From oil economy to digital payments: the evolution of the Middle East's financial system

The Middle East's financial system is undergoing a profound transformation from an oil economy to digital payments, an evolution driven by the global wave of digitisation and the inherent need to diversify the region's economies. This process is analysed below in five dimensions:

1. Petrodollar Path Dependence and Breakthroughs

• UAE central bank data shows non-oil GDP share has reached 721 TP3T in 2022, but dollar assets still account for 631 TP3T in foreign exchange reserves
• Saudi Arabia's Vision 2030 sets a clear goal to increase the share of electronic payments to 70% from 18% in 2016
• Qatar Financial Centre (QFC) has attracted 500+ fintech companies to its premises

2. Digital Adaptation in Islamic Finance

• Bahrain launches BenefitPay, which is Shariah-compliant and has grown by 4 million users in two years
• Dubai International Financial Centre (DIFC) creates $25 million FinTech fund dedicated to supporting Shariah-compliant solutions
• Kuwaiti Financial Institution Launches Blockchain-Powered Sukuk (Islamic Bond) Trading Platform

3. Innovative experiments in the "regulatory sandbox"

• ADGM's (Abu Dhabi Global Market) Regulatory Lab has incubated 47 payments projects
• Saudi Arabia's SAMA-developed instant payment system SARIE increases processing volume by 210% annually

4. The construction of a new geo-financial landscape

• Cross-border payments alliance on the rise: In 2023, the "Aber" digital currency project, jointly launched by Saudi Arabia and the UAE, entered its second phase, testing an average daily settlement volume of more than $120 million, challenging the monopoly of the traditional SWIFT system in the Middle East.
• De-dollarisation of oil trade settlements: Iran has completed its first oil transaction using the digital renminbi, and Qatar Energy has accepted multi-currency payments for LNG shipments in rupees, renminbi and other currencies, promoting the diversification of regional reserve currencies.
• Sovereign wealth funds turn to fintech investments: The Kuwait Investment Authority (KIA) has raised its stake in payment firms such as Stripe and Checkout.com to an average of 7.81 TP3T in the last three years.

5. The localisation wars of the super-app ecosystem

• Saudi Arabia's STC Pay, which gained a cross-border remittance licence through the acquisition of a Pakistani fintech company, has surpassed 8 million users (341 TP3T of the country's adult population) and is valued at $2.75 billion in 2023.
• Careem in the UAE has transformed from an online car rental to an aggregated payment platform, integrating payments for 23 types of lifestyle scenarios such as utility bills and school fees.
• Fawry Egypt connects 140,000 convenience stores across the country to form an offline cash recharge network, addressing the digital payment needs of the local 80% unbanked population.

6. Next Generation Infrastructure Competition

• The Dubai Metaverse strategy, which calls for all government services to support cryptocurrency payments, is expected to attract 1,000 Web3 payments businesses by 2025.
• Qatar Central Bank has launched a blockchain instant clearing system with a processing speed of 5,000 transactions per second (1/3rd of Visa's system but at a cost of only 15%).