The Dubai International Financial Centre (DIFC) and the Bahrain Financial Harbour (BFH) are acquiring the latest legal and physical infrastructure and financial and technological skills to lure global institutions to their patch. Although neither is yet fully up and running, glossy public relations campaigns are hammering home their virtues with extravagant claims and even more extravagant buildings.
Strategic investment
The BFH is a massive $1.3bn development, which began in March 2004, is scheduled for completion in 2007. The project is the brainchild of Gulf Finance House, an Islamic investment bank, headed by Ahmed Janahi. Bahrain’s financial regulator, the Bahrain Monetary Authority, has designated the BFH as a ‘strategic investment zone’, and investors relocating to the BFH will enjoy liberal terms.
Other regional centres have not sat idly by as these states bid for the international dollar. For example, Saudi Arabia has passed investment legislation that puts it squarely in the sights of international institutions seeking a foothold in this dynamic region. Lebanon, though some distance from the Gulf, is also a contender after a long period in the doldrums.
Dubai has been loudest in trumpeting its international supporters. Public announcements that Standard Chartered Bank, Bank Julius Baer, Deutsche Bank, Credit Suisse and HSBC have already requested licences to operate in the DIFC put other banks on notice that the centre has achieved a strong degree of support, at least among European institutions. The insurance company AON has also applied for a licence. A further 40 institutions are said to have applied, although their identities have not been revealed.
Dubai’s goal is to attract the largest international banking names, says Phillip Thorpe, the chief executive of the DIFC regulator, the Dubai Financial Services Authority. He says, “The big institutions have arrived on the ground, seen their clients, done a bit of business and disappeared again. That’s not good enough. We want them to be here and stay here.”
Dubai has spared no cost in acquiring the latest paraphernalia of the financial centre. These include its own financial law book, its own regulators, courts and its own buildings. It also plans to have its own stock and bond markets, called the DIFX. There is no shortage of ambition, and advisers to the centre argue that it will be in the running to replace Dublin, which is now seen as becoming expensive, and Luxembourg and Liechtenstein, now the butt of American opprobrium for the number of their brass-plate companies.
The DIFC site is also proving an attraction, says Naser Nabulsi, the DIFC’s chief executive. He points to the care that has been given to ensure security and efficiency at the buildings which are presently under construction. Mr Nabulsi stresses that the 110-acre site will be self-contained. “We’re building it as a city within a city. That city will be independent from anywhere else and it will be built to the specifications of the financial institutions.”
Infrastructure
Local facilities and infrastructure, as much as law and practice, will be a key weapon in the contest with Bahrain, says Husam Hourani of lawyers Tamimi and Co. Mr Hourani says Bahrain’s laws and regulations are “far more advanced”, but that Dubai’s facilities and infrastructure are greatly superior. “There is no comparison between Dubai and any other country. You can attract staff more easily to move to Dubai, and you will have to pay them double to go to Bahrain.”
Law is of the essence in ensuring Western banks feel comfortable in a new financial market. Dubai’s regulators say its structures will be more streamlined and clearer than rival centres. They have been able to cherry-pick laws from around the world which are least cluttered with historic baggage. Mr Thorpe says: “We have been able to start with a clean sheet. We’ve looked at some of the US codes and some of the European directives. We’ve looked at the legislation of Canada, Australia, you name it. We’ve begged and borrowed where necessary.”
International models
Mr Thorpe, a New Zealander, who has worked in the Hong Kong and London regulatory systems, deliberately overlooked UK company law, which he says has too much ‘baggage’, in favour of the Guernsey model of company law. Other legal models have been borrowed from Hong Kong. Dubai has also passed a re-insurance law based on the Bermudan model. Mr Thorpe says re-insurance law “is a novelty in the world at the moment, but it is of growing importance”.
The scale of the task is considerable, says Mr Hourani. “They are trying to build a country within a country, creating a small territory with its own laws, regulations. They will all be in English, they will have their own court, and their own arbitration centre. They are bringing judges and regulators from UK, Singapore and Hong Kong.” Mr Thorpe confirms he is talking to a possible chief justice for the DIFC financial court from Singapore.
Big ambitions
Another consultant to the DIFC describes the size of the DIFC’s ambition: “They are trying to achieve overnight what Singapore, London and New York took a few hundred years to achieve. The rationale of putting something here is that there is a lot of wealth and GDP, and you are in between West and East, so it makes an ideal location.”
The same cannot be said of Bahrain, where a financial centre of at least regional scale has been in existence for some 20 years. Bahrain took over from Lebanon as the Middle East’s financial hub in the late 1970s, and its banking system was the beneficiary of a massive influx of petro-dollars. Bahrain has been at the vanguard of the boom in Islamic finance, however. Dubai aims to overtake Bahrain, with ambitious plans to create an international, rather than a regional centre. It is bidding to offer five forms of financial business:re-insurance, private banking for high net worth individuals, islamic finance, corporate finance and debt issuance.
A stock market will also operate in the DIFC from early 2005, for which Euronext, Clearnet and the London Clearing Houses will provide clearing and settlement services. Lynton Jones, the exchange’s chief executive expects between 30 and 40 stocks listed over the next three years. He also expects a similar number of corporate bonds.
Attracting business
Regulators for the exchanges hope to attract issuers, such as Emirates Airlines and the local property company Emaar, who have recently raised money in Europe. They believe fund raising for property development will be particularly buoyant as local banks come under pressure from the central bank to curtail construction loans.
Dubai has acquired its law book and it will soon be ready to move into its new buildings, but first has to face the concern about the centre’s integrity. Unscrupulous financiers have exploited its open and laissez-faire culture to move illegal money on behalf of organised criminals and terrorists. Such a reputation will be hard to reverse.
Mr Thorpe says: “Unless an American banker, who wants to set up in the region, can go along to his group audit or his group compliance officer and say ‘there’s nothing to worry about, everything is just as you’d expect in your own backyard’, it’s going to be a very hard sell. US regulators will also object as they don’t want to see weakness introduced into the system. We can’t afford to allow that to happen. It’s a critical part of the equation to sell the value of Dubai.”
New culture
Mr Hourani anticipates some resistance from local banks and players to the new culture of regulation. “This part of the world is not used to being heavily regulated. It will be an educational process and it will take time. It will also require a change of culture. There is likely to be a sensitivity between the central bank of the UAE and the DIFC, as each shows off who is the better regulator.” The division of responsibilities for supervision between the central bank and the new DIFC regulators has proved time-consuming, controversial and complex. One commentator observes, “The central bank had to understand there would be minimum effect on the UAE but a maximum affect on the region. Then it softened its approach. It will work out, but it will not be easy.”
The central bank retains the key control over implementation of money laundering law. It also oversees some 52 banks operating within the UAE and all financial activities denominated in the local dirham currency. Institutions operating within the DIFC, where DIFC regulators have sole supervision responsibility, are limited to wholesale banking. The DIFC has complete jurisdiction over the application of commercial law that applies to financial activity in the free zone.
Sultan bin Nasser al Suwaidi, the governor of the central bank of the UAE was noticeably circumspect in his comments to The Banker, regarding the DIFC. ‘They have all the facilities that they need. Their success will depend on the personnel. They will need to market themselves very well, and to manage it very well.’
While the DIFC’s ambitions are high, its capability to implement them remain limited. A shortage of regulatory capacity, coupled perhaps with a nervousness about local standards, means that applicants for banking licences are limited to those institutions already regulated by a leading international regulator.
For the moment, Dubai and Bahrain will continue sparring. Both hope that the global pie will be large enough for each take a slice. The loser, over time, could be complacent Western financial markets, rather than these nascent players in the Middle East.
