Pushing Dubai’s capital markets forward

When the UAE officially transitioned from “frontier” to “emerging” on a key market index in June 2013, a new era of both greater opportunity and closer scrutiny for the financial markets in Dubai was ushered in. The results are already coming to the fore: stocks across the UAE are up 41% in 2014 and 89% over the last year as of June, while capital markets in Dubai are starting to draw more attention from foreign investors.

The change in ranking, announced last year by MSCI, also meant that several stocks traded in Dubai would be added to its Emerging Market Index, joining companies from Brazil, China and more than 20 other markets across the globe. With estimates for investments in MSCI’s and other similar indexes as high as $1.4trn, even being a small part of this category could be a boon for stocks listed directly and should provide plenty of positive externalities for the capital markets throughout the emirate.

In late May, MSCI released a list of the nine companies from the UAE that would be added to its index. The list included several Dubai-listed companies such as Arabtec, DP World, Dubai Financial Market, Emaar Properties, and Dubai Islamic Bank.

Hand in hand with the increased investment that will come with inclusion in the index will be an ever-increasing level of expectations for the listed companies, and indeed for the markets as a whole, to perform well while maintaining the sound fundamentals that international investors will demand. If carried out successfully, however, the new standards could lead to a true maturation of the markets in the emirate.  

Staking a claim to Islamic finance

And while joining the ranks of other emerging markets is an important step for Dubai, focusing on Islamic financial products and services, which could be worth as much as $2trn worldwide by next year according to some estimates, will also be an important part of the future of capital markets in the emirate.

There have also been several signs coming out of the private sector over the last year that the emirate has the potential to start attracting more global and regional businesses from the industry.

For example, Bank of London and the Middle East (BLME), the UK’s largest Islamic bank and one of the leaders of Islamic finance in Europe, chose to launch its IPO on NASDAQ Dubai in October 2013. The last listing on the market had been in 2009, and there was some concern that low trading volumes had become too big an obstacle for further growth.

However, BLME’s CFO Richard Williams played down the issue, saying, “There is a mild concern [about liquidity], but we feel we are coming to the right market at the right time.”

Key to the emirate’s ability to attract more Islamic companies and financial institutions to follow suit will be the existence of market infrastructure that is competitive with other options throughout the world.

Last year Dubai Multi Commodities Centre (DMCC) took an important first step in this regard by launching a sharia-compliant commodities trading platform called Dubai Commodities Asset Management (DCAM). Commodities trading is one of the most popular ways for Islamic financial institutions to manage funds, and DCAM has already set up several partnerships to expand its offering, including a joint venture with Shariah Capital called Dubai Shariah Asset Management, which provides a wider range of Islamic investment opportunities.  

New trading platform

More recently, there was the announcement by NASDAQ Dubai that it had successfully completed the pilot phase of a new murabaha trading system, and that it should officially open to the public in the coming months. Where DMCC’s platform focuses on commodities, NASDAQ Dubai’s will specialise in non-commodity assets, which should, to a degree at least, limit the competition between the two.

“The platform aims to provide a solution to the challenges individuals and institutions face in obtaining Islamic financing though traditional channels such as share price movements and a lack of liquidity,” Hamed Ahmed Ali, CEO of NASDAQ Dubai, told OBG.

Taking aim at the regional and, eventually, global market of Islamic institutions looking for reliable options to manage their funds, these new platforms should be a welcome addition to companies in the region that often have to look elsewhere for similar offerings. Despite the opportunity to tap into this demand, however, NASDAQ Dubai and DMCC will face an uphill climb to take customers away from more established markets such as the London Metal Exchange and a wide range of operations in Malaysia.

Overall, the upgrade in the market status, in conjunction with the investments being made to develop room for growth in Islamic finance, raises the stakes, pushing the potential ceiling of growth upward, while also exposing the markets and companies to new levels of competition.

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