Punching below the potential weight
By Yadullah Ijtehadi, Special to Gulf News
It seems only natural now that the Gulf should have a very high profile in the world’s financial circles.
Gulf states have been injecting funds into Barclays, HSBC, Deutsche Bank, Merrill Lynch, Nasdaq, LSE and Citibank, among others, and the authorities are investing billions in their financial services infrastructure.
But the Gulf’s aspiring financial hubs – namely Dubai, Doha and Manama – have to support this infrastructure by implementing some crucial reforms to propel themselves forward, otherwise they will remain in the second or third tier of offshore financial hubs.
All the economic indicators certainly seem to help the Gulf’s case.
World Bank data suggests that the Gulf Cooperation Council’s (GCC) combined GDP (purchasing power parity), stood at $930 billion last year, making it the 15th biggest economy in the world, ahead of Turkey, the Netherlands and Australia and not far behind South Korea and Canada. Other estimates suggest that the collective GCC economy could emerge as the 10th largest in the world this year, surpassing South Korea and India.
While some would argue that the Gulf’s financial hubs have raised their profile very quickly, others analysts have suggested that much more can be done to speed up the process even further otherwise Dubai, Doha and Manama will not realise their true potential.
Currently Dubai ranks 24th in the International Finance Corporation’s (IFC) global financial centres rankings, with Manama ranked at 39th and Doha at 47th. This may seem impressive at first, but Hong Kong and Singapore are ranked much higher at number three and four.
“The relatively high positions of international financial centres such as Hong Kong and Singapore… suggests that the GCC is punching below its potential weight,” notes a report by think tank Chatham House on the Gulf’s potential as financial centres. “Clearly, so far, it [the Gulf] has failed to develop a presence in financial products in which, arguably, it should be well placed… However, provided shortcomings are addressed, the backing for the GCC to move up the IFC rankings is strong.”
So what’s holding the Gulf’s financial centres back?
The foundations of any good financial centres is not built on brick and mortar but sound legal environment. The oases of financial regulations aside, the Gulf’s financial framework is largely seen as weak and inadequate to serve the needs of the international and even the regional financial community. Gulf authorities are moving at varying degrees on financial reforms and in the absence of a coherent, urgent and collective framework, Gulf financial centres are losing out to places like Latin America, Eastern Europe and Asia.
What good is regulation though, if it is not implemented? According to Hawkamah, poor corporate governance is costing regional listed companies anywhere between $200-300 billion a year. Which is why, even as the companies are clocking double-digit growth, their shareholders are not reaping the benefits of their progress.
Nowhere is this truer than in the Dubai Financial Market (DFM) where the Deyaar and Dubai Islamic Bank corporate scandals have depressed overall investor sentiment. Many foreign investors have reportedly pulled out funds from the DFM, with some of the market heavyweights witnessing a decline in foreign ownership last month.
Strong institutions are the key, as some of the leading financial hubs centre around some very large companies.
But this month’s Forbes 500 Companies Survey only features one GCC company (Sabic, ranked 227th) on its annual list, which shows that most Gulf corporations continue to operate as small fiefdoms, with little or no impact on the world stage.
The truth is that the Gulf’s financial institutions can no longer afford to be in the backwaters or hide behind protectionism.
Whether it is investment houses, or exchanges, the time is ripe – when the going is great – to do away with protectionist policies.
The merger of Emirates Bank and National Bank of Dubai has been widely regarded as ground-breaking in the region, but there is room for more consolidation.
Imagine a Samba Financial Group merger with National Commercial Bank, National Bank of Abu Dhabi with Abu Dhabi Commercial Bank, Qatar National Bank with Commercial Bank of Qatar or the amalgamation of various Islamic institutions in Dubai – Dubai Islamic Bank, Dubai Bank and Noor Islamic Bank. What powerhouses would that create.
But the Gulf banks’ decision to ignore local opportunities and pursue regional acquisitions shows that they are tiptoeing around the protective M&A environments on their home turf. And what’s stopping Dubai International Financial Exchange to leverage its brand new relationship with Nasdaq to merge with the Dubai Financial Market?
Anthony Mallis, CEO of Bahrain-based Securities and Investment Company (SICO), goes even further. “Why can’t Abu Dhabi and Dubai exchanges merge? Why the sensitivity around it – these exchanges are simple electronic trading platforms and should not have any sentimental value attached to them as they are very recent developments.”
Qatar’s decision to split its central bank and merge it with the country’s stock market regulator in an effort to attract more international banks is a hugely positive development.
Such sweeping measures will give the aspiring regional financial centres the edge and allow them to displace other financial centres from the top spots. Otherwise, the Gulf financial centres will continue to play the role of regional and niche players. That is certainly not the end game Dubai, Doha and Manama have in mind.
– The writer is managing editor, Zawya.com