Ever since the announcement that Dubai was to establish an international financial exchange, there has been scepticism that it would ever become a reality. Was it just another Dubai real estate project? Would the vision be scaled back in the light of reality? Would the desire for regulation to the highest international standards give way to a more ‘realistic’ ambition, given the prevailing regional standards? Was there even a real need for such a development?
After a longer gestation period than originally projected, the Dubai International Financial Exchange (DIFX) is expected to receive its licence from the Dubai Financial Standards Authority (DFSA) and open for trading on September 26.
Daunting proposition
I was one of the doubters. It seemed improbable that Dubai would have the courage to persist with creating a centre that could operate to international standards. Not only was there likely to be conflict over the required legislation but the political consequences seemed daunting.
The region’s markets are characterised by large tranches of blocked shares (often government held), a small institutional investor base, no market making, no underwriting, no sponsorship, limited transparency, poor reporting, limited company analysis, primitive merger/takeover provisions and poorly regulated insider trading.
Not only did the Dubai International Financial Centre (DIFC) have to convince the existing regulators to allow the ‘international’ vision to move forward, but it also had to convince the outside world that it was making no concessions to international best practice.
How has it achieved this? I believe that the jury is still out and will remain out until the first listings and trades have been successfully accomplished. There is immense scope for regulatory discretion and, in the desire to obtain new members and new listings, there is a danger that these discretionary powers will be used liberally, especially to accommodate leading regional players. That said, the volume of rules and regulations that has been produced far exceeds anything that has been attempted elsewhere in the region so far. Even if there are some concessions to local practice, they represent a huge leap forward.
Hidden gateway
In the streets of Dubai, there appears to be little interest in the DIFC. As far as real estate developments go, the DIFC area is dwarfed by the other major projects. Ask a taxi driver to take you to The Gate, the DIFC’s main architectural landmark, and he is unlikely to know where to go. So far, the DIFC does not resemble Dubai’s imaginative real estate projects, although this does look set to change.
Even the majority of businessmen have little or no knowledge of the DIFC vision. However, many major global financial players seem more alert to the possibilities and are signing up to be part of the DIFC and members of the exchange from its very beginning.
I still question where the business will come from. In the event, who will be allowed to list on the DIFX and who will be able to invest? There will be many obstacles for Gulf Co-operation Council companies to overcome because they will need to comply with DIFX rules and with their home country’s companies law and listing requirements. They may find that they are restricted to listing depositary receipts on the new exchange.
However, at a time when the region’s markets are booming with seemingly endless liquidity pushing prices ever higher, regional companies may have little interest in a DIFX listing.
These realities were appreciated at the time of the launch of the DIFC. The aim has always been to attract issuers from the broader region – from India, Turkey and South Africa, for example – giving them access to Gulf dollars. But will they have that access? Although the region’s markets are retail oriented – largely because of the lack of institutional investors – the DIFX aims to be a wholesale market. So who will be these participants?
Natural home
The DIFX does seem a natural home for sukuk issues and, as these issues are multiplying by the moment, this is a growth business with banks, in the main, being avid investors. With its robust legislation and good transparency requirements, it is possible that the DIFX will become the preferred home for such issues. The Dubai government has already tapped this market and is well placed to have its sukuk listed on the exchange.
Bahrain may have other ideas. It is home to the Liquidity Management Centre, which has successfully managed many sukuk issues. It is also home to the Accounting and Auditing Organisation for Islamic Financial Institutions and the less successful International Islamic Financial Market (IIFM) but, under its new leadership, the latter may also play a role in making Bahrain the Islamic finance centre for the Gulf.
Qatar also has ambitions in this area. It has played host to some of the biggest and most successful sukuk issues in recent times and would like to have these listed and traded through its new Qatar Financial Centre. Qatar is also establishing a best-practice regulatory framework and has benefited from the Dubai experience. Not only did it recruit Philip Thorpe to head the regulatory body after his dismissal from the DFSA, but it has also subsequently hired several experienced people from the DFSA. This has allowed it to avoid the inevitable mistakes made in Dubai and fast-track the development of its own laws and regulations.
Is there room for three centres in the region? There is always room for best practice, and the competition between these Gulf states should lead to improved transparency and governance standards throughout the region. Many people have been critical of the current environment and it is somewhat disingenuous to condemn bold moves for change as being unlikely to succeed because of that environment. There has to be a way out, a way forward. Has Dubai found it?
Impressive effort
The effort of the past few years, the professionalism with which the plans have been made, the legislation introduced and the new exchange promoted to key players are all impressive. Although there have been problems along the way, the people that have been recruited to implement the project are of world-class quality, are committed to working for a world class market and, so far, have solved all the problems.
So I am putting aside my doubts and pinning my hopes on a successful start for Dubai’s new exchange. The investments that have been made in people and systems – and not just in real estate – deserve success. The region deserves to be better served by its capital markets, and the world will benefit as the region takes one huge step towards joining the global marketplace.
Elizabeth Jackson-Moore is an experienced financial consultant based in the Middle East.
