When Cominvest, the asset management unit of Germany’s second largest bank, Commerzbank, prepared to open its first foreign branch, it considered Saudi Arabia, Bahrain and Qatar, finally settling on Dubai.
“Our parent company, Commerzbank, has been in Beirut for more than 50 years and Bahrain for more than 30 years but we chose Dubai,” says Cominvest head Michael Klimek. “Typically, the first choice for companies like us is London. But we wanted to leverage our parent company’s network in the region and the economic environment [in Dubai] made it very attractive.” Klimek says the emirate’s advanced infrastructure, deep talent pool, and favorable regulatory environment tilted the balance in Dubai’s favor. “The DIFC [Dubai International Financial Center] welcomed us with open arms. One is required to fill out the application forms, but you can start doing business within weeks. That is being supportive, which is exactly what a foreign player would expect,” he says. Klimek admits there were some hiccups, such as waiting a little longer than expected for the license and visas, but is philosophical about it.
If Cominvest’s experience, hiccups and all, is representative of other financial services firms establishing a Gulf presence, then Dubai stands a chance of winning the battle to become the Middle East’s financial center. Between Dubai, Bahrain, Qatar and Saudi Arabia, perceptions are in Dubai’s favor. Many see Qatar as merely a blip on the radar, Saudi Arabia as a sleeping giant, and Bahrain as having coasted while business went elsewhere. Inevitably, such perceptions are hotly contested. A high-ranking Manama official derides the assertion that complacency caused Bahrain to slip, adding that Dubai’s first place aspirations are built largely on fantasy. “To begin with, I don’t see it as a race and I don’t see how we have lost the race. If a financial center [Dubai’s DIFC] hands out 500 licenses, only half of which are financial institutions and the rest are flower shops, sandwich makers and opticians. What do you make of that?” he says. By contrast, he says, Bahrain has 403 regulated financial services businesses.
Perhaps, but Dubai is increasingly popular, and the relative ease of doing business there is one way to account for the interest. Dubai has not yet consolidated, but when it does, will it be as a specialist financial center? And how many financial centers does the region really need? Expert opinion is divided, and the real question may lie in whether specialization is the way forward at all.
Race is run. Ali Al Shihabi, founder and chief executive officer of regional investment bank Rasmala Investments, says the race is over and the battle decisively won by Dubai. “Ultimately, the bankers have voted with their feet and it boils down to where the firms want to locate. Global firms have set the trend by coming here, the Dubai International Financial Center, because it benefits from all the natural advantages that Dubai benefits from,” says Al Shihabi. “I also don’t think Qatar is seriously trying to compete in this domain, because it is too late to compete.”
Al Shihabi says Dubai’s success as a financial center happened for the same reasons the city’s tourism and aviation industry have been successful – first mover’s advantage and business momentum. “You can’t beat Dubai today [in terms of] of the airline connections, infrastructure and the talent pool, all of which want to be next to each other. Professionals want to come here, so you can recruit for Dubai globally. You can’t do that for Bahrain or Qatar,” he says. Bahrain’s preeminence as the Gulf’s financial center has slipped, he says. Qatar is a different story. “Qatar is a huge gas producer so people will be coming there to do business and its market will be locally focused. However, it is still a very interesting market and a lot of people will set up in Qatar, including us,” he says.
Dubai may be in the ascendant, but a good case can still be made for Bahrain: it’s a mature market with a sound reputation. Jane Dellar, managing director of Bahrain Financial Services Development (BFSD), puts up a spirited defense of the city. “In Bahrain you have a third of cost in terms of commercial and residential properties, inflation is very low here and the engines of the companies are based in Bahrain,” she says, adding that Bahrain has been an established financial center for 30 years. “We have over 10,000 people working – 7,000 of them Bahrainis – in the finance industry, contributing over 27 percent of GDP,” Dellar says.
Also to their advantage, she says, is that Bahrain is a countrywide business community – the finance industry is not confined to a free zone. “We don’t have special zones. The same regulation, legislation and taxation apply across the board in Bahrain. You can have 100 percent foreign ownership in Bahrain and you are free to employ whom you want,” she says.
Al Shihabi, of Rasmala, counters that free zones have benefited Dubai. “The regulatory environment was an enabler, but I think what clinched it for Dubai was ‘Dubai Inc.’ – the whole package,” he says. “The fact that you can open up without any local impediments was the clincher. So the capacity to incorporate the DIFC in a 100 percent free zone with a worldclass commercial and legal environment was another factor.”
Khan Zahid, chief economist at Saudi Arabia’s Riyad Bank, votes Dubai as most likely to succeed, citing Dubai’s head start, infrastructure and reputation as the critical attributes. “I don’t think the UAE will have enough business within the country to serve itself, so they have to be a regional player. But whenever a foreign finance company thinks about opening an office in the region, the first place they think of is Dubai because that is the one they know about. That familiarity gives them a big edge,” he says.
Role-play. Although Zahid is careful not to rule Qatar out as a regional competitor, he says Doha will likely become a financial center dedicated to servicing its domestic industries. “Qatar has been growing by leaps and bounds and has huge gas reserves, which are going to inject billions of dollars into the economy. At the last count, they have been talking about $120 billion in spending. The money will go into infrastructure services, the oil and gas sector, and downstream projects. All of these will require financial services and the financial services industry in the country will be best placed to focus on them,” he says.
Doha and Dubai are not directly comparable, he says. “I see Dubai as a regional success story and Qatar as a local success story. Bahrain may have traditionally been the hub of the banking industry but it lost its luster some time back and didn’t do anything for a long while. Since there is not much local business in Bahrain, Manama’s standing as a financial center will depend on how much it can attract regional business. If Dubai and Qatar are counted out, there isn’t going to be much left for Bahrain and it will havethe most difficult ride,” he says.
Which is another way of saying that no one will have an easy ride. But competition is good for business, says Youssri Helmy, chief executive officer of fund management solutions provider IdealRatings. “[Whether] three regional financial hubs are possible, healthy competition ensures good service to clients. One of them will certainly dominate the others in the coming years but for now these hubs will have to compete [on offering] better services,” says Helmy. Until then, he says, the emergence of competing hubs has prompted valuable developments, such as an expansion of the talent pool. “Some of the players that have moved in have also expanded, which, again, benefits the region,” says Helmy.
The elephant in the room is, of course, Saudi Arabia, which, despite being the region’s biggest economy, has done little more than watch as its smaller neighbors fight for supremacy. Analysts say this is no accident. Zahid says Saudi Arabia is taking its time – typical of the country – but that when it enters the ring, it will quickly dominate the region. “Considering that they are the biggest economy in the region, even if they start late they can quickly become bigger than anybody else by virtue of their local business alone,” he says.
Rasmala’s Al Shihabi says Saudi Arabia has stayed out of the race because the country, with its enormous domestic market, is operated on a different model. “It is not in the international financial market game. It doesn’t need to go around buying companies across the world. It has foreign reserves but they are mostly in capital markets. The government in Saudi Arabia invests more domestically than other GCC governments,” says Al Shihabi. Abu Dhabi is similar, he says. “It is an extremely rich place, like Qatar.It has its own rules, it doesn’t need to do what Dubai is doing and I don’t think it can duplicate Dubai,” he says. Dellar, of BFSD, says Saudi Arabia has a de facto financial center in Bahrain, which, conveniently, is not far from Riyadh. “Around 70 percent of tourism in Bahrain is Saudi and a lot of business here is conducted for, with and through Saudi Arabia,” she says.
Two too many. One dissenting voice on the desirability of three financial centers is Riyad Bank’s Khan Zahid. “I don’t think all three are going to work, especially at the level of ambition that they each hold.” Cautioning against the fragmentation that will ensue if the hubs blindly persist in competing, Khan proposes instead that the three centers define boundaries in a cooperative spirit before economic reality compels one or all of them to scale down their ambitions.
“The region just does not need three financial centers,” agrees a leading Dubai banker, who dismisses the problem as one of simple oversupply. “The DIFC had a Singapore-Luxembourg inspiration and it has worked in terms of attracting investment houses,” he says. But since the houses established themselves in the DIFC there has been a dearth of international confidence in the exchange, he continues, because even though they come from three centers, the available financial products are too homogeneous. “If you had a certain amount of differentiation, it would justify independent financial centers in each of these countries, but that is not the case,” he says.
Cominvest’s Michael Klimek disagrees. “Europe, which is not the biggest continent, is the biggest financial center in the world, even bigger than Chicago and New York lumped together. In Europe you have London, Frankfurt, Zurich, Geneva, Luxembourg and Milan as financial centers, plus a few sub-centers. Put in perspective, three centers here is fair,” he says.
Dellar, of BFSD, agrees that the number of centers is a red herring and that, as in Europe, it’s about differentiation. “Look at the mature markets in London, Dublin, Edinburgh, Geneva, Frankfurt and Zurich in Europe, and Cayman, Bermuda and Bahamas in the Caribbean – they are all doing financial services very successfully,” she says. Competition is good, she says. “There are fierce battles going on between London and New York, between Dublin and Luxembourg, between Germany and France, between China and India. Every country is entitled to an economic plan to the success of its own economy,” she says.
But Al Shihabi, of Rasmala, says that, ultimately, the top performing center is what counts. “You don’t have six financial centers in Europe. It is only London. All the big Swiss and German banks are in London. Switzerland and Luxembourg may have a private banking legacy but today if you are a hot-shot investment banker, you want to be in London, not Luxembourg or Switzerland,” he says.
Leslie Dharmasena, director of equity trading at Dubai-based NBD Investment Bank, says the region needs a centralized financial center, be it Bahrain, Dubai or Qatar. “I think these countries will continue to have autonomous financial centers and that they will compete with each other – leading to a situation where there will be downward pressure on prices and margins,” she says. “It’s because they will come up with the best possible offers to attract customers, which will ultimately drain their profitability.”
For many analysts, the real issue is the inability to agree on a coordinated approach, a problem that mirrors disagreements plaguing currency unification and the lack of cohesion on monetary issues. But with each city aiming for glory, there are no plans to negotiate any time soon.
