Three cheers for the DIFX

The lack of transparency and illiquidity of Middle East capital markets used to be a frequent essay topic for business administration students in the region.

But perhaps the conclusions of all those essay writers have finally been appreciated, and will contribute to the success of the Dubai International Financial Exchange which launches on September 26. This is a historic moment indeed.

Observers will be keenly awaiting news of the first companies to list on the region's first cross-border stock exchange. Will the first candidates all be regional? Or will some foreign companies seek a listing to attract the interest of Middle Eastern investors?

The DIFX has two key characteristics. First, the listing and regulation of the exchange will be to the highest global standards. Secondly, trading will be open to investors from anywhere in the world.

Those who question the need for a regional stock market, with cross-listings of top regional companies and even non-regional stocks, are generally involved in the closed, semi-transparent local stock markets of the region. Only those with a vested interest think that the DIFX is a bad idea.

This not surprising as in the UAE, for example, we have regulations that mean that most initial public offerings are start-ups, albeit with a business plan passed by the Ministry of Finance and Economy. Thus many strong local companies are unable to raise money from the local stock markets and have to look elsewhere for funding.

Efficient capital markets are very good news for any economy. Money flows to where it can most profitably be employed and away from areas that cease to offer an economic return. Investors get the highest returns available on their capital and good companies grow and prosper.

So much for the theory, in practice markets have to be organized and allowed to compete amongst themselves for business. It is going to be very interesting to see how the DIFX squares up against existing stock markets in the region. They may put up something more of a fight or just bow to the inevitable and encourage cross-listings.

In the end the investors will decide which sort of market they prefer, and vote with their capital. That a more modern, well regulated, and larger market will triumph looks inevitable, and investors should welcome the DIFX with three cheers this autumn.