LONDON, 27 September 2004 — The opening for business last week by the Dubai International Financial Center (DIFC), the self-styled “Middle East’s first world class capital market”, is the latest manifestation of Dubai Inc. “Future Without Oil” strategy.
Indeed, the DIFC, according to the promoters, is a “culmination of thirty years of development that has transformed Dubai from a petroleum-reliant emirate to one with a diverse, broad based economy. Furthermore, it will contribute hugely to the ongoing development of the region by allowing the repatriation to it of the significant regional wealth invested outside the Middle East as well as creating jobs and opportunities for UAE nationals and expatriates alike.”
The case for the DIFC is powerful and perhaps logical. The Middle East perhaps is the only major high-liquidity region that has no international financial center of substance or repute. The Americas have New York; Europe has London; the Far East has Hong Kong; Japan has Tokyo; ASEAN has Singapore; and Southern and Central Africa has Johannesburg. Beirut enjoyed that mantle up to a point before civil war and violence put paid to those ambitions.
The GCC region, especially, has one of the highest concentrations of high net worth individuals in the world, thanks largely to the oil price booms since the 1970s. The current oil price rise has resulted in a market awash with liquidity — over $1.3 trillion according to one estimate. Yet most of these funds are managed outside the region, partly because of the weak asset management and fund management infrastructure in the region. But in a post-9/11 environment, there are signs that some of these GCC fund invested abroad are coming home, and new funds are more likely to be invested in the region than abroad, especially in the US.
However, before the Dubai authorities get carried away by their own aspirations, ambitious and hype, all of the above centers are based in politically enabling democratic environments and in more-or-less free market economies. In this respect, Dubai would stand alone, given that it is an absolute monarchy with no independent legislature. Even Hong Kong, until the Chinese took over from the British, had its own assembly and government.
A financial center is more than just transplanting a business and operational plan based on international best practice into a new location. It also requires the necessary political, socio-economic, administrative, regulatory, supervisory, legislative, compliance, and enforcement policies and practices. Comparisons can be awkward, but it is up to Dubai and the DIFC to prove overtime that it can become the “Singapore of the Middle East” — its oft-quoted supposed aspiration.
The DIFC’s independent regulator, the Dubai Financial Services Authority (DFSA), in fact issued its first three operating licenses to coincide with the opening. The DFSA issued licenses to Standard Chartered Bank and Julius Baer (Middle East) to operate as “authorized firms”. The third license, a financial services license, went to the GCC Energy Fund Managers Limited, a regional integrated equity fund making investments across the energy sector within the six Gulf Cooperation Council countries.
According to the DIFC, other financial institutions including international majors such as Merrill Lynch, Credit Suisse, and AON, the insurance giant, have all signaled their intent of applying for operating licenses in the Center.
Dr. Habib Al-Mulla, the new chairman of the DFSA, is naturally upbeat about the DIFC launch: “Today Dubai has begun to supply the missing link in the global economy. Until the launch of the DIFC, a central time zone of 1.6 billion people with an annual GDP of $1.5 trillion has lacked any financial market comparable in quality to the Western markets of London, Frankfurt and New York; and the Eastern markets of Tokyo, Hong Kong, and Singapore.”
Mulla together with his Chief Executive Officer David King have only been in their new positions for a couple of months after their predecessors Ian Hay and Phillip Thorpe were abruptly removed from their respective posts. No official reasons were given for their departure, although UK press reports suggested differences over some of the real estate deals involved with the Dubai Financial District, of which the DIFC is the flagship project, with its “signature building” headquarters, The Gate. Such an apparent lack of transparency did raise a few eyebrows among international institutions. But David King maintains that “international institutions will have the peace of mind of knowing that when they apply to locate in the DIFC, the regulations they operate under the are crystal clear, of world class quality and will be very familiar to them as they are based on best practice in London, Wall Street and other major financial centers.
“They will thus enjoy an operating environment in which they can create a real and vibrant capital market that will channel investment in the region, act as a motor of economic growth and gradually make a difference in the lives of many people in the Middle East.
International bankers are ambivalent about the future success of the DIFC. Some stress that a major challenge will be the extent to which the DFSA and its enforcement can operate outside the legal structure of the UAE, of which Dubai is the second largest entity after Abu Dhabi. Other point to the fact that capacity, for instance, in the debt market and daily traded value of equities is woefully low. As such the financial markets in Dubai are in a very early stage of development. Others still believe that Islamic finance is one of the areas where the DIFC can offer a competitive proposition in the value-added areas — funds management, merchant banking, and trust business.”
