Progress despite instability: Taking a look at MENA e-FX

The Middle East and North Africa (MENA) region finds itself at a crossroads. While recent headlines have been dominated by the ever-widening Israel-Hamas conflict and its ripple effects across stock and commodity markets, a more nuanced story of financial transformation continues to unfold beneath the surface.

Despite recent turmoil, the region’s fundamental shift toward electronic trading, fintech innovation, and economic diversification beyond oil remains steadfast. Israel’s resilient fintech sector, coupled with the Gulf’s expanding financial product offerings, paints a picture of technological resilience amid geopolitical challenges.

However, uncertainty looms large. According to the World Bank’s latest MENA Economic Update, the region’s economic uncertainty is currently double that of other emerging markets and developing economies. While overall GDP growth is expected to inch up to 2.2% in 2024 from 1.8% in 2023, this growth isn’t uniform across the region.

The FX picture follows a similar pattern of stability coupled with uncertainty. “Currency markets in the Middle East are heavily influenced by the pegged nature of GCC currencies and the central bank controls in non-pegged markets,” explains Tod Van Name, Global Head of FX Electronic Trading, at Bloomberg. “While pegged currencies like the United Arab Emirates Dirham and Saudi Riyal have remained stable, non-pegged currencies, such as the Egyptian pound, have faced significant depreciation due to high inflation and macroeconomic pressures.”

This creates a stark contrast with other emerging markets, Van Name notes, where “currency movements are more driven by market forces, allowing greater volatility and opportunities for investors.”

How are regulators responding to recent events and is investor interest waning in the region? Here’s a deeper look.

State of remittances and investor demand

One indicator of the MENA region’s state of FX is its remittance flows, which have emerged as the most stable external resource flow since 2010. Interestingly, the World Bank sounded an alarm last year, highlighting the lower remittance volumes.

In a report a few months back though, the institution sounded a positive note. Despite sharp drops in foreign direct investment in the region, remittances continue to demonstrate remarkable resilience. These flows are projected to grow by 4.3% to $58 billion by the end of 2024 – the fastest pace globally with a further increase to $61 billion expected in 2025.

This growth is particularly striking given the challenging backdrop of 2023’s geopolitical tensions and economic slowdown. Last year, remittance inflows were more than double the combined sum of foreign direct investment and official development assistance to the region, underlining their crucial role as an economic stabilizer.

Egypt’s case exemplifies the transformative power of these flows. The country’s economic landscape is being reshaped by multiple factors. The recent devaluation of the pound, the landmark $35-billion Ras El Hekma deal with the UAE, and an $8 billion IMF agreement. These developments are expected to trigger increased portfolio investments and remittance flows, potentially setting a new precedent for regional financial integration.

The remittance outlook varies significantly across regional subgroups, influenced by dominant host countries, exposure to energy and food price fluctuations, and varying degrees of fiscal challenges. In the West Bank and Gaza, where remittances traditionally account for 19% of GDP, the current conflict has severely disrupted, if not destroyed, financial flows. While the World Bank anticipates a potential revival through revamped payment systems, this is unlikely to occur as long as conflict prevails.

The institutional side of FX meanwhile is experiencing plenty of positives. “Foreign investor interest in Middle Eastern markets, particularly in sectors like energy, infrastructure, and technology, has increased demand for electronic FX trading services,” explains Van Name. 

However, he notes an important distinction: “Most regional currencies are not traded electronically. The e-FX market for G10 currencies is growing, with institutions offering digital platforms to meet investor demand.”

This means the region maintains its role as a price taker for major currencies while focusing on managing local currency liquidity, a balance that reflects both its historical economic structure and its emerging financial sophistication.

Continuing from previous years’ trends, the institutional landscape is becoming increasingly sophisticated, driven by new players and evolving market demands. Chinese investments in the region have emerged as a significant force, diversifying FX flows. Small vanilla FX flows have largely moved to automation, with market participants increasingly demanding Transaction Cost Analysis (TCA) as standard practice.

The region’s debt capital markets have seen exponential growth, a transformation that began during the oil price downturn of 2014-2016. This expansion, coupled with broader economic diversification initiatives across MENA, has attracted a new wave of sophisticated investors.

Despite these events, the region’s markets remain a confusing mix of electronic and manual processes. Electronic markets are now the norm in more established and larger Middle Eastern economies, while in smaller markets, central banks usually work with their local counterparties to facilitate orderly markets.

The expanding presence of hedge funds and asset managers, particularly in the Gulf, has brought heightened interest in execution methods and data analytics, tailored for more sophisticated market participants. Yet in some regions where electronic trading remains relatively new, ongoing credit pressures and banking sector dynamics are shaping the pace and nature of this transformation.

The good news is, regulators are taking note of developments and are staying the course with regards to transparency.

The regulatory picture and local developments

The evolution of MENA’s financial markets is being actively shaped by its regulatory framework, particularly in leading financial hubs. “The regulatory landscape in the Middle East, particularly in the UAE and Saudi Arabia, has been conducive to the growth of electronic FX trading,” says Van Name. “Regulatory bodies are focusing on enhancing transparency and governance in financial markets, which has encouraged the development of digital trading platforms.”

However, a nuanced picture emerges when examining the adoption rates across different currency markets. While Van Name notes that “the adoption of e-FX for local currencies remains limited,” he emphasizes that “regulations are creating an environment that supports the expansion of institutional-grade electronic trading solutions.”

The local banking sector’s response to this regulatory environment has been proactive and far-reaching. “Leading regional banks have been investing in digital transformation across their treasury and financial markets operations,” Van Name explains. “They are developing their FX capabilities by implementing advanced electronic trading platforms that offer real-time pricing, improved risk management, and automated order management.”

This transformation is particularly evident in the UAE and Saudi Arabia, where regulatory frameworks have evolved to accommodate both traditional banking operations and emerging fintech solutions. The approach reflects a deliberate balance—maintaining the stability of established financial systems while creating space for innovation in trading technologies and market structures.

As banks invest in more sophisticated platforms and risk management tools, regulators are developing more nuanced approaches to oversight. This symbiotic relationship is helping to build a more robust and technologically advanced financial ecosystem.

While regulators have largely maintained a status quo in FX, they’ve been far busier in the digital and virtual asset sectors. The Dubai Virtual Assets Regulatory Authority (VARA) achieved significant momentum in its first year of operations, processing 133 applications for various licenses and issuing 19 VASP licenses, while granting 72 Initial Approvals.

The authority’s scope has expanded beyond basic oversight, introducing new regulations for Staking from Custody Services and developing frameworks for stablecoins and virtual assets backed by real-world assets.

The regulatory landscape achieved another milestone in March 2024 with the Dubai International Financial Centre’s (DIFC) enactment of its new Digital Assets Law (Law No 2 of 2024). The practical impact of this evolving framework was evidenced when Binance, one of the world’s largest cryptocurrency exchanges, secured a full Virtual Asset Service Provider license in Dubai in April 2024.

The UAE has been particularly active in this space, seemingly taking advantage of its move off the FATF’s Grey List in July 2024. With those markets opening up, financial technology and FX infrastructure is set to rapidly improve.

Islamic finance still has an electronification gap

The electronification of MENA’s financial markets is perhaps most notably tested in its approach to Islamic finance. The growing demand for Shari’a-compliant products presents both opportunities and challenges, particularly in the FX space where core market functions can conflict with Islamic principles.

The retail FX market exemplifies these challenges. While Shari’a law explicitly prohibits interest and gambling—both integral elements of retail FX trading—market participants have developed creative workarounds. Some brokers offer swap-free accounts, essentially recasting interest charges as client fees while executing swaps in the background.

The regulatory approach to these developments has been notably measured. MENA governments have generally maintained a hands-off stance regarding certain market practices, such as swap-free accounts, while showing more explicit support for institutional innovations like Shari’a-compliant hedges, swaps, and options.

The institutional market has found ground for innovation, as a result. “e-FX services are gradually adapting to the principles of Islamic finance,” explains Van Name. However, he notes a significant operational gap: “most hedging solutions are still facilitated via voice or email, especially for corporate flow.”

This gap between traditional execution methods and electronic trading platforms reflects the unique complexities of Shari’a-compliant products. Van Name explains that “Shariah-compliant products require unique structuring, and while electronic platforms for conventional FX are advancing, there is a gap in the automation of Islamic finance solutions.”

Progress is being made, however. Bloomberg’s FXGO platform, for instance, currently offers trading capabilities for Mudharabah, Murabaha, Wakala, and Wadiah deposits, with Wa’ad solutions in development. This evolution in platform capabilities suggests a gradual but steady advancement in the electronification of Islamic finance products.

The future of Islamic finance in the electronic trading space appears to hinge on this balance between innovation and compliance. As Van Name notes, “Bridging this gap will be key for expanding e-FX in this segment, offering corporates greater access to compliant hedging tools.”

What lies ahead of the MENA region

The trajectory of MENA’s electronic FX market points toward significant evolution in the coming years. “As the e-FX market in the Middle East continues to evolve, buy side firms and investors will benefit from greater automation, best pricing practices, and improved transparency,” says Van Name.

This transformation promises tangible benefits, as he notes that “the adoption of electronic trading will streamline operations, reduce costs, and provide enhanced audit capabilities.” Particularly significant is his observation that “this shift will be especially beneficial for non-institutional flow, allowing firms to access more competitive pricing in the coming years.”

Despite instability and pockets of illiquidity across the region, the broader outlook remains decidedly optimistic. The Gulf economies’ growth trajectory suggests an inevitable transformation into a major financial hub, with both Dubai and Riyadh emerging as key centers. Dubai has already established itself as a significant financial center, while Saudi Arabia’s economic opening presents new opportunities for firms considering Riyadh as an operational base.

These positive developments are, of course, tempered by growing instability and all-out war in parts of the Mashreq. Considering the possibility of progress seems distant given recent events. However, the region’s continued growth despite the constant threat of instability offers hope.

Even amid current regional turbulence, the MENA financial sector’s modernization continues unabated. The path forward may not be linear, but the direction is clear—towards greater electronification, increased sophistication, and deeper integration with global financial markets.

MENA Institutional brokerage picture

The Middle East’s institutional FX brokerage landscape is undergoing a fundamental transformation, shaped by the region’s growing prominence as a global financial hub. Regulatory advancements, particularly in the UAE and Saudi Arabia, coupled with increased sophistication among market participants, have created fertile ground for institutional brokerage services. “The region’s strategic position between East and West is one factor that’s helping the Middle East grow fast as a financial hub,” explains Mohammad Isbeer, Chief Institutional Officer, Equiti Group.

Here’s what the brokerage picture looks like in the MENA region currently.

Post-pandemic resilience and market maturity

While many global markets experienced a reversion to pre-pandemic trading patterns, the Middle East has maintained its momentum. Daniel Lawrance, CEO of Scope Prime, notes that regions historically less well-served, like the Middle East, have sustained their trading volumes even as traditional markets like Europe and the US saw activity normalize after the COVID surge.

“As the brokerage community serving these clients has evolved, there’s been a growing demand for the provision of high-quality liquidity, along with ancillary services such as reporting tools,” he says. “Given these needs very much reflect the Scope Prime offering, we’ve certainly seen significant growth at an institutional level.”

This sustained growth reflects deeper structural changes in the market. The institutional demand isn’t just about volume—it’s about sophistication and service quality. “Institutions in the Middle East want the best of the best, just like a lot of other strong economies,” Isbeer observes, pointing to demands for comprehensive e-FX services, prime brokerage capabilities, and robust execution infrastructure.

The evolution is particularly evident in how institutions approach their choice of service providers. Where once price might have been the primary consideration, stability and reliability have emerged as crucial differentiators. Lawrance highlights this shift, noting that brokerages previously fixated on minimal commission reductions now recognize that system stability can be the difference between success and failure.

“Historically, brokerages would spend weeks negotiating “1 dollar per million” reduction in their commission,” he says. “Yet, a single 10-second system outage or erroneous price could send a retail brokerage out of business. It’s refreshing to have conversations about system uptime, price stability, and execution quality. We are very proud of the long-term relationships we have with our clients.”

Technology and trust have become inextricably linked in this new landscape. Modern analytics and Transaction Cost Analysis (TCA) tools have made it increasingly difficult for providers to engage in questionable practices. This transparency has fostered a market environment where, as Lawrance emphasizes, “honesty, stability and multi-asset liquidity” have become key determinants in provider selection.

Hand-in-hand with sophistication, the attractiveness of establishing a retail brokerage firm has increased. The market’s maturation has spawned multiple pathways for new entrants. White-label solutions have emerged as a popular fast-track option, allowing new brokerages to leverage established infrastructure while focusing on brand building and client acquisition.

However, the market shows nuanced preferences, with many firms opting for more flexible approaches that allow greater control over account management and platform customization.

These entry strategies reflect a broader trend of institutional adaptation to regional specificities. While offshore licensing remains a viable path, with GCC regulators showing pragmatic acceptance of such arrangements, the emphasis on local understanding and relationship building remains strong.

Isbeer points to the value of regional strategic partnerships, noting that joint ventures and memoranda of understanding can provide benefits ranging from enhanced market credibility to expanded product offerings.

“The benefits of that can range from co-branding validity to sharing a wider offering of expertise and products to clients,” he says.

The FX brokerage landscape is further shaped by the growing need for advanced risk management tools and diverse investment strategies. This demand isn’t merely about accessing markets—it’s about doing so with sophisticated tool sets that meet global standards while accommodating local market nuances.

Crypto and the state of institutional platforms

The cryptocurrency landscape in MENA is experiencing unprecedented growth, driven by regulation and increasing institutional interest. “Crypto is really taking off in the Middle East, especially with clearer regulations in places like the UAE,” says Isbeer. “There’s growing interest from both retail and institutional investors, and more demand for solid infrastructure around crypto trading.”

The region’s embrace of digital assets reflects a broader cultural shift in investment attitudes. “For many in the UAE, the concept of investing is synonymous with either cryptocurrencies or Real Estate,” explains Lawrance. He points to a significant regulatory advantage: “There’s a very forward-thinking approach being taken at a regulatory level in terms of how digital assets and the blockchain can benefit the region’s economy – and it would be no surprise if this ends up being the global hub for the asset class and its supporting technology.”

This enthusiasm is translating into concrete product offerings. “Last year, we launched over 50 coins as part of our CFD offering and we’ve seen strong interest there too,” Isbeer notes, while adding that Equiti is “working closely with homegrown associations like D2A2.io to contribute to the crypto landscape.”

The convergence of crypto and traditional institutional platforms marks a significant evolution in the region’s financial infrastructure. Brokers are increasingly viewing digital assets not as a separate category but as an integral part of their comprehensive offering. Isbeer and Lawrance both paint a positive picture.

“Leading brokers are providing top-notch platforms with deep liquidity, fast execution, and advanced trading tools,” Isbeer explains. He emphasizes the importance of customization: “Equiti Capital’s liquidity is designed to be customisable; and we have the depth, expertise, and product range to be able to deliver as such.”

Lawrance acknowledges greater competition in the institutional brokerage space. “We live in a highly connected world,” he says, “so whilst we have seen the growth of some significant regional players, there have been no shortage of international companies arriving in Abu Dhabi and Dubai to provide these services, too.”

Success in this space, says Lawrance, hinges on relationship building and communication. “Service providers like Scope Prime have established 24-hour teams with multilingual experts to properly support our clients in their native languages.”

Innovation in product offerings continues to evolve to meet local market demands. “It is essential to provide regional specific trading products,” Lawrance notes, pointing to his firm’s recent launch of “two new UAE equity indices – Abu Dhabi Index (AD15) and the Dubai Index (DXBI).” The immediate trading interest in these products suggests a strong appetite for localized trading instruments.

“It’s part of our company’s vision to bring world-class tools to every market we participate in,” Isbeer states, “and the Middle East certainly has the appetite and resources to make the most of that.” This commitment to technological advancement, coupled with deep understanding of local market needs, suggests a mature market infrastructure developing at pace with global standards.

Picturing growth

The trajectory of MENA’s institutional FX landscape points decisively toward expansion, with key markets positioned for substantial growth. “The UAE and Saudi Arabia are leading the way, thanks to progressive regulations and economic growth,” notes Isbeer. “We’re also seeing increasing interest in Qatar, Egypt, and Bahrain where regulatory improvements are making markets more attractive to institutional investors.”

Dubai’s emergence as a global financial nexus represents more than regional success. “Dubai is a rapidly growing, global financial hub and there’s no reason to believe that the trajectory here will end any time soon,” observes Lawrance.

He emphasizes a crucial point about Dubai’s strategic position: “That hub concept means counterparties from across the globe are convening in the region to trade with one another – it’s not just about serving the local market. The advantageous time zone also means New York, Sydney, and Tokyo are all in scope.”

The growth story extends beyond pure institutional services. “The continued stream of migration into the UAE – especially Dubai – will continue to drive demand for retail brokerages catering to those based locally,” he continues, highlighting the symbiotic relationship between institutional and retail market development.

Several factors will shape this evolution. Isbeer points to “how regulation continues to be shaped, the evolution of cross-border investments and of course – how the global economy continues to react to geopolitical developments and rate cut forecasts.”

This balance between global reach and local presence, between innovation and tradition, between institutional sophistication and retail accessibility, defines MENA’s emerging financial identity. The path forward suggests not just growth, but evolution – toward more sophisticated markets, more diverse products, and more integrated services.