LONDON, 11 August 2003 — The ink is hardly dry on the decree signed by the UAE Federal Cabinet in mid-July approving the “full establishment” of the Dubai International Financial Center (DIFC), and already its promoters are singing their own praises with the act of legal incorporation “a giant step toward the creation of the Middle East’s first truly world class international financial center.”
Between the hype and hyperbole, the spin doctors, largely recruited from the US, UK, and Australia, are pushing the DIFC, it is claimed, well on course as a financial capital market “equal in quality to London, Tokyo, Hong Kong, and New York”. The timing for its opening for business, it seems, is more deliberate than coincidental — just before the start of the Annual Meetings of the World Bank/IMF Group in Dubai in September, the first time that the meetings will be held in the Middle East.
Chief Executive Officer Naser Nabulsi even makes a virtue of the fact that “no international financial center of this stature has ever been launched so speedily. By taking this bold step, the UAE has empowered us to create a world class regional exchange that will generate wealth and jobs.”
Just as one swallow does not make a summer, speedy legal incorporation does not ensure a world class financial center. What is more important is the quality of legal, regulatory, enforcement, socio-political, and economic infrastructure and culture. On the contrary, boasting about speedy incorporation could give the perception (whether rightly or wrongly) that corners may have been cut because the overriding objective was to get the first licenses out before the start of the World Bank Group meetings, instead of the establishing of an up-and-coming regional financial center, with aspirations of going further.
After all, the UAE, let alone Dubai, has no parliament which debated the DIFC legislation; nor any Finance Select Committee which further scrutinized the minutiae of the legislation and its impact on the economy, the sector, employment, on political sovereignty, and the wider society. Its regulatory authority is comprised mostly of foreign nationals. In the above respects, the DIFC is certainly not modeled on the City of London or Wall Street, as it is claimed.
Offshore financial centers in the Middle East in general and the Gulf states in particular, unfortunately, are also hostages of their geopolitical and geographic locations. This especially in a post-9/11 global political and financial environment.
Ask the Bahrain Monetary Agency (BMA), which is the DIFC’s de facto rival offshore financial hub, and which has a head-start of almost two decades. No sooner was there any hint of a second Gulf War and Citigroup transferred its funds from Bahrain to a safer haven. Financial globalization and the IT evolution, in fact, have enhanced the ability of international capital (read mainly Western fund managers) to be fair weather friends.
This has been demonstrated time and again, and even acknowledged by that arch-speculator George Soros, during the height of the Asian financial crisis. Only the Mahathir government in Malaysia had the political chutzpah to follow a policy independent of the dictates of the IMF. Malaysia’s introduction of capital controls; of an exit tax on fund managers; of pegging the ringgit to the US dollar; and of banning speculation in the ringgit; together with restructuring the financial sector and the debt portfolios of banks and major corporates; has been vindicated. So much so that the IMF now is openly admitting that the Malaysian model has merits and perhaps should be emulated by others in the region and elsewhere.
In the Gulf, on the other hand, a continuing impasse in the resolution of the Palestinian-Israeli conflict; the scourge of international terrorism of whatever flavor; the lack of and in one or two instances the painstakingly slow pace of democratic reforms in the Gulf region; and continuing instability in Iraq and Afghanistan; all seem to conspire to make the potential conditions for thriving offshore financial centers that much more difficult.
There is also serious skepticism about the Gulf’s newfound liberalization model which espouses “one man one share” as opposed to “one man one vote” and calls for change through “evolution not revolution”.
The reality is that only the privileged can afford “the one man one share”, because the gap between the rich and poor even in the oil-rich emirates is widening because of years of waste, corruption, nepotism, non-transparency in fiscal matters, and inefficient management of resources and the economy.
The UAE and Dubai, is no exception to this. Only time will tell whether the gratuitous optimism of the promoters and senior executives of the DIFC are justified or misplaced.
International banks are not going to leave Bahrain, Istanbul, Beirut en masse and relocate to the DIFC. For a start there is the huge cost of relocation. Dubai is not exactly a cheap location.
The cost of living is very high, which not even the perks of tax-free living can offset. To the international and regional majors, and the allied professions such as international legal firms and auditing firms, it will be the proposition that DIFC offers.
It has to offer value-added opportunities in fund management; merchant banking; trust financing; Islamic finance; and insurance services - all core target business areas for the DIFC. But this will also depend on the removal of barriers to entry — is the legal system based on Common Law? Are their any trust laws in place? Then there is the feeling of culture and gravitas as a financial center. Bahrain is beginning to have it. Dubai simply does not, and comes across as an artificially-constructed entity at which money is being thrown willy-nilly.
According to one Dubai-based banker, who works in a senior management position at one of the banking majors, “The DIFC by its very nature is an offshore hub and is focusing on value-added areas. While there is some commonality with Bahrain, there will be areas they will complement each other. That is going to be good for the region. Dubai is a commercial hub and as such has excellent connectivity in terms of airlines, airport and other facilities.”
But as a financial center, “Bahrain in my opinion is still the hub for financial institutions. Dubai has a lot of catching up to do in this respect. There are not many financial institutions. We are there simply because our regional head office is in Dubai. You have the credit, legal, and financial infrastructure already in place. If you go to a new financial center, you have to build it all over again — that is an expensive business.”