The grass is not always greener

Farhan Bokhari discusses the problems facing Dubai’s growth as a world leading financial centre

More than three years after the Government of Dubai launched its ambitious plan to establish a new world class financial centre, Omar bin Sulaiman, director-general of the Dubai International Finance Center Authority (DIFCA), has reason to seek greater transparency and governance in the countries around the oil rich region.

“Transparency and governance is critical in delivering the knowledge, capital, and skills that will enable the region to diversify its economies away from oil and gas, and to grow the wealth of its people, which will lead to political and social stability,” was how Sulaiman urged participants of a financial services workshop in Dubai in December, as he listed a variety of challenges that need to be tackled. “As we raise our corporate governance levels, it will increase trust in the region’s financial sector, and contribute to attracting foreign direct investment, as well as encouraging local and regional banks to provide financing to SMEs and entrepreneurs,” he added.

Executives such as Sulaiman are both well aware of the opportunities and pitfalls ahead of them as they seek to further consolidate the considerable influence of Dubai as the financial centre of the Gulf region. Among the DIFCA’s major successes, one has been the success in arranging an international meeting of the international monetary fund (IMF) and the World Bank (IBRD) in Dubai in 2003, drawing together some of the best known members of the international financial community.

Businessmen in Dubai and the surrounding region see the DIFC experiment as a unique development at a time when the Arab world is flush with petro-dollars flowing from high global oil prices since last year. “Dubai is not the world’s largest oil producer. But that doesn’t preclude the possibility of Dubai becoming a major cash producer. People have good access to this place, Dubai is modernising, and forums such as the DIFC have a role to play in this development,” says a Dubai based businessman. Many analysts believe the DIFC could eventually become a key institution in consolidating the regulatory environment - an essential pre-requisite for promoting Dubai as not only the main financial centre of the Gulf region, but also the more secure one from a regulatory perspective.

Sakib Sherani, an economist in Pakistan for ABN-Amro, the Dutch bank, believes the DIFC experiment could be helped by the large traffic of businessmen from the surrounding region, travelling regularly to Dubai. “There are a lot of investors who regularly travel to Dubai. For them, different instruments which support business dealings such as the DIFC are an important consideration,” he says.

Mehdi Zaidi, a UK based banking consultant who routinely travels through Dubai, says: “If you go just by the anecdotal evidence, there is something to suggest that a lot of people with money are trying to be based in Dubai. These are people who have a home elsewhere but also want to have a base in Dubai. When something like this happens, it suggests there is money to be made and people are aware of that reality.”

Sulaiman believes there is a need to ensure improved regulation as well as corporate governance standards - elements that are crucial for any business. The DIFC’s response was to announce the establishment of a new Regional Corporate Governance Institute (RCGI) - a body dedicated to helping companies, governments and other players in the public and the private sectors to come together for backing the transfer to the region of all the necessary international best practices.

“The existence of a regulatory best-practice regime on your doorstep gives you, the Arab world’s leading entrepreneurs, an opportunity. You are able, by engaging with international financial institutions in your region as opposed to seeking opportunities abroad, to do business under the first world-class regulation regime ever to have existed in the Middle East,” says Sulaiman.

But sceptics warn, the DIFC’s experiment faces a significant array of challenges related not just to its own work but the future profile of Dubai as a leading financial centre.

Expatriate businessmen living in Dubai lament the increasing number of issues surrounding local living conditions, such as increasing road congestion and rising property rents. They warn such trends, though not primarily on the minds of investors, nevertheless add to aggravating the image of Dubai as a stable location, close to the oil rich Middle East.

“Many of us are concerned that, in a few years time, there would be such heavy traffic on the roads that driving would become impossible. To keep on attracting investors, experiments such as the DIFC must only work along with successful plans to improve local living conditions,” says a Dubai based European businessman, who sought a relocation from Bangkok as he was disturbed over local driving conditions.

But key officials at the DIFC, such as Sulaiman, believe the ultimate test of the success or otherwise of the experiment lies fundamentally in the quality of work that comes with DIFC rather than issues that are external to the centre, such as local living conditions.

“The latest oil boom along with capital flow into the region post-9/11 has increased liquidity. Regional banks have to take an aggressive role in channelling the money into the region and funding investments,” said Sulaiman, narrating an oft-repeated account of the ways in which petro-dollars are more likely to stay within the Middle East, driven in part by the concerns among Muslim investors over an anti-Muslim backlash in the world, following the New York terrorist attacks. “In order to succeed in this, it is critical to build investor confidence. Greater emphasis is needed on corporate governance, market discipline, transparency and disclosure,” concluded Sulaiman.

But the Dubai based Western businessmen warns: “There are attempts by the local authorities to say the DIFC is a solution to many problems. The reality is, however, that this is just a new beginning and a beginning which, in its own way, does not have solutions to problems or answers to challenges. Even if this is credited as an impressive beginning, this is just a very new beginning.”

Farhan Bokhari is a business journalist based in Pakistan.