Dubai is renowned as being a beacon of capitalism within the Islamic world. The rulers of Dubai, the Maktoums, are credited worldwide for building Dubai as a major technological and tourist hub for the region, at time when the country had very little in the way of oil wealth.
While there are other financial centres in the region Dubai has reached a critical mass in terms of infrastructure, which is now a major attraction. Education, healthcare, restaurants and alcohol (within reason) are all readily available. Although Dubai has suffered in the recession, and property prices have fallen sharply, unrest elsewhere in the Middle East has emphasised the stability of the UAE.
Islamic finance has experienced very fast growth since its emergence in the1990s. Current growth is often estimated at between 15% and 30% per annum. By many estimates, the market is currently at some $50 billion per year and rising. In contrast, the global market for non-Islamic issues is some $2 trillion per annum – some 40 times larger.
Islamic issuers and markets have recognised the need for, and benefits of, standardisation of products and certainty of interpretation – both of which were lacking in the earlier years.
A series of international bodies have been established with the explicit remit of achieving the sort of standards in reporting, contract design and trading that characterise non-Islamic products.
These are gaining an increasingly strong international reputation and play an increasingly prominent role in international agencies. In addition, there are several international initiatives to develop, including Islamic swaps (using ISDA-style standard documentation) and Islamic Repo contracts (in collaboration with ICMA). It is expected that this process will continue and will accelerate Islamic finance’s acceptance into the mainstream of capital raising.
Wealth and Asset Management
The Gulf region is home to about 60% of global Sovereign Wealth Fund (SWF) investments. SWFs are expected to grow rapidly, and their influence is expected to rise. The growth of Gulf SWFs is causing them to seek a wider range of assets, and also to act more like long-term institutional investors.
NASDAQ Dubai is located within the Dubai International Financial Centre (DIFC) which is one of several offshore areas within Dubai. The significance of the separate area is that a form of international law applies where all conventional western financial instruments are valid and Sharia Law need not apply. Concepts such as Trusts are legal.
Currently there are plans to merger NASDAQ Dubai with the local Dubai Financial Market (DFM). There are also further discussions to merge this grouping with the ADX in Abu Dhabi. This makes strategic and financial sense but local rivalries may prevent this occurring in a sensible form.
GCC Market Structure: The Regional Markets in the Gulf Cooperation Council
The basic structure of financial markets in the Gulf Cooperation Council (GCC) and the region is of nationally based markets devoted to local companies. On an international scale these markets have tended to be ignored by institutional investors and so the local markets have grown on the back of often speculative local money flows.
The next stage in the growth of the region’s financial markets has been the overlaying of international markets in Dubai and Qatar. Both countries have acted to overcome the restrictions of the small size of their domestic economies by opening international financial centres which have attracted major international players.
Both centres have similarities but also important differences. Qatar may have advantages because of its need to mobilise capital for infrastructure and because of the greater integration with the domestic economy.
Trading volumes on all the local markets have fallen substantially in the wake of the world financial restructuring. The inescapable logic of merging all the Gulf markets, or at the very least all the GCC markets, sadly seems as distant as ever.
The Local Markets: Major Pools of Market Capital
The Dubai Financial Market (DFM) is the local stock market within Dubai and is only available to local companies. Within the UAE there is a similar market in Abu Dhabi: the ADX.
A recent City of London research paper had the following view of the GCC markets* The Gulf States are not like other developing markets. Some distinctive attributes include:
Reservoirs of vast private and public wealth which requires investment in capital markets.
Motivated to develop significant financial centres, either to aid resource allocation, to provide alternative income streams, or to provide employment for a growing population.
A significant Islamic bloc with a growing interest in Sharia compliant financial markets.
These features give the States significant strengths in competing for contestable parts of international capital market business.
Possible roles include: Regional banking centres, international fund management centres to manage the regional flows of investable capital market funds, regional global capital markets, supporting other regional markets and attracting global players, global capital market centres, attracting business from outside the region.
*The Competitive Position of the Gulf as a Global Financial Centre, City of London & University of Reading, .May 2008
Dubai International Financial Centre
The Dubai International Financial Centre (DIFC) was conceived by the Government of Dubai for the benefit of the UAE and the wider region as a whole. Its remit is to create a regional capital market, offering investors and issuers of capital world-class regulations and standards. Its hallmarks are: integrity, transparency and efficiency.
There are six primary sectors of focus within the DIFC: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives & Commodity Trading); Asset Management & Fund Registration (Fund Registration, Fund Administration & Fund Management); Reinsurance; Islamic Finance and Back Office Operations.
As a new global jurisdiction for financial institutions, the DIFC offers its participants a highly attractive investment environment, including: 100% foreign ownership, 0% tax rate on income and profits, a wide network of double taxation treaties available to UAE incorporated entities, no restrictions on foreign exchange, freedom to repatriate capital and profits without restrictions, high standards of rules and regulations.
It should be noted that the ambition of Dubai is not to be an ‘offshore' tax haven, the objective of the DIFC is to create a fully fledged ‘onshore' capital market, comparable to Hong Kong, London and New York. The recent rash of deals involving NASDAQ, OM Group in Sweden and NASDAQ’s stake in the LSE will give them an immediate and massive differential from all other local exchanges and financial centres in the Middle East.
The DIFC Authority
The DIFC Authority is the body of the DIFC charged with developing overall strategy and providing direction and supervision to the Centre. Its responsibilities include attracting licensees to operate in the DIFC as well as the creation of laws and regulations that govern non-financial services activities.
The Dubai International Financial Exchange Limited (DIFX)
A wholly owned subsidiary of the DIFC Authority, the DIFX has been created to provide investors and issuers with a larger and more liquid securities market than currently exists in the region. Based on state-of-the-art technology, this fully integrated electronic market place will be capable of trading a wide range of financial instruments, including equities, bonds, funds and derivatives. The DIFX opened for trading on September 26, 2005.
In July, 2006, Per E. Larsson took over as Chief Executive of the DIFX. He is the former head of the Sweden-based OM Group (now OMX and owner of several Nordic Exchanges). OM was the company which launched the first bid for the London Stock Exchange which sparked the current worldwide exchange merger mania. Borse Dubai (the holding company of the DIFX) now holds a substantial stake in OM Group via its cross shareholding with NASDAQ. They have also announced that the DIFX will implement the OM-X trading platform.
DIFC Registrar of Companies (ROC)
A corporation administered by the DIFC Authority, the ROC is responsible for incorporating and registering all the companies that will operate within the DIFC, from multi-billion dollar financial institutions through to non-financial registrants seeking to establish a presence in the DIFC. The ROC is also responsible for administering the companies’ law and regulations.
The Dubai Financial Services Authority (DFSA)
The DFSA is the independent body responsible for regulating all financial and associated services conducted in or from the DIFC; as well as licensing, authorising and registering businesses to conduct those services. The DFSA's regulatory framework has been developed by a team of experienced regulators and legal experts drawn from internationally recognised regulatory bodies and major financial institutions around the world, and is based on the best practices and laws of the world's leading financial jurisdictions. The DFSA is an Associate Member of the International Organisation of Securities Commissions (IOSCO), the world's leading body of securities regulators. Many of the rules in Dubai were written by ex-London FSA officials and as a result the rulebook looks extremely familiar to anyone from the City of London.
The DIFC Judicial Authority (DJA)
An autonomous body, The DIFC Judicial Authority is responsible for administering and enforcing civil and commercial laws at DIFC. The DIFC Courts, including both trial and appellate courts, deal exclusively with all cases and claims arising between DIFC registered entities and out of the DIFC operations. The official language of the Courts is English.