Bahrain bets on fintech, payments to reboot its economy

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Following its own economic downturn that required bailouts by Saudi Arabia, Kuwait and the United Arab Emirates, Bahrain’s governors hit on an economic recovery plan that includes turning the tiny nation into a global payments hub.

The Kingdom of Bahrain is small—the island between Qatar and Saudi Arabia has only 1.5 million people—but its role as a gateway to Gulf countries whose economies are rapidly modernizing could be a big deal for payments technology.

The first move was reshaping its own economic policies late last year to favor open-banking initiatives and ensure its laws welcome foreign companies and investors setting up shop in Bahrain.

“Bahrain made changes to its international trade law framework to kick-start a fintech ecosystem,” said Simon Galpin, managing director of the Bahrain Economic Development Board.

Bahrain next set up a payments sandbox and local accelerators to make its ecosystem inviting for fintechs and financial services companies looking to expand in the region. Other alluring factors include Bahrain’s absence of personal income tax, limited corporate tax structure and overall light regulatory stance next door to the $1.5 trillion market comprising the Gulf countries.

“What we have here is an unusual opportunity for companies to experiment and develop financial services in a contained ecosystem with a central bank that’s working closely with the government to promote best practices,” Galpin said.

Bahrain promises that companies looking to develop banking and payments services can launch services immediately to a ready test market, versus many countries that confine financial product development to certain sectors and economic zones.

“Companies that come here can start operating in Bahrain’s market from Day One and test their services for a year without being required to get a formal banking license,” Galpin said.

So far about 35 companies are working the Bahrain's new regulatory sandbox at various stages of testing and licensing in areas that include payments, cryptocurrencies and general financial services, according to Maissan Almaskati, managing director of New York-based FinTech Consortium, which is building connections to Bahrain from other global financial centers.

Bahrain's strategy is similar to that of Lithuania, which aims to become a fintech hub by licensing fintechs and challenger banks to operate in a post-Brexit EU.

"It's not just about payments, but encouraging entrepreneurship, because government realizes that to get an economy going outside of oil, you need small-business enterprise development, a society, grants and incentives," Almaskati said.

FinTech Consortium oversees Bahrain Bay, a startup incubator and co-working space for entrepreneurs, that has been up and running for more than a year, with 45 companies using its services.

The organization also has a hub in Singapore, is currently developing one in Silicon Valley, and in May it will open offices in Detroit, all with links to Bahrain, Almaskati said.

"Our new hub in Redwood City, Calif., will have a tie-up with Bahrain, allowing U.S. startups to work in both directions," Almaskati said.

A linchpin to Bahrain’s plan was enacting a new Electronic Communications and Transactions Law in January of this year, based on a model devised by the United Nations Commission on International Trade Law. The law introduces electronic transferrable records that can be used broadly in place of paper-based commercial documents, including checks, bills, promissory notes and warehouse receipts.

One example where the shift would dramatically improve efficiency and security is in the shipping and transportation industries, where Bahrain serves several other Gulf countries, Galpin said.

Bahrain also enacted the Electronic Communications and Transactions Law early this year to promote a wider use of electronic communications in business. This law also aligns with the United Nations’ Convention on the Use of Electronic Communications in International Contracts.

The moves updated older laws that made it more difficult for startups to operate in the country, Galpin said.

“Bahrain actually was a leader in financial services in the 1980s and 1990s, but we had lost momentum. Now we’re reinventing Bahrain’s financial services industry to become a pioneer and leader once again in the Middle East,” he said.

So far about three dozen companies — mainly from the U.S., U.K., India and UAE — have expressed interest in using Bahrain’s new sandbox to develop new products, including companies navigating around Sharia law.

“One of the opportunities that sets Bahrain apart is that it caters to both Islamic and Western types of banking, so fintech companies can come here and test products that are Sharia-compliant, which could be of interest to Islamic banks looking to invest in them,” Galpin said.

Beehive, a Dubai-based small-business P2P lending platform, recently raised $4 million for expansion in the Middle East and it’s working with Bahrain’s economic development organization to launch its platform there, according to a recent blog post.

Sharia forbids earning money from lending cash alone, so Beehive is leveraging an Islamic financing approach called Murabaha to process loan-financing requests, according to the blog post.

One analyst said Bahrain’s fintech environment could offer advantages in the region but it won't appeal to all comers.

“Fintechs looking for a pure Middle East play could find a fit in Bahrain, but I’m not sure other fintechs would go there first before trying London or New York,” said Eric Grover, a principal with international consulting firm Intrepid Ventures.

One reason to be cautious is the fact that Bahrain is a kingdom run by a Sunni family, with a majority Shiite population, Grover noted.

“I'm skeptical of the advantages of special jurisdictions where local political issues could possibly come to bear on a company operating there,” Grover said.

There’s also the question of having access to a broad talent pool in such a small country.

“In fintech, talent and trust are huge factors, and when you’re developing financial services products with high trust, you’re going to need a lot more than a supportive regulatory and customer ecosystem,” Grover said.

Bahrain's local workforce in the private sector comprises about 200,000 people, of which about 10% currently are dedicated to finance and banking and over time could be trained into fintech, FinTech Consortium's Almaskati said.

But Bahrain isn’t banking solely on fintech to accelerate its economic growth. After its government rebuilt its framework around innovation, Bahrain last year discovered 80 billion barrels of oil and 29 trillion cubic feet of natural gas that will likely go a long way toward resolving its national deficit.

The new laws easing financial services development dovetail nicely with the country’s resurgence, Galpin suggested.

“Bahrain’s momentum plus new fintech-friendly policies and its proximity to emerging Gulf markets put the country in an ideal position to serve a much larger customer base than its own population,” Galpin said.

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