Chinese development banks do not have such a rigorous mechanism or internal safeguards. They are not compelled to avoid certain types of investment or abide by certain environmental and social standards and processes.’
Jennifer Zhang, a partner with DeHeng Law Office in Beijing, says these issues date back to the early days of China’s enhanced engagement with the developing world. ‘What we learned in the 1990s is that Chinese banks are not familiar with a range of standards that are considered the norm elsewhere, whether that’s environmental standards, labour protection standards or any other form of non-financial commitment that comes with a typical development financing. It is not that the development banks or other financing institutions set out to deliberately violate these standards, it is simply that they were used to the Chinese way of financing and ran into problems. From that early experience development banks learned rapidly how to structure things in a way that meets the required standards relevant to the country in which they are investing, but some problems remain. Things like community protections remain relatively unfamiliar to Chinese lenders because they are rarely encountered at home.’
‘The rapidity with which Chinese businesses have matured in their approach to Latin America can be seen across the board.’
Even Chinese businesses that are well established in Latin America can find it difficult, adds Lin Zhong of EY Chen & Co. ‘Complying with local regulations in terms of visas, immigration and local labour law can be a challenge for Chinese parties and often requires additional legal support, especially if there is some kind of labour outsourcing arrangement.’
Analysis issued by The Ministry of Commerce of the People’s Republic of China (MOFCOM) in 2015 based on a detailed study of 254 companies involved in outbound investments showed that failure to manage labour relations was the biggest hindrance to Chinese investments in the Latin America, followed by issues arising from failure to understand political and regulatory structures.
Examples of Chinese-backed projects being derailed due to concerns over their broader social impacts are numerous. The Rosita hydroelectric project in Bolivia, agreed in 2016 with backing from China Three Gorges Corporation, has been placed on hold due to insufficient prior consultation with indigenous communities likely to be affected by the project, while two Chinese-financed dam projects in Santa Cruz, Argentina were suspended by the Argentine Supreme Court in 2016 pending environmental impact assessments on the proposed sites.
But it is not only the Chinese side that needs to be educated. ‘While the number of lawyers relative to the population is high In most Latin American countries, there are elements of local legal practice that have comes as a surprise’, says Charles Wu of Zhong Lun.
‘To take one example, the notarisation process is very burdensome for signing public deeds in many Latin American countries. To complete the process you must appoint a time to go to the notary office with an approved notary officer; signing in the presence of a witness is not taken as sufficient proof that the document was approved by the signatory. Company officials are often told that there is legal requirement to be physically present in the country to transact business while at the same time being refused visas. Such formalities do not make business easy. It is also the case that, even on some major projects where the counterparty is a Latin American government, key documents will only be made available in Spanish.
Further, it can be difficult to persuade the local party, particularly if they are government or state-owned entities, to agree to international standard arbitration. They will insist on either the arbitration chamber in their home country or, for private parties, they will perhaps consent to having a hearing in Miami but no further afield. Hong Kong, London, Singapore – they won’t accept any of those.’
But as Zhang points out: ‘Latin American lawyers need to understand that Chinese investors have their own system for outbound investment. If you are looking for Chinese capital it seems only reasonable to accept that it will come with characteristics that are familiar to Chinese lenders.’
It is also clear that Chinese entities are becoming much more adept at executing cross-border investments. Miguel Flaksman is executive managing director at Brazil-based Banco BOCOM, which since 2015 has been majority owned by China’s Bank of Communications. He says a new generation is showing that the old adages no longer apply.
‘Business people and entrepreneurs coming from China are adapting to local market conditions at a much faster rate. At the same time, they are really making an effort to learn how to do business in those markets. They have experience of a range of jurisdictions and know that not everything works the same way. You can definitely see that the younger breed of investors is far more exposed to a variety of standards. The do not experience the cultural misunderstandings that had traditionally led to problems.’
Latham & Watkins’ David Blumental has been doing outbound work for Chinese clients since 1998 and agrees that the level of sophistication among Chinese clients has increased significantly. ‘Not only are Chinese business teams much more familiar with international approaches to doing deals, but their expectations of external counsel are now significantly higher. It is now common to be engaged by a Chinese company with a large in-house team containing a lot of very well-qualified lawyers who are familiar with international legal structures.’
In-house teams at Chinese companies are also becoming more demanding, notes Molly Su, a finance partner with King & Wood Mallesons. ‘Chinese clients are more sophisticated and are asking for more from their counsel. They have their finance team with international education background, they know about the international documentation. The ability for an SOE to negotiate is getting much better than before, and the expectations they place on external counsel are much higher than before. Leading firms in China have to be up there with the best practices globally.’
There has also been a pressure to cut costs, adds Lily Zhang of Harneys. ‘Recently I attended a dinner with a famous Chinese investment group that has a lot of active outbound investment deals. Their legal team told me that they are more and more concerned about the cost of engaging outside counsel in the context of outbound investment deals, and that in-house counsel will now do a lot of the work to remove these costs.’
The rapidity with which Chinese businesses have matured in their approach to Latin America can be seen across the board, from the role of in-house counsel to the quality of the underlying documentation used in financings. DeHeng’s Jennifer Zhang regularly advises Chinese commercial banks and financial institutions, including China Development Bank and Exim bank, in their lending to Latin America. There has been a trend, she says, of running financings under international standards and with a higher degree of security demanded.
‘From the outside these transactions can look very simple but the loans typically rely on a parent guarantee. If the parent company becomes insolvent the Chinese bank has no recourse to recover assets. If the borrower is an SOE then it is relatively simple to secure parent guarantees, but if it is a private company then it is not so simple, particularly when the company wishes to invest in Latin America.’
Molly Su has seen similar developments in the approach taken by major policy banks. ‘Ten years ago policy banks provided finance based solely on guarantees from the SOE that was preparing to undertake the project. The bank tried to wrap up the transaction very quickly on a simple structure and was certainly not willing to fly to Latin America to do outside due diligence. Now they are becoming much more internationalized in their approach. They may require local assets as security or use English-law governed documents to underwrite the loan.’
A further development, says Paul Wee of Norton Rose Fulbright, is that Chinese banks are participating in syndicates and co-financings rather than accepting all the risk a project in Latin America entails.
‘More and more I am seeing Chinese banks not wanting to go it alone when it comes to financing big, sizable projects. There is a concerted effort to make it a co-financing, not just with other Chinese banks but with international banks and financial institutions.’
An increase in trade is inevitably followed by an increase in disputes. Lawyers active in the cross-border space are seeing a big growth in arbitrations at the China International Economic and Trade Arbitration Commission (CIETAC), including significant cases concerning countervailing duties and anti-dumping. ‘There are far more disputes involving Chinese and Latin American parties than gets reported, simply because of the nature of the process’, says Xinyue Ma.
It is a trend we can expect to see continue as international trade becomes weaponised, forcing both Chinese and Latin American parties look for new markets. Riva Palacio highlights one of the more interesting unintended consequence of this political tension.
‘As the US ceases to be the single easiest and most attractive market for Chinese manufacturers they are shifting their products elsewhere. Chinese products that did not previously flood European or Latin American markets are now starting to do so, and that is causing frictions in Europe, Japan, Korea and a number of Latin American jurisdictions. These jurisdictions, and specifically Latin American jurisdictions, are starting to ramp up their countervailing duty investigations, their anti-dumping investigations against Chinese products. That comes with an increase in work not just with defending these companies against these investigations but in helping them plan for those investigations and for a new reality where they will be facing this kind of scrutiny that they didn’t necessarily have to face before. It is the start of a new world and the legal outcomes are still unknown’.
Getting the right advice
Anecdotally, Chinese interest in the continent continues to grow. Of the more than 50 China-based lawyers specialising in Latin America consulted for this report, over half said they had seen a growing demand from Chinese clients wishing to invest in Latin America over the past 12 months.
Whether there will be enough lawyers to satisfy this demand remains a moot point.
‘Doing business in Latin America can be very niche and very complicated’, says Susan Guo, a partner at AllBright Law Offices in Beijing. ‘It requires a lot of hard work to assemble teams with expertise on the ground and it is difficult to get people who tick all of the cultural, linguistic and subject matter boxes in a single market. When suddenly a matter crosses several borders it becomes exponentially more difficult. If you layer on a Latin America-based component to the deal then you really are looking at a very small sub-set of people who are qualified to handle it.’
Miguel Zaldivar, regional chief executive for Asia Pacific and Middle East at Hogan Lovells, has a similar take. ‘Sophisticated Chinese buyers of services are looking for those that understand their culture, can deliver the product in English, and can negotiate in Spanish. It is a highly, highly specialised end of the market and there are very few true players. The simple reality is that when most firms work on a matter in Latin America they advise the Chinese client then refer the work to a local firm in the relevant jurisdiction. It is often not even possible to have the deal written under local law because when it comes to financing the banks will require documentation that is not dissimilar to what you see in more mature markets. You have to have the right guarantees, reps and warranties, and if you look at the deals that are actually placed you will see that all the documentation is governed by English law or New York law.’
There may be a small number of lawyers and firms that are truly able to handle such work, but client demand means many will advertise their ability to do so.
‘Clients do care about where a firm has offices and they do prefer to see firms with a presence in the markets they are looking to access’, says David Blumenthal of Latham & Watkins. ‘That doesn’t always make sense – if you have an office in Sao Paolo it is completely irrelevant if you are doing a deal in any country other than Brazil – but the fact is clients care and that will drive more firms to formalise their China to LatAm offering.’
Monica Sun, a partner with Herbert Smith Freehills’ Beijing office, agrees. ‘My observation is that Chinese clients generally prefer to work with firm that have an office the jurisdiction they wish to operate in, and a firm is certainly seen as much more competent to handle matters in a market if it has also a physical presence there. This becomes a driver for Chinese firms to open offices overseas, which is one of the reasons why we are seeing Chinese firms go abroad now. Clients need to know that having a small office in a jurisdiction doesn’t necessarily make you more able to resource a matter in that jurisdiction. I believe that partnering with the best local firms to drive a matter is the best way to proceed.’
Our survey of China/LatAm specialist counsel shows…
Are you seeing increased interest from clients looking to undertake China-LatAm work vs two years ago?
What is the biggest challenge clients face on China-LatAm matters?
How will China’s trade relationship with Brazil develop over the coming year?
I am a moderate optimist. There is uncertainty in the region, but in the case of Brazil you are talking about the largest economy in Latin America, and an economy which is important enough regardless of uncertainty elsewhere.
Until recently, there was also a degree of uncertainty surrounding Bolsonaro’s government and how it would stand in relation to China, especially following Bolsonaro’s vocal alignment with Trump administration in the US, and certain negative comments concerning China which were made during the Brazilian elections in 2018. There was doubt as to what Bolsonaro would think of the BRICs as a concept. However, the outcome of a first official visit to China by Bolsonaro in October 2019 and the 11th BRICs summit, held in Brasília, in November 2019 was generally perceived as very positive by signalling a pragmatic, constructive approach to the development of Brazil-China cooperation.
China has been the largest trading partner of Brazil since 2009, both for exports and imports. Indeed, China imports almost twice as much from Brazil as does the US. Maintaining a strong relationship is therefore taken very seriously by senior ministries in Brazil.
What are you seeing with respect to large-scale Chinese investments in Brazil?
The main thing we have been seeing is Chinese companies signalling interest to participate in the investment partnership programme (PPI) of the Brazilian government. This scheme, launched in 2016 under President Temer, has been embraced by Bolsonaro. When qualified as priority matters under the PPI, concessions and other public-private partnership projects receive special attention of the relevant authorities in Brazil, typically with the support of Brazil’s National Development Bank (BNDES) in structuring and modelling. This has been attracting both domestic and foreign players and unlocking substantial investment for energy and other relevant infrastructure projects in Brazil.
While early interest from Chinese parties in the PPI was not as high as expected in certain sectors (with the notable exception of the energy sector), there is perhaps an opportunity to align Brazilian PPI projects with the Chinese Belt and Road Initiative and expand cooperation as a result. Following the bilateral meetings in October and November 2019, the Chinese delegation announced that they were looking forward to reviewing the PPI opportunities in more detail and potentially participating in the tenders.
As an example, in November 2019 there was a much anticipated oil and gas tender under the PPI. The Brazilian government had big expectations concerning this tender though it was seen as a relative failure as Western multinationals did not participate. The Brazilian state-owned Petrobras participated and managed to attract Chinese operators as partners, albeit in minority positions. That was a positive sign in terms of Brazil-China cooperation, and we hope to see expansion of Chinese investment in other sectors such as regional and urban infrastructure, as well as technology, including 5G. On the latter, of course, we have the US on the other side who will be making comments and will be very interested to see what form Chinese interest takes.
A further positive development we are seeing is Chinese private companies and institutional investors entering or exploring the market, exploring the opportunities and trying to understand risks. We were expecting that to happen more intensively in 2019, but the prevailing uncertainty slowed it down. This trend should pick up in 2020, particularly in energy and infrastructure, with private entities taking a minority position, and in other sectors such as telecoms and technology.
This is particularly important in light of the changing nature of financing in Brazil. First, the local development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), has been focusing on project structuring and becoming less active when it came to issuing loans. Second, we continue to see the development of infrastructure debentures and alternative debt instruments to finance projects in Brazil. Both of these trends mean we should see a greater diversification of financing, including through enhanced collaboration between Brazilian and Chinese banks and the involvement of multilateral regional banks, including regional development banks such as the New Development Bank (NDB) – the ‘BRICS bank’ – which recently opened a regional office in São Paulo. We will watch this closely because if it develops properly the conditions will be right for more projects and M&A involving Chinese parties.
Has the increase in trade and investment led to a rise in disputes between Chinese and Brazilian parties?
It is notable that when it comes to arbitration we are seeing a more positive alignment between Chinese and international parties than is commonly acknowledged. That being said, we don’t see often Chinese-seated arbitrations involving Brazilian parties. In addition to ‘neutral’ seats in Europe or in the US, we notice a trend of international clients, including Chinese clients, feeling more comfortable arbitrating in Brazil, which has been rightly perceived as an arbitration-friendly jurisdiction. The fact that the ICC court opened a case management office in São Paulo in 2017 and launched a new set of hearing facilities in 2018 both reflects and tends to reinforce this trend.
In fact, there is a good reason for international clients to arbitrate in Brazil. If the arbitration is seated in Brazil it counts as a domestic arbitration for the purpose of enforcement in Brazil. This allows the foreign party to enforce the arbitral award directly against the Brazilian party in a Brazilian court, bypassing a potentially lengthy recognition process through Brazil’s superior court of justice (Superior Tribunal de Justiça – STJ). Chinese parties are well advised to consider these issues as part of their risk assessment and investment decision processes when negotiating with Brazilian entities.
How does Veirano position itself to help clients capitalise on Chinese/Brazilian cross-border opportunities?
Veirano’s commitment to servicing Chinese and Brazilian bi-lateral trade is underscored by the fact that we have decided in 2019 to adopt a Chinese name (未来, reading “Wèi lái” and meaning “Future”). As far as we are aware, this is the first time a full-service law firm in Brazil has adopted a Chinese name. It helps provide a standardised form of the name of our firm for Chinese parties, ensuring consistency of branding. Most important, it signifies that we are a fixed presence in the Chinese market.
We already have significant experience of working with Chinese partners. Our founding partner, Ronaldo Veirano, has been attentive to the Asian market for at least 20 years. Our partner Pedro Freitas is director of the Brazil-China Business Council (CEBC), of which Veirano is a founding member. Our senior counsel Evandro Carvalho, head of the Centre of Brazil-China Studies of the FGV University (Fundação Getúlio Vargas) in Rio de Janeiro, is esteemed among Brazilians and Chinese parties alike as one of the leading sinologists in Brazil today.
Founded in 1972, Veirano has been a leading firm in energy, infrastructure, telecommunications and other regulated sectors for decades. When it comes to handling transactions in regulated sectors we have a savvy, project-oriented frame of mind. We know the main players in these sectors through our participation in trade organisations. As such, we are not just legal experts but market experts who understand sector-specific drivers and how they interact with the legal risks.
Latin America in general has experienced a fast rise in investments from Chinese companies during the last decade. The increased investment is especially clear from year 2010 and has accelerated as a result of the Belt and Road Initiative (BRI). The manifestation of this trend suffered a sort of “delay effect” in Chile, but since 2016 we have been witnessing a steady increase of enquiries from Chinese companies in the country and, more importantly, a higher success rate in transactions and a speedier implementation of investment plans.
Most transactions are still Chile-inbound and SOE-driven; approximately 80% of Chinese investment into Latin America are government-related according to a report by the OECD and Atlantic Council. The most high-profile transactions are still in infrastructure and commodities-related sectors, such as mining, energy, agribusiness and food production.
However, in the past years, we have detected an increasing activity and interest from POEs like Huawei, MoBike, DiDi, car manufactures, and other private companies. Interest in technology-related sectors (such as the plan to connect Asia with Chile through a fiber optic cable, in which the giant Huawei has been a key player) has also noticeably increased.
How is Carey positioning itself to help clients capitalise on these opportunities?
Carey has consolidated its status as a leading adviser to Chinese corporates on their operations in Chile and Latin American entities looking to enter China. In recent years, we have acted on some of the most significant matters connecting Chinese and Latin American interests.
The firm has been exploring the Chinese market in situ since 2012, placing great emphasis on understanding the local culture and business practices, and the motivations of China in connection with Latin America,. For that reason, we decided to open a physical presence there and, in 2016, incorporated a subsidiary in Shanghai: Carey Business Consultancy (Shanghai) Limited. Since then, it has become the only full-service Chilean law firm with offices in the People’s Republic of China.
However, we realised that to be successful in China it was critical to establish alliances with the right players in the market. This comprises both local PRC and international law firms that have decades of experience in China. These firms have become strategic partners and a source of mutual referral of work.
These firms can rely on us for cross-border work when they need assistance in Chile or even a coordinator for regional work in Latin America; and, at the same time, we can offer our Chilean (and other non-Chinese, especially Latin-American) clients a strong and diverse network of local experts suitable to their specific needs, that has resulted in a very effective way for assisting them in their internationalisation strategy in Asia.
What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?
Challenges have decreased considerably and in a very rapid manner. We used to see important language and culture gaps; lack of relevant experience and sophistication during transactions; long
internal approvals; poor cooperation with advisors; among other obstacles. Currently, we would say that the biggest remaining challenge relates to how decision-making is made inside state-owned enterprises and, in general, a lack of understanding on how this type of companies operate, their internal structures, motivations, form of communication, etc. This is an important barrier not just for Latin American entities but also for local regulators.
In addition to these business-related considerations, the most important legal considerations for our clients when dealing with Chinese counterparties refer to environmental, labor, and antitrust matters. However, Chile has a well-known friendly environment towards FDI and, unlike other countries and recent trends, Chinese investment is treated under the same conditions as any other foreign or Chilean investor (i.e., national treatment is granted to FDI investments coming from China or other nations).
Recent experience and representative matters
In recent years, Carey has acted on some of the most significant matters connecting Chinese and Latin American interests. These include advising:
Tsinghua University on the setup of its Latin American Center, incorporated as a foundation in Chile.
Tianqi Lithium Corporation on its acquisition of a 24% stake in Sociedad Química y Minera de Chile (SQM) for over US$4bn.
China-LAC Cooperation Investment Fund on the preparation of a memorandum on antitrust regulations in Chile.
Skysolar on the negotiation of an EPC and O&M contract for the development of a 46MW solar energy plant in the north of Chile.
Industrial Commercial Bank of China, China Development Bank, Bank of China and Ecport-Import Bank of China on a $7bn loan granted to a Chinese mining consortium led by MMG to fund the acquisition and further development of Peru’s Las Bambas copper mine from Glencore.
China Development Bank on the first loan to be granted by a Chinese bank to a Chilean one. In August 2008, Banco de Chile received a three-year US$100m loan from the China Development Bank.
We have seen more Chinese parties shifting investment attention overseas to projects in Latin America. While Colombia has not historically seen a large number of Chinese investors the wave of infrastructure projects in Colombia has driven the attention of large Chinese SOEs and private companies.
Matters in which we have been involved are typically driven by SOEs; but we expect to see an increasing number of Chinese private investors and entities looking for opportunities in Colombia. Our Chinese prospective clients are usually interested infrastructure projects, including ports, public utilities, and mass transportation. Another area of interest is energy: clients will frequently ask for opportunities in generation, transmission and distribution of electricity.
How is Posse Herrera Luis positioning itself to help clients capitalise on these opportunities?
Business interaction between China and Colombia is increasing. As a firm we have taken the decision of getting to know the Chinese business and legal market, so that we may pass along such knowledge and cultural sensitivity to our clients. This means getting to know the country and our local legal partners. Building and maintaining business relationships with local law firms and SOEs is essential for successfully doing business and assisting our Chinese potential clients.
We consider that the support of local Chinese counsel is critical to achieve an effective interaction with clients, since their assistance may help to bridge the cultural gap and to pass along valuable information which in turn we can use to better serve our clients.
What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?
Having different cultures and different languages is always a challenge, as well as situations resulting from different work styles and dynamics. Cultural understanding is key. Latin American parties must learn that formality is a key element in business negotiations with Chinese counterparties. Of course there are also many difficulties arising out of using different technologies and working in very different time zones, which may lead to working during times away from the office, or early in the morning and evenings.
The decision-making process in projects with PRC clients may take longer than in projects with domestic clients. The speed of projects may be different, and obtaining internal approvals for a project may be a lengthy process. In general, transactions involving PRC clients may take longer than what it would take for a domestic client.
PRC-based clients who wish to enter the Colombian market should pay attention to and ask thoroughly about labor and environmental regulations, and the protection that our legal system grants to foreign investments. A Chinese client will also be concerned about getting a fair and just dispute resolution mechanism. If the project involves a public tender, then the concern is shifted to how fair and objective the selection process is, and whether there is a bias in favor of local bidders.
On the other side, Colombian companies wishing to do business in China must think about issues such as how to operate legally in China, how to obtain adequate protection of intellectual property, compliance with local foreign exchange regulations and compliance with local tax and import duties.
Bahrain
