The speech by Sheikh Mohammed bin Rashid Al Maktoum at the launch of the Dubai International Financial Centre in February 2002 was typically ambitious. The then crown prince, now ruler, of Dubai, told his audience that the DIFC would be "a bridge for financial services between our region and the international markets", in effect providing a new link in the chain of global financial hubs.
Perhaps wisely, however, he did not say just when Dubai would be seen as the equal of Tokyo, London or New York. Since then, the emirate’s economy has gone through a severe dip and several other nearby states have made it clear that they too want to be the financial link between the Gulf and the wider world.
The plans of Qatar and Bahrain were crystallized in 2008 with the release of two official reports. In July of that year, the Qatari government published its National Vision 2030 – a development strategy that included creating a diversified economy that could act as "a regional hub for knowledge and for high value industrial and service activities".
Two months later Bahrain, which has had a sizeable banking industry for decades, published its Economic Vision 2030, which talked about becoming a "global contender" in which "our financial sector will remain our economic engine".
All three states certainly have the potential to be financial hubs for the region. They have the physical infrastructure in place and there appears to be a market opportunity. "All the way from South Asia to Algeria and perhaps some parts of sub-Saharan Africa – that’s the catchment area for all these financial centres," says Sameer Abdi, a Bahrain-based partner at Ernst & Young.
Struggle for momentum
But the Gulf region is struggling to regain momentum after the global banking crisis of recent years and, despite the impressive growth of the financial industry in all three hubs over the past decade, there is still some way to go until that gap is filled.
In 2004, when the DIFC’s current regulator, the Dubai Financial Services Authority, was set up, just seven financial services firms were registered to operate in the free zone. There are now 245, along with 50 ancillary services providers, including law firms, consultants and accountants.
Similarly, the Qatar Financial Centre (QFC) was set up in May 2005 and ended that year with just three licensed firms, but the number had reached 111 by the end of 2009.
Bahrain regulates its financial sector slightly differently. Instead of setting up an authority with specific regulations or courts crafted to appeal to international firms, the Central Bank of Bahrain applies the same rules across the entire country. However, it too has seen growth, and there are now more than 400 financial institutions with a presence in the country, compared with 324 in 2001.
Even with this expansion, however, all three cities are still very much in the second tier globally, trailing behind such operations as Dublin’s International Financial Services Centre which has 430 companies licensed to trade and a further 700 ancillary businesses.
There are also relatively few companies listed on local stock markets: 66 on the Dubai Financial Market (DFM), 49 on the Bahrain Stock Exchange and 44 on the Qatar Exchange. Those figures put them in the same league as the Stock Exchange of Mauritius, which has 65 listings, and the Budapest Stock Exchange, which has 46.
In terms of market capitalization, the Qatar Exchange, the largest of the three centres’ stock markets, rose in value from $5.17 billion at the end of 2000 to almost $88 billion by the end of 2009. Yet even at that level it was only just larger than the Philippine Stock Exchange, which had a total market capitalization of $86.3 billion on December 31 2009.
In terms of the value of shares traded, the DFM leads the three, with $47.2 billion-worth of shares traded last year – a figure that puts it slightly behind the Vienna Stock Exchange, which had $47.9 billion-worth of shares traded across its market in 2009.
But it is not necessary to go as far as Europe to find more active markets. In 2009 the Saudi Stock Exchange had trading of $404 billion on its market while the Kuwait Stock Exchange had $79 billion. The difference between Dubai, Qatar and Bahrain and these other Gulf markets is the ambitions the first three harbour to be regional or even global financial centres. Clearly, however, they have yet to reach their targets.
In the size of their banking industries, they also have plenty of ground to make up on markets that they hope one day will be their peers. The combined assets of all the banks in Bahrain, Qatar and the UAE amounted to about $764 billion at the end of 2009, with the UAE accounting for the largest share at $414 billion (separate figures are not available for Dubai). In comparison, Singapore’s banking sector assets were almost three times larger, at $1.2 trillion.
"I don’t think you could say that any of them have met their goals," says Simon Williams, chief economist of HSBC Middle East, who rates Dubai as the strongest of the three financial hubs. "This is a long process. The region is maturing and growing and so its need for financial services is expanding and those centres are continuing to grow their financial industries."
An issue for all three economies is that they are relatively small, which means that if they are to grow substantially they need to rely on the economic health of the wider region. However, growth rates in most countries around the Gulf have fallen in the past two years and have been slow to recover.
"The Gulf in particular and the Middle East as a whole hasn’t kept pace with recovery in other emerging markets over the past 18 months or so," says Williams. "That needs to change if the demand for financial services is going to grow."
He adds: "All the Gulf states slowed very sharply last year. Dubai undoubtedly slowed more markedly than its peers but there is a sufficiently well-established centre of gravity in Dubai that protects its leadership.
"If the Middle East can fulfil its potential to be a significant and substantial emerging market economy then the demand for the financial services that Dubai is looking to provide will increase very sharply. If the Gulf falls off the pace then the role of Dubai will also fall short of what had previously been hoped for."
So what can the three centres do to enhance their prospects? For Qatar and Bahrain, the strategy is to target specific niches in the market. Those niches include Islamic finance and insurance but also funding the states’ own domestic development.
Bahrain’s minister of finance, Sheikh Ahmed bin Mohammed Al Khalifa, set out the need to focus on certain segments of the market in early July. Speaking in Manama at the meeting of the Bahrain-Bermuda Joint Economic Committee, he said: "Bahrain’s future development strategy ... involves continuing to encourage a vibrant and diverse financial sector, with asset management and insurance at its core."
To that list, Ernst & Young’s Abdi adds Islamic finance. "It is a global centre for Islamic finance and it is definitely still seen as a regional centre for Islamic finance," he says.
There are some 27 Shariah-compliant banks in Bahrain, one of the largest concentrations of such institutions in the world. There are also 2,743 authorized funds managing assets of almost $10 billion between them, and 169 companies involved in the insurance industry. Between 2001 and 2008 the value of gross premiums for Bahrain’s insurance industry more than tripled, from BD58.6 million ($155.4 million) to BD187.05 million.
The expansion of the finance industry is not an end in itself for Bahrain. The government is hoping that it will encourage growth and job creation in other parts of the economy too.
"The financial sector is so important for Bahrain, not only because it accounts for around a quarter of the economy but it also enables us to develop other sectors," says Kamal Ahmed, chief operating officer of the Bahrain Economic Development Board, which leads official efforts to expand the country’s economy. "The benefit of the financial services sector is more in value creation, not job creation."
Qatar is targeting similar territory. The QFC Regulatory Authority, which oversees the rules of the QFC, has issued a series of consultation papers this year on how to develop and expand in a range of areas such as asset management, short-term life insurance and captive insurance.
"The QFC will be focused around the development of three areas: asset management, reinsurance and captive insurance," says Shashank Srivastava, acting chief executive of the QFC Authority, the centre’s marketing and development arm. "We see ourselves as becoming the pre-eminent centre for them in the Middle East region. In the future we will look at other sectors and other areas."
Qatar’s ambitions are helped by the strength of its overall economy – growth in its GDP dipped to 9% in 2009, according to the IMF, but otherwise has been in double figures since 2006 and is expected to remain so, helped by healthy global demand for its natural gas exports.
"The development of the financial sector is obviously linked to the health of the overall economy, and the Qatari economy has weathered the crisis well," says Srivastava.
Bahrain’s GDP growth was just 2.6% last year but at least it kept growing. Dubai’s economy, by contrast, contracted by an estimated 3% in 2009, according to the Institute of International Finance, and could shrink by a further 0.5% this year.
Dubai is targeting a wider range of financial services than the other two and, while it might have to cede ground in such areas as Islamic finance or insurance, it is hoping to maintain an edge in areas such as investment banking, capital markets and wealth management. However, for Dubai to fulfil its aims, it first needs to regain the confidence and trust that has been lost in the wake of the crash of its economy that started in late 2008. The risk of loan defaults in 2009 by corporations owned or controlled by the Dubai government, such as property developer Nakheel, has further unnerved international investors, and that damage needs to be repaired.
Jeff Singer, chief executive of the Nasdaq Dubai stock market, which is based in the DIFC, acknowledges the problems but argues that there is an opportunity for Dubai to strengthen its reputation if it responds in the right way.
"It’s a critical moment," he says. "When things are going well you don’t have the chance to test the character of the market or how it functions. Right now Dubai is being tested and the whole world is watching to see how it responds. It has the opportunity to demonstrate to the world the principles it has espoused and when those principles have been tested and respected then people will nod their head and say it’s a good place to be."
Dubai suffered the most but it was not alone in being affected by the financial downturn. Local banks across the region had high levels of exposure to real estate developments, many of which have stalled. In Bahrain, the central bank was forced to place two banks, Awal Bank and the International Banking Corporation, in administration in July last year because they could not meet their financial obligations – their problems were linked to those of their Saudi parent companies, Saad Group and Ahmed Hamad al Gosaibi & Brothers Company, which themselves are locked in a wide-ranging legal dispute.
Saudi Arabia could provide more problems for the three Gulf centres in the future, in the shape of stronger competition for both talent and finance as its economy grows.
"The scale of Saudi Arabia’s financial services needs and its ambition to accelerate development of its services sector is likely to see a very substantial financial services sector growing up," says Williams. "It will be more domestically than regionally focused, but it has such a large economy with such substantial financing needs and such a clear need to broaden and deepen the financial services on offer. It already has the most liquid equity market by a very considerably margin. I think the financial services sector is going to grow rapidly in Riyadh over the coming years."
The smaller Gulf states are well aware of the nature of the risk. "The fact is that financial services are mobile across international boundaries – it’s a cross-border business," says Srivastava. "The financial services industry will go to wherever has the right mix of growth, stability, regulations and laws, taxation and so on."
Certain developments could help to spur growth across the region. A single stock market across the Gulf Cooperation Council states would boost liquidity levels and improve access to capital for companies looking to raise equity finance, even if it would remove one area of distinction between the different cities. Similarly, a single GCC currency should boost financial activity around the region, providing fertile ground for trade finance and merger and acquisition activity in particular.
Single currency on hold However, while economists say that there are clear arguments in favour of both developments, neither is expected to materialize in the short term. A deadline for introducing a single currency across Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE came and went in January this year and no new date has yet been formally announced by the countries’ central bank governors. A single stock market appears to be just as remote a prospect, given the levels of national pride at stake and the scale of regulatory convergence needed.
For now, most countries in the region are focusing on how best to recover from the downturn. Financial services will certainly play a substantial role in reviving the lost momentum, but even so the process will take time. "It’s important to be realistic," says Ahmed of the Bahrain Economic Development Board. "We don’t think the growth we have experienced in the past 10 years will continue in the next three to four years. No one in the world will have [the same levels of growth]."
Given that prospect, it is likely to be many years before Manama, Doha or Dubai can claim to be more than a local market. As to which one is best placed, Williams points to Dubai. "We’ll need to see what happens when the regional and international economies return to more normal, healthier states to see which of those centres comes out most convincingly," he says. "My expectation is that Dubai is still likely to be at the forefront, but there will be clear roles for those other centres as well."
Even if it is at the forefront, it is still far too early to say that Dubai and the DIFC is filling the gap between east Asia and Europe when it comes to financial services, as Sheikh Mohammed promised it would back in 2002.
"New York and London have been around for two or three hundred years as financial centres," says Singer. "A more natural evolution for Dubai would be to look at Singapore and Hong Kong. To me that’s a realistic next-step aspiration.