Opinion: The UAE's shift towards becoming a hub for financial innovation

The United Arab Emirates has emerged as a shining example of how a traditional oil powerhouse can diversify its sources of national revenues away from oil to other industries.

One of the key components of this diversification is the strong development of the financial ecosystem.

The country has been focused on developing the banking, finance, offshore financial services and corporate governance initiatives to drive this diversification. However, the banking sector in the UAE continues to be quite fragmented, with 23 domestic banks and 29 foreign institutions operating onshore, as well as a plethora of alternative finance companies that exist to serve SMEs and retail clients whom have exhausted traditional banking lines and offerings.

Joining forces

It is imperative to understand that the hydrocarbons sector will continue to be the compelling force behind anticipated growth for the near future. Nevertheless, the UAE government continues to pursue its diversification programme through several investments in trade, transport, tourism, manufacturing, and technology – a strategy that is helping the UAE promote other core sectors such as banking, finance, trade and tourism.

The UAE banking sector recently saw the merger of two dominant players, First Gulf Bank and National Bank of Abu Dhabi, creating one of the largest financial institutions regionally, with the breadth and scale to be competitive globally.

I believe this consolidation ethos will continue, with other local banks looking at either target acquisitions or mergers as well.

There are, however, challenges that will continue in UAE’s banking sector, with property markets across the emirates continuing to show softening trends in prices and depressed yields. Faced with these challenges, we are witnessing many corporates and developers looking at restructuring their traditional lending lines with more alternative financing options that are more flexible in terms of repayment and required collateral. This comes with a higher possibility of increased nonperforming loans and has a negative effect on the banks’ P&Ls due to higher provisioning.

Nevertheless, banks continue to perform well and are profitable despite these challenges, certifying the breadth and strength of local banking institutions and their ability to sustain weakening banking segments through diversification and investments.

Fresh challenges

Although the banks today are flush with cash and have a larger appetite for lending, these banks are being more cautious than ever. Adding to this is the IFRS 9 and Basel III regulations, aimed at reducing exposure to the real estate markets even further. This gives room for other finance companies to gain market share and flourish.

One other vital change is the drive towards financial technology. Fintech is redefining modes of operation in the financial industry, and we are witnessing unprecedented levels of change and growth. Although it comes at a high initial cost of development, fintech in the long run will serve to drive efficiencies in the sector to new levels.

Fintech – which is now omnipresent in the industry – is providing the critical elements of swift action, more convenience and higher accessibility to the delivery of financial services. The influx is exceptionally transformational and continues to gain momentum.

The UAE has been at the forefront of such changes, with the introduction of e-banking, e-dirhams, online platforms and regulatory bodies such as the Abu Dhabi Global Markets and Dubai International Financial Centre serving as bright examples of how the country is becoming a hub for financial services innovations in the region.

The UAE financial services industry is truly geared to becoming a leading example of how leading the pack creates unprecedented value.  It is clear that as the financial services industry continues to mature in the UAE, the country will enjoy great dividends and be a leader on the world stage of the industry.

Recently, the government had one of the largest gatherings of its kind in the UAE, in which new strategies were discussed, resulting in the launch of 120 initiatives in 30 different sectors at the local and federal levels, as the country works towards a roadmap for the UAE’s centennial in 2071. This initiative demonstrates how the leaders of this great nation are gearing up to make sure the UAE is a global leader and regional role model.

Mustafa Kheriba, Chief Operating Officer, ADFG