Dubai - the Region's Leading Financial Center

Dubai - the Region's Leading Financial Center

By Anas Almasri

The fact that the Emirate has no natural resources worth mentioning makes its success story even more admirable.Dubai built its current reputation for being an international business hub mostly out of thin air, and lots of sand. Aside from its glamorous iconic buildings, the Emirate is now renowned for its

financial services sector, transit connections, trade facilities and its touristic destinations.

The United Arab Emirates continues to be the dominant player with regards to Foreign Direct Investments (FDI) in the Middle East with Dubai serving as the key destination for overseas investments in the country.

Over the first six months of the year, it registered $4.5 billion in FDI according to official figures issued by the Department of Economic Development. That represents a seven percent rise when compared to the first half of 2011, a clear sign that investor confidence in the Emirate's economy is gradually returning. Financial & business services, real estate, leisure & entertainment, chemicals, food & tobacco, healthcare and metals were among Dubai's top recipient sectors of FDI. Additionally, overseas investments appeared to be more attracted to larger projects in 2012 than they previously were.

Dubai's Business Attraction

Commonly referred to as "the fastest growing financial hub in the world", the Dubai International Financial Center (DIFC) provides global businesses with the opportunity to access new economies and expand their potential investment options. It does so through its advanced infrastructure, an exceptionally business-friendly tax system and a high degree of regulatory independence.

Since its inception in 2004 the free zone has steadily established itself as an essential part of Dubai's investment hotspot image. DIFC reported a seven percent increase in total value added by its sub-economy (GDP equivalent) from 2010 to 2011, reaching an impressive $3.13 billion-a lot more than many countries around the world can claim. According to the IMF, that represents 1.4% of the whole country's non-hydrocarbon GDP. One of the Center's main strengths, and indeed that of Dubai itself, is its ideal location that allows it to truly act as platform linking Western and Eastern financial markets together.

The geographical distribution of registered companies in DIFC demonstrates its global integration role. European and North American businesses accounted for 37 and 17 percent respectively, while those from the Middle East and Asia totaled 26 and 11 percent respectively with 9 percent from the rest of the world. DIFC promotes itself as an international financial community covering various sub-sectors including banking, insurance, wealth management, capital markets, financial services, retail and also serving as a preferred location for corporate headquarters. As of September 2012, DIFC's total registered companies were 899 with 13,000 employees working in the Center.

In the latest Global Financial Centers Index (GFCI September 2012) ranking, Dubai was the highest ranked financial center in the Middle East and Africa. The Index illustrated the positive gains obtained by the Emirate, leaping 7 positions since the previous edition six months prior and ranking 22nd globally. Its closest regional contenders were Qatar ranked at 35th and Abu Dhabi at 38th. With the exception of one edition, Dubai has been consistently ranked as the best financial services center in its wider region since the twice-a-year GFCI was launched 5 years ago.The Index ranks 77 of the world's top financial centers based on competitiveness via responses to surveys and ratings primarily answered by investment professionals worldwide. Dubai and Doha were rated as the two fastest rising centers out of around 26 emerging economies studied in the report. The GFCI also asked respondents which centers they believed were most likely to feature as the next office location for their organizations over the next few years, Dubai was rated 5th most expected destination.

Foreign Funds Regulatory Update

The DIFC essentially operates within an independent legislative system, similar to the English Common Law, as it adheres to its own set of civil and commercial laws. This includes separate regulations governing all financial and secondary supportive services provided in the Center through an independent regulator, the Dubai Financial Services Authority. The ability to shape its own regulatory environment provides DIFC with the power to offer attractive structural guidelines and operational incentives to its registered companies. The existence of an independent Authority is crucial for fund promoters and has been regularly referred to as one of the Center's most attractive characteristics with regards to the fund industry in the Emirate. On August 26th the UAE issued a new investment fund regulation that has resulted in a mixture of different reactions in the market. Highlights of the new rules include the official shifting of regulatory supervision for investment funds from the UAE Central Bank to the Securities and Commodities Authority (SCA), which in practice has already been in charge of overseeing investment funds on a day-to-day basis. Discreet marketing of foreign funds to sophisticated investors without prior approval from the Central Bank, a previously generally tolerated practice in the UAE, might now require the SCA's authorization.

The new regulation also requires foreign funds marketed in the country to be offered through a licensed agent as well as proposing a framework for the establishment and distribution of UAE domestic funds. Some industry experts have criticized the added layer of bureaucracy in obtaining the SAC's approval and the extra constraint for fund managers to effectively treat well-informed investors in the same manner they would retail clients. Others have voiced their support to the recent guidelines, specifically since they aim to ensure a higher level of investor protection.

In an interview with Invest In, Husam Hourani Managing Partner at Al Tamimi & Co, stressed that"it is essentially business as usual" in the industry and DIFC, where one of the company's offices is based. He mentioned that prior to the updated rules; DIFC was not granted any special treatment in terms of its securities regulation. Adding "while it may have been hoped that the new Regulations would provide some form of mutual recognition or carve-out for the DIFC, the lack of this in the new regulations does not in fact change anything on the ground". Furthermore, he stated that some observers even consider the lack of such preferred status for the Center as a positive sign, because it would have resulted in the DIFC being dependent on a standing that it could theoretically lose in the future.

"The former tolerated market practice in respect of non-retail foreign funds is essentially free to continue as before on a cross-border or reverse enquiry basis" he said, commenting on the status of foreign funds under the new regulation. The absence of exemptions with respect to promoting non-retail foreign funds in the new law initially worried some fund managers, but he pointed out that there was no special treatment for these funds previously when they were regulated by the Central Bank. Hourani then highlighted how the SCA had provided several proofs of its intent to preserve the current practices in the UAE's foreign fund industry; "Given the new Regulations only apply to activities"in" the UAE, for cross-border activities and reverse enquiries it is business as usual-a position which the SCA has recently confirmed (even to the extent that the SCA has recently verbally confirmed that an invitation to a foreign promoter to come to the UAE and meet regarding foreign funds will not be caught).

The SCA has also provided other confirmations, for example, that use of fund platforms will also be treated as reverse solicitation as long as the platform itself is in compliance with all relevant regulations. Also, it should not be forgotten that there are certain exceptions contained within the Regulations themselves (for example, it is possible to market to a discretionary portfolio manager)."

Rebuilding the Silk Road

Chinese investments are becoming increasingly important for Dubai and DIFC, and perhaps the best indication of that is present on the Center's official website. In addition to the country's native language (Arabic) and today's global business language (English) the only other language option available on the website is Mandarin, providing the Chinese readers with a complete introduction to DIFC and its areas of business, registration procedures, and legislation. During the last week of September, a senior DIFC delegation visited China with stops in Beijing, Shanghai and Hong Kong to discuss Dubai's strategic role as a gateway for Chinese investments into the region. Jeffrey Singer, Chief Executive Officer at DIFC Authority led the visiting group and his official comments convey the Center's confidence in its ability to facilitate China's growing presence in the Middle East and Africa. "Since its inception, DIFC has attracted major Chinese financial firms, who over the years have achieved significant growth in the region. In our recent visit to China, we saw great interest from Chinese institutions looking to come into the region to benefit from the promising growth opportunities. DIFC is committed to growing business and trade relationships between China and the Middle East, and to be a catalyst in the development of the new Silk Road" he was quoted as saying in an official press release.

He also noted that although relations between the region and the second largest economy in the world were historically strong, they have only now started witnessing tremendous growth. "China and the Middle East have been important trade and investment partners for centuries, but it was only relatively recently that volumes have risen dramatically. With the advent of high-technology, the scale today is many thousands of times greater and more complex, and DIFC is the ideal jurisdiction to access this opportunity" he said. This trip comes a year after DIFC signed a Memorandum of Understanding (MoU) with the Chinese Pudong Financial Services Bureau in Shanghai in 2011, displaying a continuous focus on strengthening bilateral relations. The main purpose behind the MoU is to increase awareness among potential investors from both sides about the numerous business opportunities spread across China, South Asia, the Middle East and Africa.

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