The Middle East: A Land of Opportunity for the Payments Industry

Prospects for the payments industry in the Middle East are frequently overshadowed but this important region should not be overlooked. It offers an encouraging economic and demographic profile, with a population of 190 million and a combined gross domestic product (GDP) of US$1.6 trillion. Its location – on primary shipping routes and with a time zone that’s midway between Europe and south east Asia – leaves it well positioned to play a major role in the emerging ‘southern Silk Road’.

“We are witnessing the creation of a southern Silk Road, a network of new ‘south-south’ trading routes connecting Asia, the Middle East, Africa and Latin America. “South-south’ connections are set to revolutionise the global economy. We believe that trade and capital flows between emerging areas of the world could increase ten-fold in the next 40 years”.1

Economic Background

The Middle East has suffered far less from the global financial collapse – possibly in part because of its commitment to Shariah principles in finance, which may have contributed to Middle Eastern banks avoiding exposure to the worst excesses of the sub-prime mortgage market.

Antoine Sreih, chief executive officer (CEO) of Europe Arab Bank in London – quoted in a Raconteur report on Islamic Finance (Nov 2008) strongly believes… “that Islamic banking is better suited to absorbing financial shocks because its basic structure is that of sound and ethical banking based on real assets and not those complex derivatives that almost destroyed the conventional sector”, while David Bailey of the UK Financial Services Authority (FSA), in the same report,2 feels that “Islamic mortgage providers have hardly had any repossessions to report.”

The Middle East’s major economies have a positive growth rate, with Middle East and north Africa (MENA) growth realising 4.1% in 2011 as compared with 3.8% in 2010; the growth rates of the Gulf Co-operation Council (GCC) countries are set out in Table 1.



Table 1: Growth Rates of GCC Countries

GCC Country Nominal GDP, US$bn GDP Growth
Saudi Arabia 447.8 4.1
UAE 269.1 2.1
Kuwait 127.5 2.7
Qatar 113.5 14
Oman 55.1 4.5
Bahrain 20.6 4.5

Source: Saudi Arabian Monetary Agency3



International Trade and Payments

Its business profile demands particular expertise in international trade and payments. Approximately 90% of companies in the United Arab Emirates (UAE) operate internationally, compared with the global average of 76%. While oil and gas is a major factor, the ‘GCC have become asset-based economies with income from foreign assets more important than oil and gas revenue’.4

Egypt is predicted to experience the fastest growth in international trade volumes – albeit from a low base – of 185% by 2025. This is being driven partly by the country’s redevelopment following the Arab Spring of 2011, but also because other countries around the world regard the region as a platform into the Middle East.5

Sixty-three percent of contributors to HSBC’s Trade Confidence Index expect international trade in MENA to grow, making it the region with the highest confidence on the index.6

Regional Structure

There’s no standard definition of countries in the region, and different analysts apply different criteria. As reported on Wikipedia, the countries typically accepted as being in MENA are Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Syria. Tunisia, UAE and Yemen. A further 13 countries are sometimes also included in broader definitions.

Of these, the World Bank defines Bahrain, Israel, Kuwait, Oman, Qatar, Saudi Arabia, and UAE as high-income countries, and the rest as developing. This group, with the exception of Israel, comprises the GCC which Jordan and Morocco have recently been invited to join.7

The Arab Maghreb Union comprises five countries – Algeria, Libya, Mauritania, Morocco and Tunisia.

“I suspect the growth potential – political risk factors notwithstanding – for Libya, Egypt, and Tunisia are also very positive,” said Simon Bailey, director of Payments Strategy at Logica, a provider of payments systems to the central banks in the region.

The Gulf Common Market of the GCC countries (Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and UAE) includes about 40 million people, GNP of US$1 trillion, and a volume of trade that reached US$800bn in 2009.8 The common market will be established by early 2015, according to Kuwait’s Minister of Finance and Health Mustafa Jassim Al-Shimali speaking at the Financial and Economic Co-operation Committee meeting recently. Plans to adopt a single currency, however, initially aimed for 2010, have for the time being been shelved.9

Financial Infrastructure

Slightly lagging the massive recent development in property and commercial infrastructure, much work is underway to improve the financial infrastructure. Challenges include:

  • According to a recent World Bank report10, the legal and regulatory framework for payment and securities settlement systems in the Arab region is one of the weakest in the world.
  • The MENA region is characterised by a heavy use of cash and cheques, which keeps retail payments far from optimal from the point of view of efficiency and risk control.
  • In many MENA countries the legal framework does not cover fundamental payment system concepts, such as settlement finality, bilateral and multilateral netting.
  • Cheques are widely used, sometimes with unexpected consequences – perhaps reflecting the lack of alternative collection instruments. For example, mortgage lenders typically require the beneficiary to sign a series of forward-dated cheques. If a cheque fails to settle, for example as the recipient has unexpectedly lost his job and income, then an offence with extremely serious consequences has been committed. As a consequence, individual Arab countries are undertaking payment system reforms, also as a result of the Arab Payment Initiative (API), and are working towards increased regional integration.
  • Also of note is the absence of any Arab currency in CLS – adding to the legal challenges of establishing reliable DvP in the region. CLS is of course heavily reliant on SWIFT, and the ongoing debate regarding establishment of a separate local SWIFT hub – so that data transiting it is not automatically visible to regulators in other regions – may be a necessary prerequisite to resolution of that issue.


UAE has established itself as a major financial centre, through the establishment of the Dubai International Financial Centre (DIFC). The DIFC operates an international legal system based on Common Law of England and Wales; while its clearing and settlement systems are modelled on those of Hong Kong, neatly bridging east and west.

Payment Services Improvements

Regulators are taking steps to improve payments services. For example, the UAE Ministry of Labour recently launched the Wage Protection System (WPS) to ensure that all workers get their salaries on time and that erring companies would be blocked from renewal of their trade licences or bringing in new resources. Many such payments are made through prepaid card or mobile channels. The lack of legacy infrastructure is an opportunity to innovate, whilst mass adoption of mobile services and prepaid card schemes for person-to-person (P2P) flows is inevitably a precursor of its use for trade flows and supply chain automation – probably faster than will happen in the low growth ‘developed’ economies. Also in Dubai, the new e-Mirsal2 system has made the customs clearance process paperless.

Remittances Shaping the Payments Market

Across the MENA region, remittances have a significant impact. This region had the highest value worldwide of remittances as a share of the GDP in 2008, and estimated remittance inflows for 2010 were US$35bn, about 3.5% of GDP.11

The World Bank estimates this region accounts for two-thirds of all remittances to Bangladesh and Pakistan and 18% of flows to developing markets. Worker remittances to developing MENA picked up by 5.3% in 2010 to US$35.5bn, which was much stronger than expected.12

UAE in particular has a very high number of expatriate workers at all levels of the economy such that expatriates account for over 80% of the work force.13 Forty-two percent of the workforce in the UAE is from either India or Pakistan14 and it is estimated that the volume of remittances in the GCC alone exceeds US$25bn per year.

The adequacy of remittance systems is variable across the GCC countries. In the UAE and Saudi Arabia, the market for remittances seems to work well. It is competitive, with a wide range of licensed operators, and there is reasonable transparency of pricing and conditions. Moreover, prices are low by international standards. UAE and Saudi Arabia remittance corridors are among the cheapest according to the World Bank Remittance Prices Worldwide database. In particular, most UAE corridors ranked within the 10 cheapest corridors worldwide in the first quarter 2010 and most corridors from Saudi Arabia can be found within the 20 cheapest corridors globally in the same period.15

Figure 1: Remittance Inflows and Outflows

World Bank Remittances Fact Book16


There is considerable commercial incentive for more cost effective, transparent remittance services. Notably, remittances amount to more than 20% of GDP for the Lebanon. If the average fee to make a transfer home were 10%, the Lebanon would be leaving 2% of GDP ‘on the table’.

For further detail the Annex of ‘Payment and Securities Settlement Systems in the Middle East and North Africa’, June 2010, includes details of the status in the region for cross-border payments and remittances.

Remittances have been a dominant force in shaping the payments market in the UAE, at least over recent years, resulting in a number of ‘exchange houses’ who mainly provide P2P international money transfer services. Competition is fierce, particularly around foreign exchange (FX) rates. Workers, on their day off, typically walk between the branches of several FX houses – seeking the best exchange rate. Few banks compete in this market; instead it is dominated by the many exchange houses.Approximately 2.5 million transactions a month are handled by the region’s 110 exchange houses1, according to Mohamed Al Ansari, chairman, Al Ansari Exchange, at a recent conference.

There seems to be a clear divide between P2P and commercial payments however, research conducted by Earthport during 2011 concluded that although corporates know about the efficiency of the exchanges as compared to banks, they tend to use the banking system due to the regulations, perceived security and safety of the payments platform. Whether the exchange houses will move up the food chain, or the banks move down, remains to be seen.

Regional Payments Outlook

With cash and cheques predominant for retail transactions, use of electronic payments (e-payments) lags the developed economies. The new law in Dubai forces employers to pay electronically (probably to get visibility of the transaction for tax reasons), which in turn drives greater demand for services such as mobile and prepaid cards – to enable employees to access account funds. This greatly benefits the large itinerant worker population, partly as it inhibits employers from bad practices such as under/late payment, and also transactions can be made wherever convenient, rather than the sender being forced to use branches – as with cash – frequently having to queue in extreme temperatures.

So, we can expect to see a proliferation of e-payments and mobile payments (m-payments) services – partly for reasons given above, and partly as UAE becomes more established as a centre for global commerce and trade. Given that local needs are different, the region has far less legacy infrastructure to constrain innovation, with many new payments models emerging in recent years. There will be greater innovation as compared to ‘developed’ slow growth economies, as the region adopts payments schemes and methods that suit the particular needs of its citizens and trading partners.

There will be opportunities for banks and payment providers to expand in the area with commercial banks following the trade routes – seeking to improve their local presence in support of their long-term clients, as they engage in the new Silk Road. Many innovative payments providers, already active in the region, will be looking for partners to adopt and launch their business models and technology. Firms such as Earthport and Luup (a specialist in mobile commerce) are among the many with established local offices.


Situated midway between east and west, with young and growing populations in need of gainful employment and skills, and with the foresight to invent and innovate, the Middle East is well placed to grow its position as a world financial centre – and a key component of the new Silk Road. SWIFT’s global conference is due to be held for the first time in Dubai in 2013, clearly in recognition of the Middle East’s role in the new financial and trade world order.

Customer demand is always the main driver of innovation, and with its large numbers of foreign workers and its natural place on the fast-growing south-south trade corridors, the Middle East is likely to generate a great deal of it. Late market entrants may find the best opportunities already taken.

“Unlike the original, the southern Silk Road won’t only be confined to Asia and Europe. It stems from connections over land, across the sea, through the air and within the electronic ether. And because the costs of transportation and communication have collapsed in recent decades, it is much more geographically diverse, offering the potential to create hitherto-unimaginable linkages between Asia, the Middle East, Africa and Latin America. If it is able to advance, the southern Silk Road will radically alter the dynamics of the global economy in the years ahead. The economic centre of gravity is about to undergo a major shift”.18




4 Dr Saidi, chief economist at DIFCA, IPS 2008.


6, October 2011.


8 Sama, 47th Annual Report.


10 Payment and Securities Settlement Systems in the MENA, June 2010.



13Doing business in the UAE, HSBC, Nov 2010.

14HSBC, the Southern Silk Road, June 2011

15Payment and Securities Settlement Systems in the Middle East and North Africa, June 2010.


17Report on SWIFT regional conference in middle east 2010

18HSBC, the Southern Silk Road, June 2011






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