Dylan February 27, 2023 Financial Inclusion, Middle East Driving Financial Inclusion for SMEs in Jordan with Open Banking Open Banking in Jordan How can Open Banking help Small Businesses in Jordan? MSME Masterminds Hackathon Conclusion Over recent years, we’ve seen numerous Open Finance regulatory developments in the Middle East, including the Kingdom of Jordan’s strategies and measures to ensure that its financial sector flourishes. At the end of November, the Central Bank of Jordan (CBJ) published instructions governing Open Finance services (link in Arabic) for all banks operating in the Kingdom. Despite the rise of FinTech innovation in the Middle East, regulatory developments have primarily impacted the payment technology market, leaving other market areas untouched. But there are opportunities to be seized in Jordan which go beyond payments. In Jordan, where Micro, Small, and Medium-Sized Enterprises (MSMEs) make up 96% of the corporate economy and contribute significantly to the country’s GDP, open banking can play a crucial role in promoting economic growth and financial inclusion. In this blog post, we will provide an overview of open banking in Jordan, explore how it can benefit small businesses and discuss the latest Jordanian FinTech hackathon, focused on promoting financial inclusion through the use of open banking. Let’s first discuss the Jordanian Open Banking framework in brief. Open Banking in Jordan The Central Bank of Jordan has multiple ongoing initiatives focussed on the digitisation of the banking sector. With these initiatives, the CBJ aims to foster innovation and encourage innovative companies to bring more inclusive financial solutions and digital experiences to the market. All banks (including payment and electronic transfer companies) licensed to operate in Jordan will be required to open Account Information and Payment Initiation services to authorised third-party providers by the end of 2023. Bank and third-party provider relationships are governed through explicit written contractual agreements that refer to roles, tasks, responsibilities, confidentiality, privacy and information security, among other aspects. Interestingly, banks have permission to monetise APIs but there is little clarity around standard fees and pricing. The regulation appears to have no limits when it comes to account types, creating a great opportunity for innovation. This could open doors to many different areas of the financial world such as savings, insurance and mortgages, to name a few. To encourage FinTech innovation and safe experimentation, the CBJ set up the JO REG BOX in 2018. This sandbox provides innovators with the opportunity to test their FinTech applications in a controlled environment. Jordan’s Regulatory Sandbox: JO REG BOX The Central Bank of Jordan’s Regulatory Sandbox for Financial Technology Innovations (JO REG BOX) is a safe, controlled and supervised environment for innovators to experiment and test their FinTech applications on real clients. The regulatory sandbox exists to catalyse and support innovation while maintaining the financial sector’s integrity and stability AND upholding consumer rights and data protection. As policymakers know, this can be a challenging balancing act. How can Open Banking help Small Businesses in Jordan? According to GIZ, only 10% of all bank and microfinance institution (MFI) loans go to MSMEs, leaving the businesses to informally arrange their own financing. Below are a selection of the main hurdles faced by small businesses in Jordan: Many small businesses lack documentation proving income or creditworthiness. Traditional lenders tend to find this unattractive in a potential borrower, so these businesses are very likely to be rejected even if their finances are sound; Banks lack appropriate risk management approaches for MSME financing; Financial products may not be tailored to MSME needs and may be difficult to find; MSMEs don’t have the tools to ensure efficiency and cost-reduction; MSMEs don’t have effective financial management tools; Banks do not have the tools to analyse large amounts of data and rely on traditional credit scoring models; Some entrepreneurs may face discriminatory practices, especially women leading MSMEs. Some of the above challenges can be tackled through open APIs in banking and financial technology: By using digital finance solutions, businesses can begin to create a digital footprint to provide a formal record of their finances; Fintechs introduce novel risk management approaches and credit scoring models that enable them to cater to high-risk profiles, including MSMEs; Data can be used to tailor financial products and services to MSME needs and challenges; APIs can increase product and service discoverability, helping MSMEs find suitable products; Fintech companies provide new financial management tools such as expense tracking and categorisation, making finance management easier for MSMEs; Digital finance enables women to independently build their financial profile and seek financing through alternative potentially less discriminatory channels. While the regulatory framework is still taking shape, key players in the industry are making efforts to drive innovation and make it easier for businesses to access finance. One such initiative is the upcoming Fintech Hackathon in Jordan, organised by the Jordan Payments and Clearing Company (JoPACC) and the Open Bank Project (OBP). MSME Masterminds Hackathon The MSME Masterminds Hackathon is a 3-day innovation sprint where developers, designers and entrepreneurs from the Middle East will unite to build FinTech prototypes which tackle MSME financing challenges. Teams will build their solutions around one of the following challenges: How can we introduce new risk management and mitigation approaches to better serve MSME financing? What new and optimised process management strategies and tools can we leverage to reduce costs and enhance efficiency when interacting with MSMEs? How could new credit data and scoring models invigorate the MSME economy in Jordan? How can we streamline the processes by which MSMEs discover and apply for financial products in order to enhance their financial inclusion? What products and services could specifically support the needs of women-led MSMEs? Winning apps will receive up to 100K JOD worth of prizes, which include cash and support from the incubation programme to help winners take their solutions to the next level. If you’re a FinTech developer in the Middle East and have ideas to revolutionise MSME financing, make sure to save your spot for the hackathon by following this link. Although Jordan isn’t among the Open Banking pioneers in MENA, the region has a growing FinTech ecosystem with the potential of following its regional peers towards an advanced digital economy. Conclusion From Saudi Arabia to Bahrain to Oman – the Middle East is overhauling its financial system. Open Banking in Jordan is in its infancy, but already benefits from significant support from the regulators and the market. There still needs to be clarity around API monetisation and fees, and around technical specifications for market use. While such clarity develops, FinTech developers, banks and other finance companies can get ahead of the curve and start experimenting. The MSME Masterminds hackathon is just the beginning of a series of FinTech innovation initiatives expected to impact the Kingdom in the next few years.