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Wednesday, 22 November 2017

IFR Mid East 2006 - Centres aim to excel

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Financial centres in the Gulf are competing to become the region's financial hub. Nick Kochan looks at the three main centres - Bahrain, Dubai and Qatar.

Measures to strengthen the licensing framework for banks operating in Bahrain came into affect on July 1 2006. They follow similar licensing reforms implemented for the insurance and investment business sectors, in April 2005 and April 2006 respectively.

Licence categories are defined, under the new measures, by regulated activity, rather than institution type. The five basic licensee categories under the integrated new framework are conventional bank, Islamic bank, insurance, investment business and specialised licensees. Onshore and offshore banking licenses are simplified, enabling offshore banks to undertake onshore business in a controlled manner.

The existing bank licence sub-category of ‘Full Commercial Bank’ is replaced by ‘Retail Bank’. Meanwhile, the two-existing offshore sub-categories of Offshore Banking Unit and Investment Banking Licence are to be merged and replaced with one unified ‘Wholesale Bank’ licence sub-category.

Wholesale banks will be permitted to undertake individual onshore transactions above BD7m in respect of deposit-taking and the provision of credit, and above US$250,000 for investment business transactions, including the sale of an investment product.

According to Khalid Hamad, Executive Director of Banking Supervision: "We have clearly defined all regulated activities in line with leading international practice. We have created a fully flexible and modern system that focuses on the regulated services undertaken, and one that will be familiar to institutions operating in other major financial centres.

"Its flexibility will accommodate future market developments, without requiring frequent changes to our licence categories. We will be monitoring the impact of the new system closely during the coming months and have set the minimum transaction thresholds for wholesale banks' on-shore business at a conservative level, in order to allow our on-shore banks already operating in the Kingdom time to adjust."

The Bahrain Monetary Agency was established in 1973, shortly after Bahrain gained it independence from the United Kingdom. The BMA was established under Amiri Decree No 23 (1973) as the central bank and the bank regulator for Bahrain. Its mandate was to implement monetary policy, supervise and regulate the banking sector, and act as the government's fiscal agent. The BMA was given responsibility for encouraging the growth of Bahrain as a major international financial centre.

Bahrain's foreign currency cash reserves are also managed by the BMA, which has maintained a fixed exchange rate against the US dollar since 1980. This provides Bahrain with a high degree of economic and price stability, while encouraging the growth of the economy. The fixed exchange rate remains the cornerstone of Bahrain's macroeconomic management strategy.

In 2002, the mandate of the Bahrain Monetary Agency was expanded to make it the single regulator for all financial institutions in Bahrain. The BMA is following the same strategy with these sectors as that in the banking sector, to ensure that the regulatory standards for these sectors meet the highest international standards.

The BMA has taken a lead role in encouraging the development of the Islamic banking and insurance industry, where Bahrain is now recognised as a global leader. Bahrain has the largest concentration of financial institutions in the Middle East. It regulates a total of 362 institutions, of which 186 are banks and banking-related institutions, 163 insurance and insurance-related firms and 13 capital market brokers. These institutions offer money market and portfolio management, corporate and private banking, investment advisory as well as insurance products and services. The financial industry is a key component of the Kingdom's economy, representing 17.5% of gross domestic product (GDP).

Banking – The consolidated balance sheet of the banking system stood at US$102.1bn at end-2004. Of this, the consolidated balance sheet of offshore banking units (OBUs) totalled US$84.1bn, representing 82.4% of the total balance sheet. The consolidated balance sheet of full commercial banks (FCBs) amounted to US$12.4bn, which represented 12.1% of the total balance sheet of the banking system, while the consolidated balance sheet of investment banks amounted to US$5.5bn, representing 5.4% of the total balance sheet.

Bahrain has also emerged as the world's Islamic financial capital, with 25 Islamic banks, five key industry-support organisations and 16 Islamic insurance (takaful) companies. Total assets of Islamic banks stood at US$4.4bn at end-January 2004.

The BMA was the first central bank to issue Islamic bonds (sukuk). A rolling programme of monthly issuance of the short-term Sukuk Al-Salam has been in place since June 2001. It complements the medium and long-term ijara (leasing) sukuk, which the BMA began issuing in September 2001.

Insurance – Bahrain's insurance industry includes 21 direct insurance firms, 1 reinsurer, 84 offshore firms, 27 brokers, eight loss adjustors and nine actuaries. The paid up capital of the insurance market totalled US$581m at the end of 2002, while total assets were nearly US$3bn and gross premiums exceeded US$1bn.

Capital markets - Foreign investors are allowed to acquire up to 49% of listed companies, while nationals of other Gulf Cooperation Council (GCC) countries can acquire 100% ownership. Foreign brokerage firms are also allowed to operate at the BSE, which had a market capitalisation of US$10.6bn at end-February 2004, with 44 listed companies, 29 mutual funds and 15 bonds.

Strong economy - The growth and development of Bahrain's financial sector has been underpinned by a buoyant, diversified economy. The Kingdom also tops all other Arab countries in terms of foreign direct investment (FDI) inflows. This is confirmed by the United Nations Annual World Investment Report for 2002. The 2002/2003 Industrial Development Report of the United Nations Industrial Development Organisation (Unido) shows Bahrain as a leader in industrial performance for the region. Bahrain has a sovereign rating of A– from Standard & Poor's (2002) and Fitch.

Dubai

The Dubai International Financial Centre (DIFC), which opened in September 2004, has attracted high-calibre firms from around the globe as well as the region. It

focuses on sectors of financial activity, including banking services (investment banking, corporate banking and private banking); capital markets (equity, debt instruments, derivatives and commodity trading); asset management and fund registration; insurance and reinsurance; Islamic finance; and business processing operations.

Financial institutions may apply for licences in these sectors. Firms operating in the DIFC are subject to zero tax rate on profits, 100% foreign ownership, no restrictions on foreign exchange or repatriation of capital, operational support and business continuity facilities.

Financial services in the DIFC are regulated to international standards by the Dubai Financial Services Authority (DFSA).

The DFSA imposes regulation that seeks to encourage a competitive environment. A team of experienced regulators heading the DFSA ensure that it promotes transparent and orderly markets that are not prone to market abuse or systemic risk.

The Dubai International Financial Exchange (DIFX), which opened in September 2005, is regulated by the DIFC's independent legal system and supervised by the DFSA.

The DIFX hosts a range of financial instruments including:

  • Equities
  • Bonds
  • Funds
  • Islamic products
  • Index products
  • Derivatives
Banking services - The underdeveloped state of capital markets in the region has turned investors and borrowers towards international markets outside the region. Over the last 30 years – a period of rising oil revenues and rapid economic growth – a vast stock of excess capital in the region has been transferred to foreign banks and financial institutions. Regional investment in foreign capital markets is estimated by Booz Allen to be approximately US$1.8trn.

Businesses in the region have traditionally depended heavily on bank finance for their start-up and expansion needs – commercial loans account for around 70% of their funding requirements. But experience has shown that commercial loans are often an inefficient, high cost and illiquid method of finance. There is a large and growing demand for the more efficient and more sophisticated forms of financing that the international capital markets can provide.

The market opportunity - Over the next five years, there are a number of factors pointing to an increase in the use of local capital markets by companies, financial institutions and governments in the region. These include:

  • A programme of more than 90 privatisations (notably in the telecoms and power sectors) enabling governments to release capital from state-owned assets and giving impetus to deregulation and market liberalisation throughout the region
  • The increasing need for IPOs and secondary offerings by growth companies in the region
  • The rapid expansion of trade in the region – the region's annual imports and exports are in excess of US$521bn and US$581bn respectively; the UAE accounts for 14% of exports.
  • Dubai is now the third most important re-export centre in the world after Hong Kong and Singapore
  • The vast programme of infrastructure spending by governments in the region, not least in the rebuilding of Iraq, requiring increasing issuance of government debt in the international bond markets
  • The growth of foreign direct investment in the region requiring access to a regional capital market – already 139 of the Fortune Global 500 companies (including all of the top 10) have established operations in Dubai.
The Dubai International Financial Exchange (DIFX) facilitates the mobilisation of capital in the primary markets and provide high levels of liquidity for investors trading in the secondary markets. Among the many benefits the DIFC offers its participants are:

  • 100% foreign ownership
  • Zero per cent tax rate on income and profits
  • A wide network of double taxation treaties available to UAE-incorporated entities
  • No restrictions on foreign exchange or capital/profit repatriation
  • High standards of rules and regulations
  • Strict supervision and enforcement of money laundering laws
  • Office accommodation, state-of-the-art technology, sophisticated infrastructure, data protection/security, operational support and business continuity facilities of uncompromisingly high standards,
The DIFC provides a low-cost environment and a workforce of well-educated, highly skilled professionals for investment banks looking to outsource the back office.

Legal jurisdiction - The Dubai International Financial Centre Courts were established and the laws enacted passed in December 2004. The DIFC Courts are an independent judicial system dealing with matters arising from and within the DIFC. The DIFC Courts are led by Chief Justice Sir Anthony Evans and Mr Michael Hwang SC as Deputy Chief Justice.

Qatar

Qatar is embarking on a process of economic development that will accelerate it into the fast lane of Gulf States. This will involve not merely a massive US$110bn project finance programme taking it through to 2010 and beyond, but also the establishment of a regulatory agency and investment centre for the Gulf.

This will be celebrated when the country hosts the Asian Games at the end of this year, a monumental challenge for a newly emerging economy and infrastructure, but one that the Government, its airline and its economic establishment is grasping with alacrity.

Economic growth and potential are the two driving forces now pushing Qatar, says Phillip Thorpe, the chairman and chief executive officer of the Qatar Financial Centre Regulatory Authority. "The numbers are quite extraordinary in terms of the development," he said. "GDP growth is at least 15% per annum. Population growth is around 100,000 a year, which represents about 10% per annum population growth. There's a lot of building going on. There's a shortfall in supply at the moment, both commercially and residentially."

Project finance is at the heart of the building of the new Qatar, and Thorpe says that the world's top 50 banks will be involved. "We’re seeing a huge flow of interest," he says. "These institutions are already alert to Qatar. They're doing the deals, they're providing the financing arrangements and looking at the refinancing." Thorpe says that the largest project finance developments are in oil and gas, and oil and gas derivatives, including new production lines, loading facilities and ships.

The country is an important supplier and hub for the transportation of natural gas, says Thorpe. He hails not merely the financial centre, where he has a key role, but also the country's sound industrial base. "It's a very interesting industrial economy with a lot more long-termism than you find anywhere else," he says. "The gas business is generally on the basis of 25-year supply contracts, which give you certainty, and it is only a matter of time before we have a spot market to match it."

Key to Qatar's development is the expansion of a quality financial centre. Many global banks have set up offices in Qatar to facilitate participation in the project finance opportunities.

Thorpe is gratified at the number of substantial names. "The aim is to get good quality institutions, and for us it's a lot easier if we're dealing with institutions that are from well-regulated jurisdictions familiar with the systems of controls; people who know how to operate the systems," he says. "It doesn't preclude people coming along with less knowledge, but they have to show that they can achieve these standards."

Standards of law are critical to Qatar's success and durability as an on-shore financial centre, says Thorpe. "It's not a free-zone that's been created with physical boundaries and a limitation on what you can do," he says. "It was intended to increase capacity in the domestic market and provide a regional platform. Firms look at Qatar and they think 'This is a story we want to have a piece of'. They want to know how they can leverage access to the region from Qatar. It's fundamentally an onshore proposition – it's not creating another offshore environment."

The range of products to be found in Qatar is wide and growing, says Thorpe. "We have a capacity for Islamic product, which is starting to be developed in the domestic market," he says. "There is scope for development in brokerage, equity research and peripheral services. We expect growth in terms of the secondary market and debt commercial paper and there’s undoubtedly an appetite for mortgage-backed securities in the market.

"There is a need for capacity in commercial banking, investment banking; working the deals for the projects that are being done. There's a huge amount of liquidity but very little product around."

History and structure of Qatar Financial Centre - The Qatar Financial Centre opened on May 1 2005 with a brief to attract international financial institutions and multinational corporates to the country. The centre consists of the QFC Authority and the QFC Regulatory Authority .

The QFC Authority is responsible for commercial strategy and for developing relationships with the global financial community and other key institutions. The Regulatory Authority supervises financial services firms in the QFC. It has a broad range of powers to authorise, supervise and, where necessary, discipline regulated firms and individuals.

Both the QFC Authority and the Regulatory Authority can recommend legislation and have rule-making powers. The QFC provides mechanisms for resolving disputes between QFC firms and their counterparties and for arbitration or the formal resolution of civil disputes before a tribunal. The QFC has also created an appeals body that reviews decisions of the Regulatory Authority, when requested by a member firm.

The QFC Authority drives the commercial strategy of the QFC, seeking to attract to Qatar international banks, financial services organisations and insurance businesses. The Authority approves and issues licences to individuals, businesses and other entities that wish to incorporate or establish in the centre. Businesses wishing to undertake financial services will also require authorisation from the Regulatory Authority.

The QFCRA structure - The QFC Regulatory Authority has been established under the QFC Law. The QFC Regulatory Authority is chaired by Phillip Thorpe, a leading international regulator (see above), who had served in top regulatory positions at Dubai and previously at the Financial Services Authority in the UK.

The QFCRA has a broad range of regulatory powers to authorise, supervise and, when necessary, discipline firms and individuals. It regulates firms using principle-based legislation of international standard, modelled closely on the laws used in other major financial centres.

QFC Tribunal - The QFC Tribunal was established by the Tribunal and Dispute Resolution Regulations to provide mechanisms for resolving disputes between QFC firms and their counterparties and for arbitration or the formal resolution of civil disputes. The appeals body hears appeals by entities, individuals and corporate bodies against the decisions of the QFC Regulatory Authority. The Companies Registration Office services entities incorporated or established to carry on business in the QFC.

Supervision of Financial Institutions Division - The Supervision of Financial Institutions Division is responsible for monitoring authorised firms, as well as acting as the first point of contact between the QFC Regulatory Authority and authorised firms. It takes a risk-based approach to supervision, gathering information about authorised firms and monitoring the activities undertaken within the QFC.

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