What Lies Beneath the Slow Economic Growth in the MENA?

What Lies Beneath the Slow Economic Growth in the MENA?

What Lies Beneath the Slow Economic Growth in the MENA? apofeed with “What Lies Beneath the Slow Economic Growth in the MENA?” attempts to elaborate on the current situation that is prevailing in certain MENA countries.

What Lies Beneath the Slow Economic Growth in the Middle East and North Africa?

 

A dynamic private sector is key for the economies of the region to grow out of their currently high debt levels; Unlocking sustainable growth in the region’s private sector requires reforms that facilitate innovation, the adoption of digital technologies and investments in human capital; Reforms to support these objectives must take account of sustainability and the global agenda to limit climate change

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The European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the World Bank have published a joint report, Unlocking Sustainable Private Sector Growth in the Middle East and North Africa (MENA(https://bit.ly/3H73CdA). The report analyses constraints on productivity growth and limited accumulation of factors or production in the MENA private sector.

The report is based on the MENA Enterprise Survey conducted between late 2018 and 2020 on over 5 800 formal businesses across Egypt, Jordan, Lebanon, Morocco, Tunisia, the West Bank and Gaza. Historically, economic growth in the Middle East and North Africa has been weak since the global financial crisis of 2007-2009 and the Arab Spring of the early 2010s. Since then, gross domestic product (GDP) per capita has grown by only 0.3% a year in the MENA region. That compares unfavourably with rates of 1.7% on average in middle-income countries and 2.4% in the developing economies of Europe and Central Asia.

Achieving higher and sustainable growth is particularly important in view of other economic challenges facing the region. Public debt has increased considerably over the last decade, accompanied by declining investment. More recently, the coronavirus pandemic has battered the region, further straining public finances. In addition, the Russian invasion of Ukraine affects the MENA economies through higher hydrocarbon prices, risks to food security and declining tourism.

Against this background, it is important that policymakers exploit the potential of the private sector to propel the region towards greater prosperity.

“The spillovers from the war in Ukraine add to structural vulnerabilities in the region. The prospects for global financial tightening, persistently high energy and food prices and concerns for food security come on top of concerns related to weak economic growth and rising debt levels,” said EIB Chief Economist Debora Revoltella (https://bit.ly/2UYJi4s). “When responding to the new shock, MENA countries need to tackle the main structural bottlenecks affecting the region. Reforms that lower regulatory barriers, tackle informal business practices, promote competition, and facilitate innovation and digitalisation are crucial for achieving sustainable economic growth and improving resilience to future shocks.”

The business environment in the MENA region as reported in the survey has been held back by various factors. Political connection and informality are undermining fair competition, bringing economic benefits to a limited number of companies. Management practices lag behind benchmark countries, with a decline in average scores in all MENA countries since 2013.

Customs and trade regulations appear to be more severe barriers for firms in the MENA region than in other countries. Firms need more time to clear customs to import or export than in other countries. The MENA economies depend on high levels of imports compared to low export activities.

Although firms trading in the international market are more willing to develop and innovate processes, only 20% invest in innovation, which can affect the long-term economic prospects for the region.

The region needs to make better use of its human capital. Predominantly, only a few foreign-owned companies invest in training their human capital, and they tend to be digitally connected exporting firms. Additionally, a significant share of companies are not engaging in financial activities with other economic players, opting to self-finance voluntarily.

Incentives for companies to decarbonise are weak, and MENA firms are less likely than their counterparts in Europe and Central Asia to adopt measures that reduce their environmental footprint.

Unlocking sustainable growth in the region’s private sector, the report calls for MENA economies to lower regulatory barriers for businesses, promote competition and reduce disincentives emerging from political influence and informal business practices.

The region is also in need of reforms to facilitate innovation, the adoption of digital technologies and investments in human capital, while being in line with the global agenda to limit climate change, enhance sustainability and protect the natural environment.

Improving management practices can be instrumental to that. “Good management practices can account for as much as 30% of differences in efficiency across countries,” said Roberta Gatti, Chief Economist for the Middle East and North Africa at the World Bank. “Management practices are lacklustre in firms in the region, particularly in those with some state ownership. Improving these practices can have substantial benefits, is not costly, but is not easy. It will require — among others — a change in mindsets.”

Companies should also be given incentives to exploit the benefits of participating in cross-border trade and global value chains more broadly, accompanied by better management practices.

At the same time, the state has a duty to ensure that this transition process is just, through measures that help workers to take advantage of opportunities to obtain new, higher-quality jobs linked to the green economy, while also protecting those at risk of losing their jobs. Such measures include labour market policies, skills training, social safety nets and action to support regional economic development.

EBRD Chief Economist Beata Javorcik said: “Climate change creates an opportunity  the MENA region to build up its green credentials and use them as a source of competitive advantage. This will create the much-needed high-quality jobs linked to the green economy.”

Distributed by APO Group on behalf of European Investment Bank (EIB).

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Eva De Francesco
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+352 437 986 637
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Serena Sertore
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Website: www.eib.org/press

 

Open banking makes MENA an oasis of financial opportunities for investors

Open banking makes MENA an oasis of financial opportunities for investors

Why and how does open banking make MENA an oasis of financial opportunities for investors? Maddyness answers quite elaborately as follows.

Economic growth in the MENA – Middle East and North Africa – region is on the rise, with Gulf countries leading the charge. The pace of innovation in places such as the UAE and Saudi Arabia is attracting foreign investment at a rapid rate, which, combined with dedicated tech programmes and an increasingly skilled workforce, sees the region stand out on a global front.

Although MENA’s escalating influence is widely known, it’s not necessarily talked about for facilitating financial progress in particular. Nonetheless, that’s about to change. In the past decade, the region has carefully cultivated a fertile soil that’s ready to flower. And it’s starting to blossom thanks to technological advances driving concepts like open banking that have the power to transform our financial future forever.

The UK’s longstanding relationship with MENA

It’s safe to say that the extensive opportunities haven’t gone unnoticed in Britain. Over several decades, the UK has maintained strong business ties and fostered stable relationships with MENA countries. For example, the UK has consistently been one of the largest investors in the global hub city of Dubai. So, with such a strong history, why is now an especially opportune moment to take notice of Middle East fintechs?

The transformation of the financial ecosystems in the region is certainly clear. MENA’s finTech sector is growing rapidly, with a compounded annual growth rate of 30%, paving the way for it to become a leading destination for digital financial activities in the very near future. 

However, there is still plenty of room to maximise MENA’s full financial potential. The great disruptor of open banking (not to mention the even more progressive world of open finance) will be a driving force in attracting British investors to the region.

MENA as an emerging hotspot for investment

Before discussing the opportunity for fintechs, let’s take a step back. Why is there an opportunity in the first place?

The region’s demographics should enthuse any investor looking for innovation. The MENA population is one of the youngest globally, with an estimated 60% of the population under 30. Much of the region’s youth are also motivated to embrace new ways of thinking and leverage digital technologies to improve both their own lives and those of their communities. Internet penetration in MENA is one of the world’s highest. 

Furthermore, the local population has proved willing to adopt digital solutions for their financial needs. According to research by Deloitte in 2020, 82% of customers in the Middle East are eager to start using fintech solutions, which coincides with the rise of a cashless economy.

Savvy entrepreneurs are already stepping up everywhere to capitalise on this market demand. Backed by the financially progressive infrastructure – which provides fintechs with regulatory support and government incentives – the fintech sector in the region has a very high growth rate. The UAE has become a hive of fintech activity – 465 fintechs there are set to generate over $2B in investment capital funding in the upcoming year, compared to merely $80M five years ago. 

Open banking as the game changer

MENA is ready for disruptive innovations, which open banking can plentifully provide. Regulated access for fintechs to use financial data in order to provide solutions to a hungry audience will drive significant and sustainable economic growth. Consumers want more freedom to handle their finances and there is a need for better banking solutions, such as instant access to money and fully digitised payments.

Open banking makes all of this possible and more when banks, fintechs and even telcos work together to improve their products and put the customer in control. Against this backdrop, everyone can benefit if we move quickly to meet demand.

The emergence of a solid regulatory framework

We’re seeing MENA tread in the footsteps of the UK when it comes to regulating open banking. The PSD2 directive, which kicked off the concept in the UK, informs much of MENA’s recent developments in terms of its financial ecosystem. In Europe, the regulatory framework proved successful in levelling access to the financial services market and promoting the role of non-traditional financial institutions. As a result, the framework enhanced competition between financial service providers and provided consumers with better financial tools. 

Similar regulations are shaping the evolution of MENA’s financial landscape, offering security for investors while remaining flexible enough to stay relevant in the face of constant technological development. Although the regulations differ across jurisdictions, making it potentially challenging for fintechs to scale throughout the region, any obstacles are well worth overcoming. 

How to navigate your fintech journey in MENA

Considering the whole picture, MENA should get your attention as a rising star of the global financial scene. It is easy to see how becoming part of an emerging, but promising ecosystem yields tangible benefits for investors.

To comply with the regional frameworks and regulations, interested parties should seek local experts who know which paths to travel and how to traverse them. The rise of open banking is already a fundamental factor driving MENA’s financial environment forward, and its growth will only increase. As opportunity knocks, it’s better to be at the front of the queue than at the end of it.  

Justin Henry is executive director at KMMRCE Pay.

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Lebanon faces exodus of its most educated citizens

Lebanon faces exodus of its most educated citizens

Like most of the MENA region non-hydrocarbon producing countries, Lebanon faces an exodus of its most educated citizens. This Financial Times article is about those reasons prevailing in this conjecture. It must however be noted that the country where the moving out attitude is known to be millennia old, is perhaps going through a first in terms of a democratic claim by its people.


Many doubt their future prospects as country sinks into economic meltdown

By Heba Saleh in Beirut

Lana Noura is only 18 and a first-year computer science student at the prestigious American University in Beirut. But like many of her classmates, she already knows she wants to leave Lebanon once she has finished her course.

“I will leave for work and hopefully take my parents with me,” she said. “Anywhere would be fine, but I would prefer somewhere in the Middle East. It’s for a good life. Here it’s not stable and you never know what will happen next.”

Jad Masry, a fifth-year medical student, also plans to leave, either for Germany or America. “It will be a better income, better education and better lifestyle,” he said. “The politicians in Lebanon cannot bring us a good future because they are corrupt.” 

Lebanon has always had a huge diaspora after waves of emigration over the past two centuries, particularly as a result of the 15-year civil war that ended in 1990. Now, once again, as the country sinks deeper into economic meltdown, it faces a new exodus of its brightest and best-educated citizens.

Forced to grapple daily with hyperinflation, power cuts and shortages, many Lebanese have little confidence in the future. They have lost hope their fractious leaders will take action to reverse the country’s catastrophic financial collapse. Two years after the onset of a fiscal and banking crisis, little has been done to salvage the sinking economy in what the World Bank has called a “deliberate depression . . . orchestrated by an elite that has captured the state”.

Students protest outside the American University of Beirut in December 2020 against the rising cost of tuition © Oliver Marsden/FT

“Lebanon has yet to identify, least of all embark upon, a credible path toward economic and financial recovery,” said the World Bank in December. “In consequence, highly skilled labour is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country.”

Lebanese people seeking jobs abroad include formerly well-paid professionals whose dollar accounts are blocked by the banks and young people who see no future in their home country. About 40 per cent of the population of almost 7m is considering emigrating, according to a recent survey commissioned by Konrad-Adenauer-Stiftung, a German think-tank.

About 40 per cent of Lebanon’s doctors have already left for the Gulf or the west, either permanently or temporarily, according to the World Bank. At least 10,000 teachers have also found jobs abroad, according to some estimates, cited by the World Bank. The Lebanese lira has lost more than 95 per cent of its value against the dollar over the past two years, rendering teachers’ salaries almost worthless.

The German survey found that 40 per cent of Lebanese have had to cut down on food and a third are unable to afford their medication. Three-quarters of the population has been plunged into what the UN terms “multidimensional poverty” — a measure that includes access to health, education and public utilities in addition to income poverty. 

Hospital workers at an intensive care unit in Beirut. The debilitating impact of the brain drain is being felt in the health sector © Joseph Eid/AFP/Getty

The debilitating impact of the brain drain is already being felt in the health sector. Charaf Abou Charaf, head of the doctors’ union, said the main university hospitals in Beirut, which employed highly skilled specialists, had each lost between 100 and 150 doctors. “It means some specialised procedures cannot be carried out,” he added. “And it is not just a question of doctors, there is also a shortage of supplies and medicines. If the political and financial situation are not quickly rectified, the health situation will be in danger.”

At the American University of Beirut Medical Center, Mona Nasrallah, an endocrinologist, said three out of the 10 doctors in her department had gone abroad. “The clinical, teaching and administrative load has increased, taking time away from my research,” she added. “It is also more complicated now because you can’t refer patients to certain specialists if they are no longer there. You have to work to find suitable replacements.”

Nasrallah said the government had made no effort to retain doctors, but individual hospitals were trying to find ways to keep them by paying a proportion of their salaries in “fresh dollars” — a term that refers to money transferred into the country from abroad or to new cash that enters the system that is exempt from restrictions on bank accounts. “It’s not a lot of money, but enough to get by on,” she added. “If you have already made up your mind to go, it won’t make you stay. But if you want to stay, it will keep you afloat.”

A Beirut resident watches the sunset. Forced to contend with hyperinflation, power cuts and shortages, many Lebanese people have little confidence in the future © Oliver Marsden/FT

Experts warn of the long-term impact of the mass emigration of the skilled. Saroj Kumar Jha, World Bank Mashreq regional director, said that the quality of education in Lebanon had been declining even before the crisis and the departure of highly skilled doctors and teachers meant there was not the flow of “human capital” to replace them.

“The Lebanese children born in today’s times when they become 18 years old, their productivity will be only 48 per cent of their potential, which means that there is structurally something wrong with the quality of learning in the schools.”

Nasser Saidi, a Lebanese economist and former minister, also warned of the dangers of the depletion of Lebanon’s “stock of human capital”.

“When you have skilled people working alongside unskilled people, they help them improve because they teach them,” he said. “If the skilled people and the educated people are not there, then we just have misery.”

Such long-term considerations, however, are not a priority for those grappling with the everyday realities of a worthless currency, lengthy power cuts and expensive food and fuel. “If I knew it was going to be like this, I would have left a long time ago,” said Zaher Nashabe, a fourth-year chemistry student who plans to go to the US. “I will work there for a few years, get some financial stability and maybe return. But if my family come too and I find work, I will stay there.”

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The impact of Covid-19 on labour markets in MENA

The impact of Covid-19 on labour markets in MENA

According to the International Monetary Fund (IMF), some of the emerging market economies grew in 2020 as government incentives and support were put into action. The Forum‘s article by Ragui Assaad, Caroline Krafft and Mohamed Ali Marouani confirm that the impact of Covid-19 on labour markets in MENA in 2021 was unprecedented and not really well lived in by most. Would this pace or resilience continue in 2022?

Employment is recovering but income losses persist in MENA countries in the second year of the pandemic. Two recent ERF policy briefs summarised in this column illustrate the mix of recovery and ongoing challenges for households and firms.

With the Covid-19 pandemic on the verge of its third year, Middle East and North African (MENA) economies are recovering from the slump caused by lockdowns and other economic disruptions, but households and firms are still experiencing steep income and revenue losses well into the pandemic’s second year.

In two recently published policy briefs, we examine how workers and firms have fared in the first half of 2021 in Egypt, Jordan, Morocco and Tunisia (Krafft et al, 2021, 2022).

Household and enterprise surveys during the pandemic

The analysis is based on the COVID-19 MENA Monitor Household and Enterprise Surveys conducted by ERF over the second half of 2020 and the first half of 2021 (OAMDI – Open Access Micro Data Initiative, 2021a, 2021b).

The surveys were conducted by telephone on a panel of firms and enterprises. The household surveys are the main source of information on how households, workers and microenterprises experienced the pandemic, whereas the enterprise surveys focused on the experience of small and medium enterprises (those with between six and 199 workers) in February 2020 (pre-pandemic).

Four waves of the household survey were conducted in Morocco and Tunisia centred around November 2020, February 2021, April 2021 and June 2021. Two waves were conducted in Egypt and Jordan centred around February and June 2021.

Two waves of the enterprise surveys were conducted in each of the four countries corresponding to the first and second quarter of 2021. Household and enterprise surveys were conducted in Sudan as part of the same series, but are not discussed here.

Health and economic outcomes in the pandemic

Among the four countries, Jordan and Tunisia experienced much higher rates of Covid-19 cases and deaths in the first half of 2021 than either Egypt or Morocco. But while Egypt gradually loosened its closure measures in 2021, Morocco, like Jordan and Tunisia, maintained more stringent measures than the world average.

Egypt was also the only one among the four countries that managed to maintain a positive economic growth rate of 1.5% in 2020. In contrast, Tunisia experienced a large economic contraction of 8.8% and Morocco likewise contracted 6.3%, while Jordan’s economy contracted by 1.6%. Despite relatively strong recoveries in Morocco and Tunisia in the first half of 2021, their economies, as well as that of Jordan, remained depressed relative to pre-pandemic levels.

The tourist and transport industries were the hardest hit in all four countries, with tourism-related industries the most negatively affected in terms of closures, reduced hours and revenue losses.

Labour market outcomes

The evidence suggests that aggregate labour market indicators, such as labour force participation, employment and unemployment rates, were recovering in the first half of 2021, except in Morocco where the progress made earlier in the year later reversed. With the exception of Morocco, more of those who lost jobs early in the pandemic were regaining employment over the course of 2021.

Private wage workers, especially those hired informally, faced substantially more challenges related to layoffs/suspensions and wage reductions in Egypt, Jordan and Tunisia than in Morocco. But the prevalence of these challenges decreased in these three countries from February to June 2021, while it increased in Morocco.

The results of the household and enterprise surveys suggest that microenterprises were the most likely to be closed due to Covid-19 in the first quarter of 2021. If open, micro and small firms were more likely to have reduced hours than medium firms.

As Figure 1 shows, a similar proportion of microenterprises across the four countries reported substantially reduced revenues, but higher proportions of small and medium enterprises reported such revenue losses in Jordan and Morocco than in Egypt and Tunisia in the first quarter of 2021.

Figure 1: Revenue change (past 60 days versus 2019), by firm size in February 2020 and country, micro, small and medium enterprises (percentage), quarter one, 2021.
The impact of Covid-19 on labour markets in MENA

Source: Krafft et al (2021), based on data from the ERF COVID-19 MENA Monitor Household and Enterprise Surveys

Income levels

Despite some recovery in employment rates, household income levels remain depressed, with just under a half to two-thirds of households in all four countries reporting income losses in June 2021 compared to pre-pandemic levels. In fact, the share reporting income losses increased from February to June 2021.

As Figure 2 shows, household income losses were highest for the households that were poorest pre-pandemic, confirming the adverse effects of the pandemic on poverty and inequality.

Figure 2: Changes in household income from February 2020 to June 2021 (percentage of households), by country and February 2020 income quartile
The impact of Covid-19 on labour markets in MENA

Source: Krafft et al (2022), based on COVID-19 MENA Monitor Household Survey in June 2021.

Social support

Social support reached a relatively limited fraction of the population, except in Jordan, where it reached 53% in February and 44% in June 2021. Assistance was generally well-targeted, reaching a higher proportion of lower-income households than higher-income households. But while targeting efficiency improved in Morocco over time, it deteriorated in Egypt.

Targeting of assistance was generally not based on the workers’ vulnerability with respect to labour market status, again with the possible exception of Jordan, which successfully targeted irregular and informal workers.

Firms’ experiences

It appears that firms in Jordan and Morocco were experiencing more difficulty than firms in Egypt and Tunisia due to the Covid-19-induced crisis in the first quarter of 2021. Although the Tunisian economy had the deepest overall downturn in 2020, it appears to have recovered somewhat by the first quarter of 2021 so that the adverse effects on firms were reduced.

The downturn in Egypt appears to be shallower than in the other countries, sparing Egyptian firms the worst of the negative outcomes. Yet in all countries, there is a clear need for continuing support, especially targeted to the most affected industries and firms, as the economic effects of Covid-19 continue to affect micro, small and medium enterprises.

Support for firms

Although policies were instituted in all four countries to support firms through the crisis, the reach of these policies appears to have been limited. A half to three-quarters of small and medium enterprises reported they had not applied for or received any government assistance.

The most common type of support received (and needed) in all four countries was business loans, but firms in Morocco and Tunisia also report needing (and sometimes receiving) salary subsidies. A substantial proportion of firms in all four countries also expressed the need for reduced or delayed taxes.

The featured top image is for illustration and is credit to Reuters

Fintech offers transformative change for financial services

Fintech offers transformative change for financial services

Arab News published article by JARMO T. KOTILAINE is an eye-opener on the currently trendy of the ongoing rush towards another type of gold. Digital this time and not good old solid bars. Does Fintech offer transformative change for financial services? Would the MENA Region be the next Fintech hub? Would it be sustainable? Let us find out.

Transformative change for financial services through Fintech

Fintech has become one of the catchwords of our time, shorthand for creative innovation and potentially transformative change in the way financial services are provided. It has spawned a multitude of start-ups and pushed many incumbent financial institutions to review their operating models.

The restrictions on economic activity during COVID-19 further validated and popularized many of these new ideas, as more and more people resorted to home delivery, touchless payments, and other solutions that reduced physical contact.

Technological change proved effective in driving the growth of disruptive innovators, protecting — or even increasing — the margins of banks, and allowing many companies to generate profits at a time when their survival was threatened.

To what extent, though, have we truly unleashed the transformative potential of fintech? Better payment systems and digitalized transactions are important, but ultimately represent the application of digital technology to something that was happening already.

A very different situation occurred in some developing countries where the rise of fintech has become a potent tool for financial inclusion as new providers have levered widely available mobile telecommunications technology to compensate for the shortcomings of formal financial intermediation in a widely accessible, low-cost manner.

Of course, some of this has been seen in the Gulf, in the form, for instance, of new mechanisms for the remittance payments of unbanked laborers.

How could fintech deliver even more? The true promise of technology stems from its ability to lower costs and boost transparency. Meaningful progress in these areas can deliver substantial benefits in terms of increasing access to finance and of doing so more cheaply.

Many countries have now capitalized on open banking to foster more competition among lenders. Technology can be used to allow customers to compare services and products between banks. This is pushing service providers to compete on price and quality.

Technology can also make it easier to structure complex transactions and products which can not only reduce their prices but also helps broaden the range of available solutions.

Digitalization is reducing the cost and time of on-boarding new bank customers. By decentralizing financial service provision, technology is enabling more business ventures and projects to raise capital through novel mechanisms such as crowdfunding.

Transparency is an issue of particular importance and potential. Perhaps the most profound change delivered by digital technology stems from the ease with which data can be collected and analyzed. This matters because informational asymmetries have been among the main factors restricting access to capital.

Central banks have used sometimes cumbersome regulatory and reporting requirements as a way of addressing the problem. Risk managers at banks are often forced to cite limited or unverifiable information as an argument for restricting access to credit or for pushing up their cost.

In principle, technology could be used to obviate some of the tasks currently pursued through regulation and supervision by making it easier to gain access to all the relevant data more accurately and swiftly. It should also make it easier and faster for customers to build reliable credit profiles which could be used to assess their eligibility for different products.

Again, open banking is being used by more and more lenders to access customer data and evaluate their financial history through hard data rather than assumption or generalization on the basis of potentially inaccurate or misleading applications.

Easy access analytics can help customers make more informed and efficient decisions. For instance, more investment platforms now provide access to a wide-range of investment options on a global scale, along with analytics on their performance and risks. They have reduced the costs of trading and dramatically boosted the speed of execution. Such platforms can also be used to build financial literacy, for instance through tools for financial projections or scenarios.

Of course, technology cannot overcome human myopia and wishful thinking. The way forward must be to build ways that properly account for data privacy and security. Today, though, the technological toolkit is more versatile than ever.

Progress is already helping us reimagine financial service provision, but much more is both needed and possible. Virtually every independent assessment of the financial services sector in the Gulf comments on constraints on access to capital, which in turn limit financial inclusion, economic diversification, and business growth.

Making the most of the opportunities presented by technology is thus not only a business opportunity but a chance to drive the economic paradigm shift, whose success, in large part, hinges on financial services. With governments repositioning themselves, the core task of financial institutions, the pooling and efficient allocation of capital, will matter more than ever. Doing it faster, more accurately, and for more customers will be an important driver of success.

• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.