The Saudi government’s aggressive push to develop its e-commerce sector for its cash-rich citizens in a bid to divorce itself from its hydrocarbon dependence is attracting new Shariah compliant alternative finance fintech solutions providers.
Two fintech start-ups providing interest-free financing solutions have been authorized by the Saudi Arabian Monetary Authority (SAMA) to test their products in a controlled environment within its regulatory sandbox. There are now 32 participants in the regulator’s sandbox.
The firms — Tabby Saudi Arabia for Communications and Information Technology, and Tamara Information Systems Technology Company — both operate a ‘buy-now-pay-later’ business model, an alternative financing mechanism enabling consumers to make interest-free payment installments for retail purchases. Due to the absence of interest in their financing — at least for a limited period of time — the businesses are likely compliant with Islamic principles; Tamara confirmed that its services are Shariah compliant.
“Tamara may charge late fees in case customers do not pay within the 30-day period. Income from late fees is donated to charities given that Tamara solutions are Shariah compliant,” the firm explained on its website. There are 10 Islamic fintech start-ups in Saudi Arabia, according to the IFN Islamic Fintech Landscape as at the 19th October 2020.
The installment payment concept is not new but the buy-now-pay-later model is surging in popularity particularly in this COVID-19 era which has seen an explosion of providers — in the west and the Middle East as well as Asia — attempting to capture the burgeoning online shopping phenomena with point-of-sale financing or loans. Sweden’s Klarna, US-based Affirm and Australia’s AfterPay are among the most prominent names in this highly lucrative space which has also attracted tech giant PayPal which revealed just last week that it will launch in the UK with its Pay in 3 solution.
Tech heavyweights aside, newer start-ups are also bidding for a slice of the pie. This month alone, three start-ups (including Tamara and Tabby) have entered the Saudi market, with the other being cashew, which is also targeting the Muslim market with a suite of Shariah compliant options.
Largely reliant on cash, Saudi however has seen a promising uptake in cashless transactions since de-facto ruler Crown Prince Mohammed Salman implemented Saudi Vision 2030, a framework to diversify the oil-dependent economy. To grow the GDP contribution of online commerce, the government in 2019 adopted the E-Commerce Law which came into effect at the start of 2020.
E-commerce user penetration in the Kingdom has increased to 73.5% this year, up from 55% in 2017, according to Statista, which projected for the figure to rise to 91.2% in 2024. Revenues from the e-commerce sector is expected to rise 28% year-on-year to US$6.31 billion this year. The cumulative annual growth rate between 2020 and 2024 is expected to hit 7.1%, bringing a projected market volume of US$8.29 billion by 2024.