Fund centre focus: Dubai and Abu Dhabi

Fund centre focus: Dubai and Abu Dhabi

Back in 1999-2000, Abu Dhabi passed legislation to create a financial free-zone and commercial business district, only to halt the project at the eleventh hour.

A few years later, neighbouring Dubai built the Dubai International Finance Centre (DIFC), establishing the Gulf’s most cosmopolitan city as its financial hub.

That fateful moment, when Abu Dhabi pulled out scheme that would have included a commodities trading platform backed by physical storage capacity, must have been long regretted by local power brokers. Indeed huge efforts have been made in subsequent years.

Fast forward to October 2015 and its own off-shore financial free-zone, Abu Dhabi Global Market (ADGM), opened for business.

The two UAE projects are ostensibly complimentary, not competing, financial centres. The two entities are nonetheless vying to host the heavyweights – and smaller names – of the financial world, from regional wealth funds to international banks, insurers, consultants and law firms.

“Having a crowded space in the UAE is a tried and tested model and has been successful,” says Niall O’Toole, a partner of Clyde & Co in Abu Dhabi.

“If the overall effect of DIFC and ADGM is to increase the critical mass for the benefit not only of the UAE but the wider region, it can only be a good thing.”

Dubai offers international finance a luxury lifestyle, scores of five-star hotels, entertainment facilities and transport links, making the emirate far from a hardship posting.

First-mover advantage has created a virtuous circle whereby international firms are attracted to Dubai because of the presence of other global institutions.

ADGM’s biggest allure is the proximity it provides to the UAE’s main focus of wealth and power – Abu Dhabi’s ruling family, which controls 90% of the country’s oil reserves and the world’s second-largest sovereign wealth fund (according to SWFI), as well as being a strong influence on the federal government.

In a 2016 report, Deloitte describes the Gulf’s wealth and asset management sector as still being in its infancy and notes the oil price slump has made the sector more competitive, squeezing margins.

However, UAE and Qatar’s inclusion in MSCI’s Emerging Markets Index, combined with Saudi Arabia’s likely addition to the benchmark, should drive growth.

“There seems to be a tendency to think that financial free-zones are all about allowing full foreign ownership but a lot of what we’re doing is implementing ADGM structures for UAE nationals to create more corporate structures that are typically not available onshore,” says Stephen McKenna, Clyde & Co corporate director.

CONTRASTING REGULATION

ADGM-incorporated companies can be 100% foreign-owned, receive a 50- year tax exemption on profits generated from their ADGM operations and face no restrictions on sending capital outside the free-zone, according to law firm Freshfields Bruckhaus Deringer.

Companies incorporated outside ADGM can operate within the financial centre, but require a licence to do so. DIFC offers similar privileges, although DIFC-registered firms, with few exceptions, must also lease premises within the free zone.

ADGM’s legal framework is based on English common law, which Deloitte predicts will enable foreign investors and international firms to operate within transparent legislation that provides more familiarity and less risk compared to other regional jurisdictions.

“We didn’t take ‘a build it and they will come’ approach. Our task was to create a financial center that meets the needs of both the consumers and providers of financial services,” says Steve Barnett, ADGM development director, Financial Services Regulatory Authority.

“Common law jurisdiction was consistently requested, so we applied English common law directly as the basis of our civil and commercial legal structure. It follows a model used by places such as Singapore and Hong Kong.”

DIFC’s regulator, Dubai Financial Services Authority (DFSA), has signed 100 bilateral memorandums of understanding (MoUs) with counterparts globally and five multilateral MoUs.

The Dispute Resolution Authority, which includes DIFC Courts, follows an English common law framework.

As such, it is “the preferred platform for legal excellence and commercial dispute resolution in Dubai and the wider region”, says Arif Amiri, DIFC Authority chief executive.

“All this makes it easy for international firms to operate through DIFC and are key reasons why we host the regional headquarters of some of the largest global institutions.”

DIFC has suffered some setbacks however. Dubai International Finance Exchange (DIFX) was slated to become a global bourse, attracting equity listings from across Asia and beyond, but companies and traders showed little interest and DP World’s $5bn flotation in 2007 – at the time the Gulf’s largest initial public offering – had little long-term impact.

Similarly, the bourse’s rebranding to Nasdaq Dubai has proved a cosmetic change, with only one ot two stocks trading regularly.

Nasdaq Dubai is the world’s largest centre for sukuk, with listings valued at $46.3bn, according to its most recent figures, but none of the 93 sukuk trade daily. ADGM decided against creating a new bourse.

TARGETED INCENTIVE

In 2012, Abu Dhabi issued an edict stating all workers at state-linked institutions must live in the emirate.

Abu Dhabi has indicated similar sentiments to companies it does business with, implicitly tying future work to firms demonstrating a tangible commitment to the emirate by opening an office.

“We’ve not found it necessary to give people particularly short-term incentives to do business here. In terms of cost structure, ours is extremely competitive internationally,” says ADGM’s Barnett.

“For us, it’s not about people having the opportunity to do something for three months, it’s about them being long-term partners.”

At ADGM, it’s substantially cheaper to establish a restricted scope company, or special purpose vehicle (SPV), than it is to create a similar entity in DIFC. Such companies, which hold assets but do not trade, can be set up in ADGM for a few thousand US dollars.

These entities do not need physical premises in ADGM; the offering is potentially pitched to compete with the likes of the Cayman Islands and British Virgin Islands.

The long-held collective approach among UAE nationals and expats was to use wealth management services in jurisdictions where regulations were better framed to deal with insolvency, bankruptcy and inheritance, but the financial crisis weakened that rationale.

With the Middle East holding $5.2trn in wealth as of 2016, according to a Deloitte estimate, ADGM’s strategy seems well-targeted.

“Part of our aim is to repatriate some of the consumption of financial services for this broader region – not just the Gulf, but also sub-Saharan Africa, India, Pakistan and the former Soviet republics – to enable them to do business in a time zone and a region that makes sense for them,” says Barnett.

FINTECH FOCUS

Both ADGM and DIFC aspire to be the Middle East and North Africa’s (Mena) FinTech hub, to this point an almost entirely untapped market.

Globally, fintech has attracted investments totalling more than $50bn in since 2010 but just 1% was invested in Mena, according to figures cited by DIFC.

The two free-zones follow differing approaches – ADGM’s FinTech Regulatory Laboratory (Reglab) offers companies the opportunity to test products in a live environment, while DIFC’s Fin- Tech Hive is touted as the region’s first fintech accelerator.

The 12-week Hive programme runs in partnership with Accenture, a longstanding supporter of fintech innovation labs in Hong Kong, New York and London.

“Both Dubai and DIFC are committed to supporting innovation and harnessing financial technology to enhance productivity and efficiency,” says Amiri, citing International Finance Corporation (IFC) estimates of a $260bn credit gap for micro, small and medium enterprises in Mena.

“When you also consider 70% of the region is unbanked, there’s a real need for innovative fintech solutions to disrupt traditional ways of accessing credit.”

The accelerator received 100 applications; 11 start-ups began the programme in August and hail from eight countries including the United States, Singapore and India.

The firms will receive assistance from regional and global banks such as HSBC, Emirates NBD and Citi as well as legal support from the likes of Clyde & Co and Simmons & Simmons, while tech partners include Facebook and IBM.

In November, participating companies will pitch to potential investors. Among the subsectors DIFC hopes to serve are trade finance, sharia-based services and peer-to-peer lending, particularly to small and medium-sized businesses.

In May, ADGM’s RegLab accepted the first five companies into the programme, while in August it announced it had received applications from 22 firms to participate in its second iteration. Applicant companies come from as far afield as Canada, United States and Hong Kong.

“In a few years, fintech will be accepted as just another way to deliver financial services. Right now, fintech firms are learning from the traditional market players. In the near future, it will be the other way around,” says Barnett.

“For us, it’s about recognising that, as regulators, we shouldn’t try and squeeze companies that are innovating into a traditional regulatory framework.

“We should understand the way in which they want to do business, the risks of them doing that business and tailor a regulatory environment to manage those risks.”

LOOKING AHEAD

DIFC is now home to 1,750 companies, of which 463 are regulated financial institutions. Its workforce numbers approximately 22,000 and aims to more than double this to 50,000 in 2024. ADGM, which has around $4.2bn in AuM, had 445 registered companies at the end of August.

It also has more than 150 SPVs, and a seven-fold increase in licensed financial entities including Northern Trust, UniCredit, Liberty International, Aberdeen Asset Management and Macquarie Capital and local players such as Mubadala Capital.

Financial services accounted for about 5% of Abu Dhabi’s economy when plans for ADGM were announced.

This could grow to double digits, says Barnett, citing Singapore deriving 13% of its GDP from financial services.

“We’re pretty comfortable with the way things are moving right now,” added Barnett. “Not complacent, but happy.”