DIFX holds the key to the DIFC

At a low-key ceremony held in Dubai's Emirates Towers on September 20th, Michael Baer, head of private banking for Zurich-based Julius Baer, received license number one from the Dubai International Financial Centre.

With the presentation of that license, the DIFC ceased to be a development project and became an operational entity that has been designed to foster a new financial services cluster in the Middle East.

Dubai officials now hope that the DIFC will catapult the city into the major league - alongside London, New York, Singapore and Tokyo - and they believe they have the right combination of timing, zero tax, regulations and proximity to Gulf wealth to make their dream a reality.

The question is, will the top tier of global financial institutions buy into the dream? The next wave. According to David King, acting CEO of the DIFC's regulatory authority, the DFSA, over 50 financial institutions have already expressed interest.

Standard Chartered and a Gulf energy fund joined Julius Baer in the first wave of licensees, and a further 20 licenses are expected to be issued by the end of the year. Others that have announced interest but are yet to be licensed include Credit Suisse, Merrill Lynch and Deutsche Bank.

The reasons why the DIFC appeals to these institutions vary, but universally include the benefits of local access to the estimated $1.8 trillion of Arab wealth. While some 45 percent of Middle Eastern assets are currently held overseas, Arabs are now looking for investment opportunities closer to home.

Banks and asset management firms that can provide high-quality local service therefore stand a good chance of winning the business of rich individuals, while the development of the region's capital markets will also throw up opportunities for investment bankers at a time when other global markets, with the notable exception of China, are stagnating.



Julius Baer has hired eight staff for its DIFC business, and will use Dubai as its hub for the Middle East and South Asia. Although the bank will only act in an offshore capacity for now - giving advice locally but passing transactions requests on to Switzerland - it will consider booking business in Dubai once it sees how much demand for its private banking, institutional asset management and capital markets services it can generate.

"What the DIFC is doing is really quite exceptional," says Michael Baer. "They have set up a financial center in a region where until now it was not possible to offer a full range of services."

Brij Singh, regional head of Julius Baer for the Middle East and Indian subcontinent, explains that high net worth individuals expect their private bank to provide a local service, and that setting up in Dubai is therefore an integral part of Julius Baer's value proposition.

Standard Chartered, on the other hand, has 10 branches in the UAE that offer a wide range of retail, corporate and investment services licensed by the UAE central bank.

According to Ray Ferguson, Standard Chartered's CEO for the UAE, his bank has sought a DIFC wholesale license so that it can be more "creative and futuristic" in the structuring it can do. "If the DIFC can attract even a small percentage of Arab liquidity, that will create major opportunities for a bank like us."

It is the creativity of the DIFC's regulatory infrastructure that lies at the heart of the center's sales pitch. 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.