For the last seven years the emirate of Dubai has been operating a domestic stock exchange, as part of wider attempts to create a vibrant, diversified economy that supports a range of non-oil related activities. Although it experienced a sluggish start and was exposed to a Gulf-wide crash, the original exchange would now seem to have consolidated its position and, most significantly, has recently been joined by a Dubai-based international financial center and an international exchange. This has attracted much interest given its pioneering regulatory framework and its ability to bridge the time zones of other global stock exchanges. Founded in March 2000, the Dubai Financial Market grew to list several dozen companies, most of which were Dubai and UAE-based. Despite the bursting of the Gulf bubble in early 2006 and the loss of over 50 percent on the value of most listed shares, by the close of 2007 the DFM was nevertheless still listing about 60 domestic companies and was reporting a respectable total market capitalization of about $350 billion. Importantly, in 2004 it was decided that this DFM would be complemented by a Dubai International Financial Exchange - a new stock exchange that would permit foreign nationals to own shares and therefore allow Dubai to absorb some of the surplus liquidity being generated by hydrocarbon-rich economies in Abu Dhabi, Saudi Arabia and elsewhere in the region. Crucially, in an effort to boost investor confidence, Sheikh Muhammad bin Rashid al-Maktoum, then the crown prince of Dubai, announced that this DIFX would be housed in a financial free zone that would be unencumbered by local legislation, in much the same way as the free zones for foreign internet and media companies that he had established in 2000, and in the same way that his father had allowed foreign manufacturers to set up free zone headquarters at Jebel Ali since the mid-1980s. Moreover, it was decided that the DIFX would operate in a US dollar-denominated environment and that the free zone s regulatory framework would be based on English law, not least because the majority of Dubai nationals and expatriates in the Gulf with a financial background had been trained in the City of London. Foreign experts were enlisted (from Standard Chartered and Julius Baer) to assist with the project, and in 2004 the Dubai Financial Services Authority was set up to administer the Dubai International Financial Center and its constituent DIFX. An impressive Arc de Triomphe-style headquarters building for the DIFC was constructed close to Sheikh Zayed Road and within months this gateway complex was home to a number of well-respected international financial institutions including KPMG, Swiss Private, Swiss International Legal, Merrill Lynch, and Credit Suisse. Within the next few years, more banks, including Mirabaud and Volaw, are likely to open branches, with many citing the DIFC s impressive infrastructure, its solid reputation and its potential to serve as an alternative location to the City of London for Islamic banking products. Indeed, the DIFC s location close to emerging markets in Muslim-dominated Pakistan and East Africa is thought to be ideal, as is its proximity and historic linkages to Bombay - a market that is likely to become enormous when the rupee becomes fully convertible and as India continues to liberalize its economy. Significantly, in the wake of the 2006 crash, the DIFX has begun to gain momentum, with many international firms believing that it will soon serve as an important way station between the time zones of the much higher volume stock exchanges in Europe and Asia. Moreover, for domestic UAE companies, most notably Dubai s Emaar Properties (which became a 67 percent publicly owned company following its flotation), the DIFX would now seem to represent an important opportunity for both domestic growth and access to international markets. Dr. Christopher Davidson is author of The United Arab Emirates: A Study in Survival and the shortly forthcoming Dubai: The Vulnerability of Success . This commentary is published by DAILY NEWS EGYPT in collaboration with bitterlemons-international.org.
