The expansion of Pakistani fintech companies into the Middle East marks a significant trend in the global financial technology landscape. This movement is driven by a combination of favorable market conditions, regulatory frameworks, and the potential for substantial financial inclusion. However, it also presents a unique set of challenges that these companies must navigate to succeed.
Market Potential and Opportunities
UAE-based fintech Encore Pay Founder and CEO Imran Saeed emphasized that startups are required to expand to ensure returns on investment (ROI) for investors. However, in Pakistan, this has historically been challenging due to rupee depreciation against the dollar. Even if a startup achieves a 20% return as projected, the gains in dollar terms remain minimal for investors.
To secure ROI and scale operations, the Middle East presents a strong opportunity for Pakistani fintechs, offering a more developed market infrastructure and greater potential for expansion. Encore Pay enables financial institutions and businesses to facilitate digital payments across multiple customer touchpoints. In 2022, it raised a $1.5 million seed round led by GreenHouse Capital (GHC).
Philip Bahoshy, Founder and CEO of Magnitt, a research firm that focuses on emerging markets such as the Middle East, Africa, South East Asia, Turkiye, and Pakistan, highlighted the immense potential of fintech in the ME region.
“Overall, fintech remains a primary focus for investors in MENA, particularly due to the disruption of the financial technology landscape,” he stated.
He further explained: “I do not see the trend of fintech investment going away. In fact, I think it will be doubled down. We will start seeing alternative capital. We already saw the likes of Tamara and Tabby raising lines of venture debt. We’ve seen companies like Property Finder doing lines of credit. I think that will continue, as they are the most likely to see exits, whether that comes from mergers and acquisitions.”
The Middle East, particularly the Gulf Cooperation Council (GCC) countries, has emerged as a vibrant hub for fintech innovation. The region’s economic diversification efforts have led to increased investment in technology and financial services. Governments are actively promoting fintech as part of their strategies to reduce reliance on oil revenues, creating a conducive environment for startups from countries like Pakistan.
In our Friday Feature, we mentioned that the fintech sector was the most funded and attracted the highest number of transactions in the Emerging Venture Markets according to Magnitt. However, the sector was the second most funded in the Middle East behind e-commerce – thanks to Saudi Arab based Salla App and UAE based Eyewa raising mega deals of pre-IPO $130 million and Series-C $100 million deals respectively. Fintech led in the number of deals by a huge margin – 72% more than e-commerce with 93 deals.
Key Growth Drivers for Pakistani Fintechs in the Middle East
- Growing Demand for Financial Services: The Middle East has seen a burgeoning middle class with significant disposable income, leading to an increased demand for consumer-focused financial products. This has created a ripe market for fintech solutions that cater to diverse consumer needs, from digital payments to investment platforms.
- Better Financial Infrastructure: The region boasts better financial infrastructure than Pakistan, including high digital penetration and established banking systems. This infrastructure supports the seamless integration of fintech solutions, enabling Pakistani companies to leverage existing frameworks while introducing innovative services.
- Regulatory Support: Many Middle Eastern countries have established regulatory sandboxes and frameworks that facilitate the testing of new fintech products. For instance, Saudi Arabia’s Fintech Saudi initiative has laid down comprehensive guidelines that encourage innovation while ensuring compliance with local laws. Such supportive regulatory environments are attractive for Pakistani fintechs looking to expand their operations.
- Investment Opportunities: The Middle East is home to some of the world’s largest sovereign wealth funds, which are actively seeking investment opportunities in technology sectors, including fintech. This availability of capital can significantly bolster the growth prospects of Pakistani fintech startups entering the region.
Challenges Faced by Pakistani Fintechs
Despite the promising opportunities, Pakistani fintechs must contend with several challenges as they venture into the Middle Eastern market:
- Cultural Adaptation: Understanding and adapting to the local culture is crucial for success in the Middle East. Pakistani fintechs must tailor their products and marketing strategies to resonate with diverse consumer preferences across different countries in the region. This includes language considerations, cultural norms, and spending habits.
- Competition with Local Players: The Middle Eastern fintech landscape is becoming increasingly competitive, with numerous local startups vying for market share alongside established players. Pakistani companies need to differentiate themselves through innovative offerings and superior customer service to gain traction against local competitors.
- Compliance with Cross-Border Regulations: Navigating the complex regulatory landscape across different jurisdictions poses a significant challenge. Each country within the GCC has its own set of regulations governing financial services, which can complicate operations for foreign fintechs that must ensure compliance with multiple legal frameworks simultaneously.
- Technological Integration: While many Middle Eastern countries have advanced technological infrastructures, integrating new fintech solutions into existing systems can be challenging. Companies must ensure their technologies are compatible with local banking systems and comply with data protection regulations.
Investor Perspectives on Pakistani Fintech Startups
Investors are keenly observing the growth trajectory of Pakistani fintechs in the Middle East due to several factors:
- Potential for High Returns: The rapid growth of digital finance in the region presents lucrative investment opportunities. Investors are increasingly interested in supporting startups that offer innovative solutions addressing unmet needs in financial services.
- Strong Track Record: Companies like ABHI have already demonstrated success in securing significant investments and achieving substantial transaction volumes in markets like the UAE. ABHI’s recent $15 million funding round highlights investor confidence in its business model focused on financial inclusion through earned wage access services.
- Strategic Partnerships: Collaborations between Pakistani fintechs and local firms can enhance credibility and facilitate smoother market entry. For example, ABHI’s partnerships with regional investors have bolstered its operational capabilities and market presence in the UAE.
- Long-Term Growth Potential: With forecasts indicating continued growth in fintech revenues across the region—from $1.5 billion in 2022 to an expected $3.5-$4.5 billion by 2025—investors view this sector as a promising long-term investment opportunity.
The Future of Pakistani Fintechs in the Middle East
The expansion of Pakistani fintechs into the Middle East represents both a significant opportunity and a formidable challenge. As these companies seek to capitalize on favorable market conditions, robust financial infrastructure, and supportive regulatory environments, they must also navigate cultural differences, intense competition, and complex compliance requirements.
For investors, this landscape offers promising returns driven by innovation and increasing demand for financial services among a growing middle class in the region. As successful examples like ABHI illustrate, strategic partnerships and a focus on local adaptation will be key factors determining the success of Pakistani fintechs in this dynamic market.
While there are hurdles to overcome, the potential rewards make it an exciting time for Pakistani fintechs eyeing opportunities in the Middle East—a region poised for significant growth in digital finance over the coming years.