DIFX holds the key to the DIFC (page 2 of 2)

The benefits of Dubai as a tax-free city are well known, and the DIFC's plans for 40 buildings with capacity for 50,000 people are impressive, but in themselves they are not enough to lure top-tier banks to the Gulf.

Speaking at the Julius Baer licensing ceremony, the DIFC's director general, Omar bin Sulaiman, outlined what he sees as the core of the center's offering: "By providing a highly regulated, low-cost financial environment with complete transparency, our vision of creating a universally recognized hub for institutional financial services and the regional gateway for capital and investment is nearly fulfilled."

Sulaiman's decision to stress regulation as the foremost of the DIFC's attractions was no accident. Management knows that without a high-quality and independent regulator their project won't fly, and that the regulator has two primary functions.

The first of these is to ensure compliance, and to give licensed banks' board members and home regulators confidence that the DFSA will prevent any illegal activity. The second function is to provide a platform of rules that international banks recognize and can use to their advantage.

Habib Al Mulla is the chairman of the DFSA's regulatory council, and he explains that the DIFC's laws have been synthesized from international best practices to give incoming financial institutions a "comfort level" when operating from the center.

Since the DIFC concept was announced in February 2002, a team of lawyers has drawn on the banking laws of Britain's Financial Services Authority, the insurance laws of the Bahamas, and the companies laws of Canada and Delaware.

Hybrid laws

Rather than worrying about compliance with unfamiliar local laws, therefore, incoming DIFC tenants and their clients will be able to start work using principles they know and laws that are written in English.

The hybrid DIFC laws have now been authorized by various local and federal decrees, and are backed up by an independent regulatory council, an arbitration committee and even a judiciary.

The needs of Islamic financial institutions haven't been forgotten either, and the DFSA has provided separate legislation, derived from the regulatory systems of Malaysia, Bahrain and Saudi Arabia, that it hopes will evolve into the common standards for Islamic banking globally.

The path to launch hasn't always been an easy one for the DIFC, however, and has been characterized by protracted negotiations with Abu Dhabi. In the early days of the project some DIFC executives claimed that the center would be operational in time for the World Bank and IMF meetings in Dubai, a claim that soon proved to be very premature.

Just this summer the DIFC was hit by a storm of negative publicity when two senior Western regulators were dismissed without a public explanation. The press was left to speculate that Phillip Thorpe and Ian Hay Davison, CEO and chairman of the DFSA respectively, had argued with DIFC management over regulatory independence and certain questionable land deals at the center's premises.

The situation was only defused when Sheikh Mohammed himself stepped in to give his personal guarantee of the DFSA's independence. Insiders also read the appointment of Sulaiman as DIFC director-general in early September as a move to boost governance and end internal politicking.

Whether delays and politics at the DIFC will have a lasting effect on the center's attractions remains to be seen. As the regulatory authority will not be issuing retail banking licenses, the hope is that the center will not step on any central bank toes.

DIFX launches 2005

What it will do is help attract new wholesale banking, insurance, asset management and Islamic finance businesses to the Middle East that might otherwise not have come to the region at all. The DIFC's plan also calls for an international equities and debt exchange, the DIFX, that will be open to foreigners when it launches in 2005.

This exchange will provide DIFC tenants with a medium through which they can take their clients to an international market, whether the client wishes to launch an IPO, undertake a secondary listing, or issue a bond or other debt instrument.

If successful, the DIFX will mean that Arab companies won't need to list on foreign bourses like Luxembourg to reach foreign capital, and that a virtuous circle of economic growth and investment can be created in the Middle East. how to bank by the rules Some experts are now questioning the sharia legitimacy of the world's fast-growing Islamic finance industry.