LONDON, 29 April — The GCC’s newest international financial center in Dubai was unveiled in February by Dubai Crown Prince Sheikh Mohammed ibn Rashid Al-Makhtoum. And to show that the Dubai International Financial Center (DIFC) means business, a Chief Operating Officer Hussain Al-Qemzi was appointed in March, and a permanent commissioner is due to be appointed by June.
A five-member regulatory council, comprising the chairman, Ian Hay Davidson; the commissioner; and three experienced international regulators yet to be appointed, is also being finalized. DIFC hopes to become operational by the end of this year.
For a region the size of the GCC, DIFC will be the third international financial center after Bahrain and Abu Dhabi’s Saadiyat international financial center. In the UAE federation itself it will be the second.
Is the region awash with such enormous amounts of liquidity and a vibrant capital markets dynamic that it warrants the presence of three international financial centers? Is DIFC yet again an example of the wasteful duplication of entities and facilities, fueled more by the short-sighted rationale of petty nationalisms than of sober economic thinking and planning?
The GCC is supposed to be moving toward a customs union and eventually toward a common market, especially in a world increasingly fueled by the onslaught of globalization and the removal of barriers. Not surprisingly, bankers in the region privately question the wisdom of having three financial centers in such a confined region.
A financial center is as good as the political, economic, financial, human resources, legislative, regulatory and supervisory infrastructure of the country in which it is located.
The ‘quality’ of offshore financial centers are often defined by the perception of their country and political risk; of their communications infrastructure and access to transport and airlinks; of their legal, regulatory, and compliance infrastructure and measures; of their accommodation and leisure facilities; and of their human resources, and visa and immigration policy.
Take for instance, Beirut. Before the civil war, it was the undisputed financial hub of the region. Today, even after the end of the civil war, Beirut will probably never (at least in our lifetime) establish itself to its former glory as a financial hub. The Lebanese economy is in dire straits; government remains weak; and the political, ethnic and religious strains in society remain skin deep.
In the Gulf, neither Bahrain nor Dubai have the political or economic clout. Dubai is already contemplating a ‘future without oil’. That is why it has built the Jebel Ali Free Zone; the Dubai Internet City; and is promoting itself as a gateway to shopping and as an entrepot.
There is nothing wrong with the concept of Dubai as a regional services and warehouse hub. But it is still light years away from becoming the ‘Singapore of the Gulf’. Political reforms are not on the agenda. The legislative and regulatory infrastructure is at best still developing. There is a serious indigenous human resource shortage. Which means that the country and the DIFC will heavily depend on foreign workers, who will have no residency or migration rights even if they have worked in the emirates for two decades or more. The DIFC may be in a unique situation where the entire five-member regulatory council may be made up of foreigners, mainly British or American. Can one imagine this happening at the SEC in America or the FSA in the UK?
If DIFC, and for that matter Bahrain’s OBU, and Abu Dhabi’s Saadiyat are serious about their role as international financial centers, then perhaps they should learn from the experience of Labuan in Malaysia, Hong Kong, or Singapore itself.
Labuan, has built itself into an increasingly sophisticated offshore center and is now starting to compete with its mighty neighbors Singapore and Hong Kong, both of whom had a big headstart on it. Today, there are over 65 banks, most of them global and foreign banks, other financial institutions, insurance companies, mutual funds etc., located there. It has allied services in consultancy, banking software, trust and administration, and custodians.
Labuan last year passed a rigorous inspection test to determine the efficacy of its anti-money laundering measures conducted by a team from the Australia-based 21-member Asia Pacific Group on Money Laundering.
The Labuan Offshore Financial Authority, whose director general also holds the rank of a deputy governor of the central bank, Bank Negara, is staffed entirely by Malaysian nationals.
DIFC reportedly will be confined to banks with primary locations either in London or New York, with memorandums of understanding to be concluded with the Federal Reserve Bank in New York and the Bank of England.
For the UAE itself, there could be further complications, especially in the relationship between the UAE Central Bank and DIFC. Is it workable to have two banking regulators in one country? DIFC supposedly will not license retail banks and retail banking activity. It will confine itself to wholesale banks, insurance companies, and other financial institutions operating out of Dubai. Does this mean that a wholesale bank licensed by the DIFC could also open a branch or office in Abu Dhabi or Sharjah, without having to seek further approval from the UAE Central Bank, and vice-versa?
Global financial institutions, like fund managers, are essentially ‘fair weather friends’. When the going is good — there is steady economic growth, liquidity, and a semblance of political stability — they can be beguiling. As soon as there is a whiff of an economic downturn, political problems, or a major event such as a currency crisis, or serious dislocations in commodity prices, or major frauds, then they can be brutally blunt, and take flight to cut their losses.
Bahrain had some experience of this in the aftermath of the Gulf War and the spate of bombings that hit the emirate in the 1990s.
It seems that Saadiyat and DIFC should not be run along nationalistic lines. They should both be transformed into UAE federal entities. Saadiyat could concentrate on capital markets, commodities and futures exchange and so on. DIFC could then be responsible for banking and insurance. But then, the UAE Central Bank must be willing to abdicate its role as a bank regulator along the lines of the Bank of England in the UK, when it handed over responsibility for banking regulation and supervision to the Financial Services Authority (FSA). But then would the UAE Central Bank be willing to do this and be content in setting monetary policy and interest rates? I very much doubt it.