Can the DIFC beat Bahrain? (page 2 of 2)

At the DIFC, jurisdiction on commercial disputes will be through a Courts Law, and not the UAE courts.

The DIFC also offers tax exemptions for up to 50 years and will not insist that UAE nationals be given a set number of jobs within any company. This is a selling point for companies hoping to reduce their labor costs. Banks in the UAE are expected to increase the number of UAE nationals on their payrolls by four percent annually. And the quota system may be extended to the insurance sector as well. If this happens, some of the affected financial institutions may make a quick exit from the country.

"As a concept, the DIFC offers a lot that is presently not possible in the UAE or any other Gulf market, even Bahrain," says a senior Gulf banker. "If the final set of laws are as good as the concept, international and regional institutions would want to be a part of it, especially given that getting licenses from the central bank or the concerned ministry is still a difficult task."

The DIFC intends to create its own capital market, but why would branch offices of the international majors want to have anything to do with raising funds through share offerings? Is the DIFC stock market meant for regional entities or select listed companies on the Dubai Financial Market seeking wider coverage? The markets are skeptical about these issues.

There are doubts on other fronts as well: will the major institutions shift their back office operations to the new center? Wouldn't they get better cost savings from bases in India or elsewhere? Dubai, after all, is not cheap.
Dubai would do well to watch what its counterparts in Bahrain are trying to achieve.

The Bahrain Financial Harbor project - in which the government holds a minority stake - aims to make the island state the Middle East hub for the global financial sector. Bahrain occupied this place until the mid-1980s when social unrest and economic uncertainties knocked it off its perch.

Already, senior Bahraini ministry officials and consultants attached to the BFH project - which is to be completed by 2009 - are wooing prospective clients. "Although the region is going through a phase of political instability, Bahrain's wealthy financial infrastructure has managed to remain attractive to international financial institutions and investors," said Prime Minister Sheikh Khalifa bin Salman Al Khalifa when construction on the BFH started.

Although the BFH will feature capital and retail insurance markets, Bahrain will primarily seek to consolidate its credentials as an Islamic banking center. The setting up of an Islamic banking subsidiary by Swiss banking giant UBS in the Gulf state was a major coup.

A further shot in the arm was the recent $500 million sovereign bond issue, which was hugely successful. "At the height of all the concerns over Iraq, we came out with an offering that has received an enthusiastic response from the world markets," said Mahmood Al-Kooheji, the director of government shareholdings at Bahrain's finance ministry.

In sharp contrast, Dubai's efforts to get its $500 million bond to the launch pad have faltered. So many deadlines have been rescheduled that there are not many takers for the latest bond offering. It started off as an international offering, and was later downgraded to regional status.

According to a senior UAE banker, "Dubai has lost a lot of face among the international financial community with the delaying of its bond. Bahrain has won this round hands down, and the BFH venture is now eliciting some serious interest. Overall, Dubai and the DIFC may still have the edge, but more postponement in granting licenses will test a lot of patience. That is something it cannot afford."

Then there is the war. A war in the region - no matter how brief the actual combat - was the last thing project planners in Dubai or Manama wanted. Many financial institutions that had expressed interest in signing up with one or the other are reportedly now having second thoughts.

According to one Swiss bank official, who was considering the DIFC with some interest, the war could "set back our plans by six months to a year. Given the charged sentiments that would be there all around, the Middle East will not be a good place to be for a newcomer, especially one from the West."