In a bid to attract global financial institutions to the UAE, Dubai crown prince Sheikh Mohammed bin Rashid al Maktoum announced on February 16th that the emirate would set up the Dubai International Financial Centre (DIFC), with the first licences to be issued at the end of 2002. While officials expect the tax-free centre to be operational in 2003, they do not see the DIFC as a major competitor with local financial institutions such as the Dubai Financial Market (DFM). Local banks, many of which have published good full-year results during February, have meanwhile been looking to reduce their risks through lending, with the first stage of a risk management framework developed by the UAE Central Bank to be implemented by the middle of this year.
The DIFC proposal aims to make Dubai a bridge between Middle Eastern financial services and the rest of the world, taking some inspiration from cities such as Singapore and Hong Kong. Officials believe that it will be the region's first "truly world-class financial exchange" focusing largely on capital and investment, but also asset management, Islamic finance, reinsurance and back office operations. The aim is to continue Dubai's growth through the introduction of large international financial institutions, as this cannot be achieved simply through local banks.
The perception is that the region suffers from an immature financial infrastructure, excessive bureaucracy and illiquid markets, forcing local investors and companies to invest abroad. DIFC is confident that this demand for investment banking, currently served in the US or Europe, can be met in the UAE. The company's chief operating officer Hussain al Qemzi said of international investment and institutional banks, that he wanted "these types of companies to create capital here, and allow our companies to raise capital for themselves". Officials have also said that as the centre will be a free zone it will not be subject to "political and bureaucratic obstacles".
The company claims to have already established an advisory board, with financial institutions such as Goldman Sachs, HSBC, Deutsche Bank and Citibank on the board, from whom it is also looking for investment in the project, and that it is in talks with Nasdaq and the London Stock Exchange to operate the DIFC stock exchange.
But much of the investor confidence will depend on the regulatory environment, especially after US allegations that much of the funding for the September 11th terrorist attacks came through the UAE. The DIFC says that it will have a draft of the legal and regulatory blueprint ready by the end of March and a final version complete by mid-April. The two-tier regulatory system will be based either on UK law or Delaware law, according to a member of the DIFC board, Mashreq Bank CEO Abdul Azziz al Ghurair on February 20th. This body is to be ready in October and headed by a former member of Lloyds of London Ian Hay Davison. In a similar version to that in operation in Hong Kong, disputes between the regulator and DIFC registered companies will be settled through a specialised court system, while disputes between companies will be referred to international arbitration. DIFC has also stated that no company based in a country that is not a member of the Financial Action Task Force on money laundering would be given a DIFC licence.
Officials claim that the DIFC will not compete with local banks, although they would be encouraged to register. Banks operating in the free zone will not be allowed to move into retail banking outside the zone. The proposed stock exchange would also not compete with the recently-established Dubai Financial Market (DFM) or the Abu Dhabi Securities Market (ADSM) as it will focus on major international institutions and would keep a very high net worth threshold limit for individuals.
Even without the impetus from the proposed DIFC local banks have been investigating ways in which their risk exposure can be reduced, with a new risk management framework developed by the central bank. The central bank and Standard Chartered bank, jointly announced the completion of a pilot study on March 3rd of a model that will set the UAE banking industry a standard for risk management, with the central bank receiving regular feed back on bank's risk. The central bank will impose this on the country's banks from the middle of this year, and in early 2003 it expects to introduce a system whereby banks have to provide quarterly updates. The scheme has been in the pipeline for over a year, largely spurred by the 1998-99 scandal in which Madhav Patel of Solo Industries disappeared with billions of dirhams belonging to UAE banks.
The banks have also become more reticent about income from interest on loans, and have said that as these areas are not performing as well as had been expected are looking to raise the profile of fee-based activities. When one of Dubai's largest banks, Mashreq bank announced its 2001 results earlier this year, income rose by 16%. However, net fee-based and other income rose 10.7% with interest income only improving 4%. Bankers have noted that the tough margins in the UAE, especially in corporate lending, have led to a growing focus on retail banking.
Some large UAE banks have registered growing profits in 2001 all the same. In early March the Union National Bank, essentially a commercial bank, announced a 20% rise in net profits in 2001 over the previous year, a total rise of 127% over the 1999 figure, bringing it to Dh243m ($66.2m). The Abu Dhabi Islamic Bank's report from the same time showed that it had earned a net profit of Dh80.4m ($21.9m) in 2001, up 33% on 2000, largely through lower operational expenses. The oldest UAE Islamic bank, Dubai Islamic Bank, is also the one through which substantial terrorist finds are thought to have passed, but its results for 2001, announced on March 7th, showed a rise in net profits of 4.2% to $168m.