How to Lift the Burden and Cut Costs of Managing Banking Regulations and Compliance in MENA

I'm Robin Amlow, Managing Editor of IBS Intelligence. You're listening to the IBS iViews podcast. With me is Temer Al-Mouj, Managing Director, Codebase Technologies, and we're focusing in on the regulatory environment for financial services in the MENA region. Are you in a position to give us an overview?

Because it seems to me quite fragmented. Let's take a pause and go back in time to 2008. This is where the financial crisis exposed significant failure in the regulation and supervision. See, regulatory requirements have since been a major contributor to how financial institutions have evolved.

And if we zoom more into that. And since that time, international standards setting bodies have become more stringent, if you like, in the regulatory requirements for banks and fintechs in general. Additionally, regulation on financial services has expanded the regulatory requirements for banks and fintechs at the same time. Additionally, you know, regulation on financial services have expanded at a significant rate since that financial crisis took place.

Hence, the cost of regulatory compliance has expanded. If I want to talk and elaborate more, I would say the finance sector had paid over and beyond $300 billion in fines and sanctions over the past 10 years by itself. Now, maybe if you spread it globally and over that long period of time, it might not count for much, but the effect of fines on the reputation and on the company and on the credibility of its shareholders, that goes a long way. Now, this tightening of standards has tickled down to our region, the MENA region.

Since institutions from this part of the world want to do business internationally, really need to comply with similar standards. This caused the MENA banks, of course, to revisit their business models and regulatory reporting process as it's being done, as well as, you know, looking forward for the digitization to help them do so. And, you know, Robin, in the Middle East, we face the challenge of interpreting international requirements to suit the needs of our own unique financial services market, where the products, the players, market maturity and existing regulatory environment.

very greatly to those if we compare them to Europe or the ones set out in the United States. Finally, you know, regtech is still nascent, quote unquote, I would say, in this part of the world and this region specific, while there's considerable diversity in the pace where which countries like for example the United Arab Emirates adopts regulatory solutions Overall investment was low compared to other regions when we compare on that front So that an overview when we zoom in and look at the regulatory environment in the MENA region What you've just described to me, though, has to be a huge business opportunity for somebody in RegTech.

Because if we look at banks who are facing a financial burden of trying to comply with regulation, if we look at banks that are facing reputational risk and fines if they don't, If somebody walks through their door and say, I'm here to solve all your regulatory problems, I can keep you up to date with the regulation in your country and in the countries next door, and I can do it all through a reg tech solution, surely a bank's going to bite the hand off of somebody who offers that.

The most important here is the time factor. So go to market is also important. And we at Codebase Technologies take pride in our fast go to market implementation. We can talk about this once we go along in this conversation today.

Well, let's look at the challenges specifically that are facing both the regulators and the financial institutions. What does that mean for the implementation of reg tech? Because both sides are playing catch up. For sure, Robin.

See, let's first of all take the mindset. One of the biggest challenges is the mindset change and education that go hand in hand. Some banks can be resistant to change and don't grasp how a reg tech solution can enhance their capabilities to combat mainly money laundering and avoid regulatory sanctions and highly organizational risk. So that's one angle.

Legacy systems. See, many reg tech solutions struggle to integrate with old IT systems that is existing within any bank. This particularly prevailed in the MENA region, where many banks have not kept pace with any advancement in the IT infrastructure or core banking. Of course, adopting these can be costly, we all know that, and time-consuming at the same time.

However, some solutions like the ones we have at CodeBase Technology, such as a reg reporting, does overcome this hurdle by integrating with any bank's legacy system. And I have to insist on legacy here. And we've tried it and it's live in this part of the world as well. Disparity of data management, Robin, the standards themselves.

You know, let's look at that. According to the Institute of International Finance, a lack of data standardization and harmonized definitions of key reporting concepts impedes the aggregation of risk data in financial institutions across subsidiaries and geographies. This makes, of course, adopting a regtech solution problematic and complex in a way, especially in the MENA region, where a lot of data management is not standardized per se, and implementing a regtech solution could be tricky from that angle.

Then I would also look at non-integrated ecosystems. And this is a very vital part as well where regtech ecosystem has a role to play in transforming how compliance is handled by all parties involved However the disparity of standards cannot resolve the complexity and inefficiency unless the technological solution is a complex and non-integrated as the requirements are on that front. So, you know, hundreds of startups offer patch solutions to comprehensive problems. And they look at that and they try to work around that.

But for the compliance business to change, the startup ecosystem has to offer a unified and standardized way to addressing the disparity and complexity of the regulatory environment as a whole. I was going to say, in the MENA region in particular, you have actually relatively small regulatory environments stacked right next to each other. So the difficulties for one institution, say in United Arab Emirates, looking to do business elsewhere in the region, there are problems there.

It's not easy necessarily to be able to do business sometimes. Yeah, I mean, you know, if we want to zoom into the whole ease of business and how we look at it from one country to the other. See, if applying advanced regulatory and financial technology platforms that enables those businesses to simplify and automate their internal procedures, then, you know, they improve on their performance and corporate value at the same time. They can boost their productivity, reduce operational expenses simultaneously, and then, you know, effectively adapt to the complex and highly demanding regulatory framework and adhere to laws and regulations which will eventually enable them to move faster from one country to the other.

You talked about some of the solutions that Codebase Technologies itself is offering. How much demand, how much take up is there in the region? There's a big demand and there's a lot of take up on that front. Looking at our different solutions, some of them are faster than the others.

Some of them require more education and, you know, more of an eye opening than others. You know, you look at the reg tech, it's a very specialized area. It's a very, you know, stiff area away from your usual retail, flashy, nice, neo-banking, if you like, colored applications, away from all that. But this is something vital and one of the cornerstones of any financial institutions doing business in this time and era.

So, you know, benefits are a lot when we look and zoom at our product, which is the Rectech. Rectech can help organizations better tackle issues of compliance and risk management and facilitate for more effective management of compliance costs and reduction, again, of operational risk. And I mentioned this earlier in our conversation today. RecTech also helps in identifying financial crime.

And we have to zoom on this one here. We're, you know, pose of considerable threat to all of the integrity and stability and development of that financial institution and the industry in general. So you know also we have potential you know strengthening the business and the performance and effectiveness within the financial industry Let take a fact here Robin and go back to 2012 where HSBC Holding faced a backlash and was fined close to billion by the U.S.

authorities for allowing money laundering from drug money flowing in and out of the cartel. That's a major issue if you look at it. And REC-TECH increases effectiveness, efficiency, security, transparency of all market participants at the same time, enabling them to focus on their core competencies, safe in the knowledge that they are operating in accordance with the legal, again, and regulatory requirements. I always say that REC-TECH, as a product of CBT, increases the accuracy of compliance, reporting, minimizing issues that can arise through human errors.

So that's another angle that we should always zoom in and look at. In general, Robin, RegTech really helps organizations move from big data to smart data by offering real-time data capabilities to ensure a timely response and a lower turnaround time. In these modern times, call for data be available at our fingertips for quick analysis. We need that.

Everyone needs that. And a better understanding of the problem to reach a quick solution or resolution. And of course, this can also help make short, tiny reporting, as these reports can be instantly optimized and extracted, allowing data-driven compliance and constructive regulation. So, RECTEK really offers the possibility of financial firms to clump their raw data to enhance agility through algorithmic process and help mitigate rising cost of compliance.

And I always come to another fact that I usually mention. You know, while banks with assets, for example, ranging from $1 billion to $10 billion, really, you know, reported the total compliance cost over close to 3% of their non-interest expense. And then we look at the smaller ones with less than $100 million in assets, where they reported the cost averaging close to 9% of their non-interest expense. So, you know, closing on this topic in general, what I would say is that, you know, our solution really helps regulators develop continuous monitoring in terms of tools to detect problems as they evolve and minimize in time that takes to investigate the compliance violation.

also promoting the development of simulation systems, sandboxes, if you like, and can really predict the possible impacts of a new regulation approaches and changes. And I really hope I was able to cover some of the benefits when we look at a REC-Tech solution on that front. Daymar Al-Mouj, Managing Director, Code-Based Technologies. Thank you very much.