Technology and enabling regulation has seen Middle East countries transform the banking and financial services infrastructure and make huge strides in financial inclusion. The final step is to deliver comparable industry education.

The banking industry is used to scathing criticism at many times throughout the ages – often justifiably so.

The nadir was the great financial crisis of 2007/8, the consequences of which still reverberate. 

But one of the more positive outcomes of the GFC was a renewed appreciation by the public of the critical role of the financial system in their lives. People learnt (the hard way!) that their financial and emotional wellbeing was – for better or worse – inextricably linked with the prudence and competence of bankers and the stability of the financial system.

As the scale of the crisis grew – and against the threat of systemic collapse – the central authorities acted to contain the damage. The wisdom and fairness of many of the measures taken at the time is still a matter of debate. 

But one aspect that seemed appropriate in the aftermath of the crisis was a raft of new regulations. The incumbent banking industry found itself deep in defensive mode as new rules were designed to ensure a repeat of the crisis could never occur. 

One critical change in the regulatory landscape was the opening up to nonbank entities of areas of retail banking previously the exclusive preserve of banks. In this regard the EU’s various Payments Services Directives were hugely influential beyond European borders. The arrival of Open Banking – where nonbanks could gain access to bank customer data with customer consent – spurred tremendous innovation with the entry of numerous Fintechs to the market. And all of this was synergised by the ubiquity of the smartphone.

It is this massive technological leap – aided by regulation – that has allowed the Middle East to bypass virtually all of the traditional industry staging posts, placing the region the frontier of retail banking today. 

With banking and financial services, the strategy of the various Middle East authorities is clear. Across the region the commitment to extensive financial inclusion is resolute: the premise being that increased financial inclusion and financial capability inevitably results in enhanced financial wellbeing at both personal and national level.

This is a belief that has been validated strongly of late.

A recent report by the Centre for Economics and Business Research for the Principal Group in the US found that higher financial literacy levels are associated with lower loan default rates, higher loan affordability, and stronger GDP growth. A one percentage point improvement in financial literacy levels is associated with a 2.8 percentage point reduction and default on household loans and a 6.7 percentage point reduction in household debt income ratios. As a result, a 10% improvement in financial literacy levels could generate a 0.3 percentage point improvement in the rate of GDP growth after a four-year period.

The Middle Eastern Gulf states saw the largest year over year increase in the financial system “pillar” – an improvement attributed to Fintech and digital transformation. United Arab Emirates was the biggest riser (up five positions) followed by Saudi Arabia (up four positions). Again, progress was attributed to “the presence and quality of the Fintechs indicator.”

The close correlation of financial capability and GDP growth was echoed by comments earlier this year of an executive board member of the European Central Bank, who said: “Financially literate individuals react more strongly to interest rate changes, are more willing to take on risk and are more forward-looking when forming inflation expectations.” This leads to more effective monetary transmission by central banks with positive economic implications.

But for all the progress on customer financial access and education, it is the banking industry that must lead in financial capability. That means aspiring to the highest levels of professional competency, complemented by a uncompromising ethical framework.

And just as technology has catapulted the Middle Eastern financial sector into a leading position with financial access to all, so new learning technologies can deliver the knowledge required for success, at scale and with unprecedented efficiency.  The outcome: reduced risk in all its forms and a solid foundation for economic prosperity.

And that is the point where banking and financial services industry professionals can increase the distance from historical shortcomings, pivot away from defensive mode, and take renewed pride in its role and in its mission to serve.

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