By Abdullo Kurbanov and Zuhursho Rahmatulloev, co-founders of Alif
When we think about the markets driving the financial technology (fintech) revolution, London, New York and San Francisco immediately spring to mind. In many ways, it makes sense for these cities to be at the forefront of fintech innovations. Each of these cities accommodate diverse pools of financial and professional service specialists, attract significant investment, and boast world-leading digital infrastructure.
Since 2015, challenger banks and fintech companies have launched in these locations, offering new products and services that seek to transform consumer finance and retail investment. In doing so, they are collectively helping to empower society through digital solutions.
While it is important to acknowledge the fintech ecosystems in advanced economies, we should not let these overshadow some of the exciting developments currently on display in emerging markets. Regions like Central Asia are on the brink of what we deem to be a “fintech revolution”, led by a new generation of fintech companies. Importantly, these companies are taking an agile approach by addressing localised issues through the creative deployment of technology.
Tajikistan is one such country in the middle of a profound digital transformation. With the aim of achieving better financial efficiency and inclusion gains, the country’s fintech industry is helping to digitally empower its citizens. Moreover, at the regional level, by applying tech to address the current banking challenges faced by people based in Central Asia, such as remittance payments and Sharia-compliant fintech platforms, the Central Asian region is set to become a global leader in Shariah compliant fintech.
Admittedly, a core driver of economic development in the Central Asia region is remittances. Over the years, the mass migration of people to Russia from Tajikistan, Uzbekistan, Kyrgyzstan and some other former Soviet Union countries has resulted in economies that rely on remittances as one of the core contributors to GDP. According to the World Bank, remittances accounted for 33% of Tajikistan’s GDP in 2019 – equating to $2.5 billion. In Uzbekistan, personal remittances received in 2019 totalled 14.75% of GDP.
Remittances do play an important role in supporting domestic households and ensuring countries are positioned to achieve the Sustainable Development Goals. However, the complexity and costs involved in arranging these payments can lead to people paying extremely high fees. Banks and money transfer operators (MTOs) are typically responsible for managing such payments. The costs arise when these operators need to engage with several intermediaries, not to mention the margin on the exchange rate.
Research by the World Bank concluded that COVID-19 has led to a decline in remittance payments in Europe and Central Asia; a consequence of weak economic growth, currency depreciation and unemployment in migrant host countries.
It is here that fintech models can drastically reduce the costs involved in such transfers while also providing greater transparency over how the payment is managed. It is estimated that if every remittance payment made in 2018 to the Europe and Central Asia region had been facilitated through Fintech models, consumers could have collectively saved US$1.59 billion.
These cost savings arise from the lower transfer costs and fees when compared to traditional operators. The payments can also be arranged instantaneously, which ultimately reduces the chances of individuals looking to informal, high-risk avenues of transferring finance.
Evidently, fintech can have important distributional effects by supporting those who rely on remittances. By making the process cost-efficient and transparent, consumers can significantly reduce the amount of fees and costs paid for any type of remittance transfer.
Empowering the region with Islamic fintech
With most people in Central Asia identifying as practicing Muslims, the region is ripe for the growth of modern, technologically enhanced Islamic banking. At the core, Islamic finance is based on the principle that money does not have an inherent value. Instead, it is seen as an instrument used to exchange products and services – things that do have value. Islamic finance also prohibits interest payments. In other words, people should not be able to make money from money.
However, there is so much more to Islamic fintech than simply ensuring the core beliefs of Islamic finance are integrated into fintech platforms. Considering the sustainability and development goals of Central Asia, the fact Islamic finance promotes risk sharing, encourages financial inclusion, and is focused on social welfare outcomes, ensures it can play a positive role supporting the economic progression of the region. The provision of Sharia-compliant banking through fintech solutions not only improves the digital capabilities of the region but contributes to broader social and economic goals.
Creating a digital ecosystem in Central Asia
Digital connectivity is a key enabler of economic productivity, growth and market innovation. As more and more services are offered online, there is a need to ensure that everyone around the world is digitally enabled. Despite this, the World Bank estimates that nearly half of all people in Central Asia are not digitally connected. This is a concerning figure, highlighting the need for a long-term strategy which directs investment into the infrastructure and skills needed for the region to have internet access.
Private and public sector cooperation is needed to facilitate this digital transformation. For example through ongoing consultations and meetings between public bodies, and local companies at the helm of digital innovation. A digital ecosystem needs to be created, and fintech companies can assist in two practical ways.
The first is through the practical deployment of accessible technologies that assist with people’s daily financial needs. From consumer and retail financing, such as buy now pay later (BNPL), point-of-sale financing through to transparent online channels that facilitate cross-border currency transfers, fintech companies are ensuring the development and proliferation of technology that practically address the common needs of those based in the region.
The second way is through education, skills and training. Digital literacy empowers individuals, and this can only be achieved if people are encouraged to pursue education that betters their understanding of technology, particularly when it comes to finance. For growing fintech companies in the region, it makes sense to implement academy programmes to create a skilled workforce. Such education programmes will also provide the inspiration needed to support a new generation of tech entrepreneurs keen to learn how to programme, thereby reducing the factors that might tempt younger generations to move outside of the region.
Fuelling growth and innovation through tech
Fintech is naturally positioned to help empower Central Asia and support the digital transformation of the region. From offering an easier and more accessible way of managing remittance payments through to the provision of Sharia-compliant services and financial education, fintech will be integral to the economic advancement of Central Asia. Importantly, fintech companies are heeding the call with companies like Alif applying the latest technology to ultimately improve the way people can manage their finances.
Based on what we are seeing unfold now, Central Asia could establish itself as competitive global hub in fintech innovation through the release of platforms, products and services that support issues typical to the region, particularly when it comes to Islamic finance. For these reasons, we are optimistic about the future prospects of fintech in digitally transforming Central Asia in the coming years.