High-Level Policy Forum, Venture Finance in the Arab World - Opening Remarks by Norbert Mumba, Deputy Executive Director, AFI
High-Level Policy Forum,
Venture Finance in the Arab World - "Accelerating Arab Startups"
Tuesday, 20 November 2017, Skhirat, Morocco
Opening Remarks by Norbert Mumba, Deputy Executive Director, AFI
H.E. Mohammed Boussaid, Ministry of Economy and Finance of the Kingdom of Morocco
H.E. Dr. Abdulrahman Al-Hamidy, Chairman, Arab Monetary Fund (AMF)
Regine Qualmann, Head of Regional Department North Africa, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)
H.E. Moulay Hafid Elalamy, Ministry of Industry, Investment, Trade and Digital Economy of the Kingdom of Morocco
H.E. Jamila Elmossalli, Ministry of Higher Education, Scientific Research and Professional Training of the Kingdom of Morocco
M. Faïçal Mekouar, Vice-President, General Confederation of Moroccan Enterprises (CGEM)
Ladies and Gentlemen,
Thank you for the very warm welcome and reception. It is a great pleasure for me to be here in this beautiful city of Skhirat, famously known for its idyllic beaches. From the outset, let me congratulate the host the Ministry of Economy and Finance of the Kingdom of Morocco for the warm welcome and excellent arrangements in hosting this great event.
I wish to start by thanking the people of the ARAB Region for successfully hosting the AFI Global Policy Forum in Sharm El Sheikh, Egypt in September 2017 as some of you may be aware this was the biggest GPF that also made important decisions. These include;
- Elevation of the Gender initiative in the network through increase of concrete Maya Commitments, enhancing the Gender and Women Financial Inclusion as a permanent Board Committee and ratification of new Board members with gender representation,
- Endorsement of the Sharm El Sheikh Climate Change and Financial Inclusion Accord, and;
- Establishment of the Financial Inclusion in the Arab Region Initiative (FIARI).
The theme “Venture Finance in the Arab World – Accelerating Arab Startups” and timing of this event is very relevant in today’s world. As many of you know, entrepreneurship has become a trend especially among the millennials as they are inclined towards venturing into businesses in response to declining job opportunities in the formal sector and the drive to be their own bosses. According to the United Nations, increasing number of youth supports the entrepreneurship ecosystem and thus more new Startups will continue to emerge. In 2017, a total of 1.21 billion youth around the world and this number is projected to increase 6.6% and could reach 1.29 billion by 2030.
Alliance for Financial Inclusion
The Alliance for Financial Inclusion (AFI). AFI was founded in 2006 on the idea that a global knowledge exchange platform was key to expanding and improving financial inclusion policy. A member owned network, AFI promotes and develops evidenced based policy solutions that help to improve the lives of the poor. Together, AFI members from than 100 financial inclusion policymakers and regulatory institutions are working to unlock the potential of the world’s 2 billion unbanked through the power of financial inclusion.
Our network has truly come a long way since its humble beginning as a project funded by the Bill & Melinda Gates Foundation and supported by GIZ to a fully-independent, member-owned organization, registered under the International Organizations Act of the Laws of Malaysia on 27 January 2016. During the past 11 years of our work, 260 financial inclusion policy improvements have been implemented by member institutions with support that they have credited to their engagement in AFI. Over 300 million poor people around the world are estimated to have benefitted from these policies.
Although the idea of a startup is interesting and hype, access to financing or to secure financing is the biggest hurdle that the startups need to face. Not many formal financial institutions are willing to finance startups to perceived risk, lack of business know-how, absence of track records, inadequate relationships with financiers as well as information asymmetries both from demand (particularly innovative startups) and supply side and the high cost of borrowing from conventional financial institutions.
Always at the back of the financers’ mind, is the sustainability of the Start-up. Is this business going to make it or not? Are they going to surpass the “valley of death”? (The period of which the startups are on the edge of failure).
Therefore, it is essential for startups to inform the success probability of their projects to the potential investors and secondly to reveal reliable information about their ability to attract investors in early financing stages.
Generally, startups rely primarily on two types of capital namely personal and family savings, loans from banks and personal credit cards. Now, with other avenues of financing on-board, startups have more opportunities to ACCESS the capital.
Venture Capital is increasingly providing financing in MENA as it diversifies from its traditional legacy of dependence on oil to alternative means of wealth and income. Based on the report by Thomas Reuters and Deloitte, 2016 saw continued development of venture capital as an asset class in the MENA region, with 175 number of investments, valued at USD 127 million with total funds raised at USD 172 million.
We see UAE leading the MENA region as home to 42% of its startups, followed by Egypt 12%, Lebanon 9% and Jordan 8%, among others. And obviously Dubai has their own success story of Souq which was founded in 2005 and is often cited as a success story by investors in the region. As for Morocco, in first quarter of this year, the World Bank approved USD 50 million on financing innovative startups and SME projects.
Here, we could see venture capital closes the financing gap for startups, leveraging on financial products that incorporate the element of debt, equity or hybrid and targets investors with higher risk appetite.
FinTech & E-Commerce
Today, fintech and e-commerce have become the buzzwords. E-commerce is one of the several industries of which startups could do much more to fill the market needs. Others include financial technology, as most Arabs do not have bank accounts or credit cards. The level of e-commerce penetration in the region is growing and for VC investors, this is regarded as a major opportunity over the coming years. It has been estimated that the value of e-commerce in the MENA region will reach $200 billion by 2020. In fact, we could consider digital financial services as the driver for financial inclusion and complement the existing measures of financial inclusion for the region.
The key trends and developments happening around the world in present times necessitate a paradigm shift in financial inclusion. Allow me to share with you our observations on some of the trends impacting the strategies and approaches we adopt as policymakers and regulators if we are to enhance the success of start-ups:
- We see increasing influence of technology and big data analytics in the delivery of financial services such as the use of psychometrics tools for credit scoring and digital payment and lending platforms.
- Financial technology innovation such as peer-to-peer (P2P) and crowdfunding are creating alternative sources of finance especially for SMEs. Such platforms are important drivers of growth in SME finance and as such, a proportionate but robust regulatory framework must be in place to facilitate innovation whilst improving access and protecting users.
- Around digital financial services (DFS), the trend is towards convergence with increasing cooperation between non-bank entities such as mobile telecommunication operators (MTOs) and fintech companies with more established banks, whilst the clear demand for fully interoperable digital financial services between banks and mobile service providers require financial and telecommunications regulators to work together more closely.
- Remittances and cross-border payments represent a growing stream of income among developing countries especially for vulnerable segments. Although there had until recently been progress in reducing the cost of remittances globally, that progress is now stalling as a result of the impact of banks’ de-risking practices, and resulting in a decline in correspondent banking relationships. It will be important for global standard setting bodies, national authorities and the private sector to work together to address this challenge and to ensure these segments are able to access suitable, safe and efficient products and services.
Besides digital economy and financial services, I would like to share with you our collaboration on Islamic Finance as this is gaining traction and demand especially from the Arab region. Currently, we are working with the Islamic Financial Services Board (IFSB) on a Technical Note of Financial Inclusion and Islamic Finance. IFSB acknowledges the importance of financial inclusion of which on average, approximately 9% of the population across selected 35 Muslim-majority countries financially exclude themselves from the formal financial sector due to religious reasons.
Thus, developing products compatible with the principles of Islamic finance could be key to expanding account ownership. And, principally Islamic finance that is based on the idea of partnership and equity sharing is also an important source of venture capital.
Your Excellency, finally, let me conclude by stating that; Policy makers must provide an enabling environment that ensures start-ups survive while at the same time ensuring a balance between better outcomes for startups and ensuring consumer protection.
Secondly that emerging Financial Inclusion Technologies (FinTech) are a wake-up call that some existing regulations and policies may be an impediment to development and may need to change to allow for an integrated financial system that will provide for a well-functioning financial system that allow all players to operate effectively.
Thirdly that women are changing the world and public policy should build in it policies that are gender inclusive particularly regarding women’s equal participation.
Lastly, we must remind ourselves of the human cost of climate change and our ultimate responsibility of ensuring that start-ups are appropriately dissuaded from businesses that harm the environment to ensure the welfare of people in the Arab Region and globally.