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Middle EastJune 4 2006

Catering for the needs of international financiers

Paul Melly in Doha reports on Goldman Sachs’ decision to set up in the Qatar Financial Centre, a purpose-built entity with its own regulatory regime as well as employment and immigration laws, entirely independent of the rest of the country.
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Already a global leader in tapping project finance, Qatar has been carefully developing a highly targeted niche operation, which it insists is not intended to directly compete with the established Gulf banking centres in Bahrain and Dubai.

Executives in Doha point to Goldman Sachs’ recent commitment to set up its new investment banking hub in the Qatar Financial Centre (QFC) as evidence that Qatar’s business model, concentrating on specialist activities tailored to the needs of the fast-growing national economy, is a genuinely viable strategy and not a speculative gamble.

“The centre was not set up as a ‘me too’,” chief executive Stuart Pearce told The Banker: “It was formed because Qatar needed a vibrant financial market in order to support what Qatar wants to do itself and to support what’s going to develop in the Qatar economy in the next few years: $135bn in investment is expected, of which $75bn will go into hydrocarbons, then a lot into education and transport.”

Mr Pearce argues: “To do that scale of investment you need a partnership with financial firms, and QFC was set up to build this partnership, rather than just have people flying in and out.” The idea is that “while people are doing business here they could use Qatar as a base for the Gulf and the wider Middle East and North Africa [MENA] region”.

He adds that Qatar has proved a magnet to project finance: “When we have been talking to banks they see the economic story very clearly.”

Space reservations for the QFC’s new office tower, designed to house 40 firms, have sold well and Mr Pearce believes a second building of similar size will be needed by early next year. “Six licences have already been granted, to Credit Suisse, Arab Jordan Investment Bank, Bahrain’s Gulf Financial Services, the Arab Law Bureau, BDO Jawad and Ansbacher – which is now owned by Qatar National Bank,” he says.

“HSBC, Standard Chartered, Axa Investments, Lehman Brothers, Morgan Stanley, Alico and now Goldman have said they are going to submit licence applications.”

The centre will not issue licences for retail banking where local institutions are already strong. But the national market will otherwise be open, including for Qatari riyal-denominated business.

“This is not an offshore centre,” says Mr Pearce. “Nobody else along the coast has 9000 billion cubic feet of gas – that sets Qatar apart. The gas is the main driver for everything. That’s going to develop a lot of investment income eventually... A lot of people are looking long term, to IPOs [initial public offerings], corporate finance opportunities, as government gradually divests out of the wealth-creating economy.

“Private banks are very interested. Credit Suisse is one of them. Other firms have said they will set up fund management. One wants to shut its Middle East office elsewhere and move it here.”

Credible regulation

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Qatar understood early on that an essential prerequisite for success was credible regulation, and it recruited a well-known City figure, Phillip Thorpe, as chief executive of the QFC Regulatory Authority.

“Regulatory standards are harmonising globally; there is no room any more for anyone to set up a financial centre that doesn’t meet international standards. Qatar recognised that it needed to increase capacity in financial services,” says Mr Thorpe. “It saw that in today’s world it would have to have international standards. The type of institutions that it wants to come would only operate in that high quality environment.”

Simply upgrading the existing domestic regulatory regime would have taken time, because of the need to allow a period for existing local banks to adjust to international standards. That, explains Mr Thorpe, is why Qatar opted to create a purpose-built QFC with its own regulatory regime.

The centre has its own court system, which sets its own laws that are written in English and drawn from modern international common law models. It also has its own employment and immigration laws, for which, says Mr Thorpe, “the model is: what would an international financial services person expect to find?”

Qatar developed the idea for the centre in early 2004 and Mr Thorpe – who had been a key player in setting up the Dubai International Financial Centre – was recruited as the regulatory authority’s first employee in March 2005; two months later the QFC law was on the statute book.

“There are differences from other places,” says Mr Thorpe. “This is not a property development. It is a legal and regulatory construct; it creates a parallel legal universe. This is an onshore environment. This exists side-by-side with the existing domestic environment. This is probably the only place in the world where this is the case.”

Scope for evolution

Some industry sources contacted by The Banker believe that, over time, domestic Qatari institutions will probably adjust to meet QFC standards. They suggest that the need for a separate centre regime could eventually disappear as the whole financial sector begins to operate on international lines.

In any case, a two-way exchange of business involvement is expected by those executives and officials canvassed by The Banker in Doha. Insurance firms in the QFC could begin to push into the local market, while Qatari banks have expressed interest in getting involved in centre activities, such as the syndication of major project loans.

Inevitably, in the Gulf context, the QFC must also be able to accommodate Islamic financial structures.

“In regulatory terms the differences are fewer than the similarities,” Mr Thorpe explains. The QFC has joined two of the leading Islamic accountancy bodies but his team will not actually assess the sharia-compliance of specific transactions. What it will do is make sure the institutional arrangements to deal with this are in place within a bank or insurance house.

“To call yourself Islamic, you must have a sharia board, have your operations follow its rulings and have a compliance system to ensure the operations do what the sharia board says.”

Mr Thorpe insists that the QFC’s legal and regulatory structures are “robust and clear”.

Of course, potential investors will ask whether the government and judicial authorities are seriously committed to allowing the independent and effective functioning of the QFC’s regulatory model. But the precedents are encouraging: a number of senior Qataris have been dismissed or even put on trial over irregularities connected to IPOs. Senior business people have served jail time for insider dealing.

The independence of the regulatory authority and the tribunal – whose British judges have now been appointed – is reinforced by the fact that they are answerable not to one minister but to the council of ministers overall.

Local welcome

Local banks welcome the advent of the QFC. “The QFC will complement the [local] banking and finance sector,” says Doha Bank’s deputy chief executive R Seethamaran. “The project finance requirement of Qatar cannot be met by the banking sector of Qatar alone. The QFC should play a crucial role in creating a risk-free, well-structured environment for global investment houses to have establishments here.”

Qatar National Bank is equally positive. “It will bring new products and services into the country that might otherwise remain provided from outside,” says Vince Cook, general manager for corporate banking and capital markets. “We are confident that the net impact on QNB will also be positive as the intention is not for the QFC entities to compete in the domestic retail market but to help develop the broader financial services sector. This should bring new lines of revenue for QNB.”

Indeed, the bank is already present – its Ansbacher subsidiary was the first institution to be licensed by the QFC.

Mutual benefit

“We can see a number of areas where a QFC presence will help to develop our business,” Mr Cook says. “These include the creation of special purpose vehicles [such as was required for the recent Qatar Real Estate Sukuk], the joint creation of investment vehicles with other Qatar-based institutions and the development of our regional wealth management business.”

Doha Bank has yet to decide on its approach. “It will take a little while for us to identify the nature of our involvement and its benefits to us. If we find a synergy in having a presence in QFC we will definitely consider it.”

Mr Cook also points out that the entities that set up in the QFC will of course need local banking services themselves, which will generate extra business for local institutions.

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