Three hubs to servea thriv<strong>in</strong>g marketDubai, Bahra<strong>in</strong> and Qatar are vy<strong>in</strong>g to be <strong>the</strong> Gulf’s f<strong>in</strong>ancial hub and <strong>the</strong> battle is by no meansover, with each centre adopt<strong>in</strong>g a very different approachIt has long been accepted that <strong>the</strong> Gulf needs a f<strong>in</strong>ancial hub. It’s an<strong>in</strong>creas<strong>in</strong>gly important market on a world scale, oil and sovereignwealth make it more relevant than ever, and it fits naturally with<strong>in</strong> <strong>the</strong>European and Asian trad<strong>in</strong>g blocs. But <strong>the</strong> Gulf has not one potentialhub, but three.For 30 years this was Bahra<strong>in</strong>’s unquestioned role. “When I worked <strong>in</strong>Bahra<strong>in</strong> <strong>in</strong> 1982 <strong>the</strong>re was no question it was <strong>the</strong> centre of f<strong>in</strong>ance <strong>in</strong><strong>the</strong> Middle East,” recalls Daniel Smaller of Algebra Capital. L<strong>in</strong>ked toSaudi Arabia by a causeway, and barely an hour’s flight from Kuwait,it benefited from <strong>the</strong> relative difficulty of access<strong>in</strong>g those far biggermarkets directly, and acted as a convenient and well-regulated hubfor those want<strong>in</strong>g to do bus<strong>in</strong>ess <strong>in</strong> or with <strong>the</strong> region. When turmoilhit Beirut <strong>in</strong> <strong>the</strong> 1970s, <strong>the</strong> bus<strong>in</strong>ess came to Bahra<strong>in</strong> and stayed.Abdul Rahman Al Baker, executive director of f<strong>in</strong>ancial <strong>in</strong>stitutionssupervision at <strong>the</strong> Central Bank of Bahra<strong>in</strong>, believes <strong>the</strong>re are severalreasons for <strong>the</strong> country’s popularity. “One is our legal framework: ithas been <strong>in</strong> place for 15 years and has proven it is able to cope withchanges <strong>in</strong> <strong>the</strong> market,” he says. “There is <strong>in</strong>vestor confidence <strong>in</strong> <strong>the</strong>system here. We have been a f<strong>in</strong>ancial centre for 35 years. And <strong>the</strong>rious non-Shariah productsg products <strong>in</strong> terms of standards <strong>the</strong> sales opportunity that we use as of <strong>in</strong> June our 2007 regulations and how you and expect legal this to framework change <strong>in</strong> two for years’ timeescollective <strong>in</strong>vestment undertak<strong>in</strong>gs [CIUs, <strong>in</strong>vestment vehicles such asgional and specialist funds, direct <strong>in</strong>vestments <strong>in</strong> real estate and <strong>in</strong>frastructure and Islamic cash alternativeow demand) mutual funds] are <strong>in</strong> l<strong>in</strong>e with <strong>in</strong>ternational standards.” The lack of anytaxation on <strong>in</strong>vestment products also helps. “What you earn is whatyou get,” he says.Last year Bahra<strong>in</strong> <strong>in</strong>troduced a new and updated regulatory frameworkfor its mutual fund <strong>in</strong>dustry <strong>in</strong>clud<strong>in</strong>g rules for CIUs target<strong>in</strong>gAverage score5.04.54.03.53.02.52.01.51.00.50.0Jun ’073.7 3.5 2.9 3.9 2.1 2.5 2.2 2.8 2.4 2.7 2.7 3.1 3.4 3.2 3.7 4.2 3.8 3.3 3.7 3.8 3.7 4.1 4.3 4.3Equity funds:globalIn 2 years timeEquityfunds:<strong>GCC</strong>/MenaBondfunds:globalBond funds:<strong>GCC</strong>/MenaMoneymarketfundsBalancedfundsprofessional <strong>in</strong>vestors. For <strong>in</strong>vestors with enough assets, this hasallowed for <strong>the</strong> arrival of hedge funds and o<strong>the</strong>r alternative <strong>in</strong>vestmentvehicles <strong>in</strong> Bahra<strong>in</strong>. It also categorizes <strong>in</strong>vestors by assets andexperience, and allows different classes of products to be sold to each.This appears to have been a large part of <strong>the</strong> reason for <strong>the</strong> <strong>in</strong>crease.“As a regulator you need to see what’s go<strong>in</strong>g on <strong>in</strong> <strong>the</strong> market, and tryto revamp regulations to be <strong>in</strong> l<strong>in</strong>e with <strong>the</strong> changes,” Al Baker says.“We took <strong>the</strong> <strong>in</strong>itiative by <strong>in</strong>troduc<strong>in</strong>g <strong>the</strong>se new categories. Previouslymost of <strong>the</strong>se [hedge and alternative] funds were not registered<strong>in</strong> <strong>the</strong> region but outside. Our new regulations are attract<strong>in</strong>g a lot ofexist<strong>in</strong>g asset managers from <strong>the</strong> region to set up here <strong>in</strong>stead.”Bahra<strong>in</strong>, unlike newer competitors, operates under exactly <strong>the</strong> samelegal code <strong>in</strong> its f<strong>in</strong>ancial <strong>in</strong>stitutions as <strong>in</strong> <strong>the</strong> rest of <strong>the</strong> country.There is no designated plot of land <strong>in</strong> which separate laws and regulationsapply (<strong>the</strong> Bahra<strong>in</strong> F<strong>in</strong>ancial Harbour, <strong>the</strong> gleam<strong>in</strong>g centrepieceof <strong>the</strong> Manama waterfront, is simply landmark real estate ra<strong>the</strong>r thana separate regime), no separate regulator for <strong>the</strong> f<strong>in</strong>ancial centre andno common law jurisdiction. Bahra<strong>in</strong> presents this as an advantage,suggest<strong>in</strong>g that hav<strong>in</strong>g two legal codes <strong>in</strong> one location can only beproblematic; <strong>the</strong> alternative view is that Islamic law is impractical formodern commerce.Rat<strong>in</strong>g of sales opportunities <strong>in</strong> june 2007 and predictions for opportunities <strong>in</strong> 2009The truly dist<strong>in</strong>ctive th<strong>in</strong>g about <strong>the</strong> Dubai International F<strong>in</strong>ancial Centreis that with<strong>in</strong> that 110-acre plot, <strong>the</strong> legal and regulatory systemsof <strong>the</strong> rest of <strong>the</strong> United Arab Emirates do not apply. Instead, DIFC isoverseen by a separate regulator, <strong>the</strong> Dubai F<strong>in</strong>ancial Services Authority,closely modelled on <strong>the</strong> UK’s F<strong>in</strong>ancial Services Authority, under commonlaw. The idea was that big global f<strong>in</strong>ancial <strong>in</strong>stitutions had longCapitalprotectedfundsPrivateequityStructuredproductsAlternativesReal estatefundsSource: Cerulli AssociatesNote: O<strong>the</strong>rs refer to regional and specialist funds, direct <strong>in</strong>vestments <strong>in</strong> real estate and <strong>in</strong>frastructure and Islamic cash alternative (5 = high demand, 1 = low demand)O<strong>the</strong>rsGUIDE TO ASSET MANAGEMENT IN THE <strong>GCC</strong>11
had aspirations <strong>in</strong> <strong>the</strong> Middle East but had been put off by <strong>the</strong> lack of alegal code <strong>the</strong>y could understand and trust, and a regulatory environment<strong>the</strong>y were comfortable with. As with everyth<strong>in</strong>g else <strong>in</strong> Dubai, <strong>the</strong>pace has been extraord<strong>in</strong>ary: 30 pieces of legislation were enacted <strong>in</strong><strong>the</strong> first three years, between <strong>the</strong>m represent<strong>in</strong>g what one senior figureat DIFC calls “an entire body of Anglo-Saxon law”.From an asset <strong>management</strong> perspective, many of <strong>the</strong> world’s biggestnames are registered and set up with<strong>in</strong> DIFC already, among <strong>the</strong>m Frankl<strong>in</strong>Templeton, Permal, Invesco, Man, Prudential and Schroders, and <strong>the</strong>asset <strong>management</strong> arms of <strong>in</strong>ternational banks such as Deutsche Bank,UBS, ING and Barclays. However, very few funds are actually domiciledwith<strong>in</strong> <strong>the</strong> DIFC – <strong>the</strong> figure was just n<strong>in</strong>e <strong>in</strong> late 2007 – which has ledcritics to suggest that all <strong>the</strong> DIFC has really done is become a conduitfor money to leave <strong>the</strong> UAE, with foreigners simply post<strong>in</strong>g sales staff<strong>in</strong> <strong>the</strong>ir offices ra<strong>the</strong>r than any manufactur<strong>in</strong>g presence. In fairness, <strong>the</strong>collective fund law govern<strong>in</strong>g domestically domiciled funds only came<strong>in</strong>to effect <strong>in</strong> mid-2006, and it will take time, and <strong>the</strong> arrival of custodialand fund adm<strong>in</strong>istration services <strong>in</strong> Dubai, before it will make sensefor many groups to domicile funds <strong>the</strong>re. At <strong>the</strong> moment, <strong>the</strong>re is noobligation for foreigners active <strong>in</strong> Dubai to domicile funds <strong>the</strong>re, somost <strong>in</strong>stead keep <strong>the</strong>ir funds <strong>in</strong> <strong>the</strong> Cayman Islands, Channel Islands orBermuda as <strong>the</strong>y always have done. There is some speculation, though,that <strong>in</strong> time foreign groups will be required to domicile feeder fundslocally which <strong>the</strong>n feed <strong>in</strong>to offshore products.From <strong>the</strong> outset <strong>the</strong> DIFC has been designed to offer domicile to awide range of products, <strong>in</strong>clud<strong>in</strong>g mutual funds, exchange tradedfunds, listed <strong>in</strong>vestment companies, hedge funds (and fund of funds),and Shariah-compliant funds. The regulatory package allows for 100%foreign ownership of <strong>the</strong> funds, no tax, no restrictions on foreignexchange or profit repatriation, and of course <strong>the</strong> world class level ofsupervision and regulation from <strong>the</strong> DFSA.It is important to noted tha <strong>the</strong> DIFC does not cover retail f<strong>in</strong>ancialservices, nor transactions <strong>in</strong> dirhams; those are covered by <strong>the</strong> centralbank <strong>in</strong> Abu Dhabi.Initially, <strong>the</strong> legal model was similar to that <strong>in</strong> Dubai: <strong>the</strong> QFC operatedon common law pr<strong>in</strong>ciples while <strong>the</strong> rest of <strong>the</strong> country hadits previous, Islamic legal code. Also as <strong>in</strong> Dubai, <strong>the</strong> QFCRA tried toadopt best practice from regulatory authorities elsewhere <strong>in</strong> <strong>the</strong>world, and aga<strong>in</strong> bears a lot of similarity to <strong>the</strong> UK’s FSA. However <strong>in</strong>July 2007 it was announced that a s<strong>in</strong>gle f<strong>in</strong>ancial regulatory bodywould be established, br<strong>in</strong>g<strong>in</strong>g toge<strong>the</strong>r <strong>the</strong> regulatory functions of<strong>the</strong> stock exchange, central bank, and QFC Regulatory Authority, andsome regulatory responsibility for <strong>in</strong>surers that had resided with<strong>in</strong> <strong>the</strong>M<strong>in</strong>istry of Economy and Commerce. A chairman and board for thisnew body should be announced soon.The QFC aims to foster a number of centres of excellence, hop<strong>in</strong>gthat clusters of firms will develop <strong>in</strong> those areas, which <strong>in</strong> turn maydevelop <strong>in</strong>to a regional hub. Insurance is one example, and ano<strong>the</strong>r isasset <strong>management</strong>. Collective <strong>in</strong>vestment regulations for wholesaleand retail funds have been enacted over <strong>the</strong> past 12 months. It ishoped that managers will domicile <strong>the</strong>ir funds locally, which has nothappened at this early stage, but a new tax regime that came <strong>in</strong>toeffect on 1 May may help: it exempts any locally domiciled funds fromtax. Many fund managers have <strong>in</strong> any event chosen to set up <strong>in</strong> Qatar.Among <strong>the</strong>m are Axa Investment Management, Global InvestmentHouse, EFG-Hermes and Kuwait F<strong>in</strong>ancial Centre.Axa was already <strong>in</strong> <strong>the</strong> region through <strong>the</strong> <strong>in</strong>surance arms of its bus<strong>in</strong>essbefore select<strong>in</strong>g Qatar as <strong>the</strong> centre of its <strong>in</strong>vestment <strong>management</strong>advisory and client services for <strong>the</strong> region. Axa, like many o<strong>the</strong>rs<strong>in</strong> <strong>the</strong> region, had historically managed its Middle Eastern bus<strong>in</strong>essfrom London and Paris, and had reached a po<strong>in</strong>t where it made senseto be on <strong>the</strong> ground.“Location was not <strong>the</strong> only issue; we did want to feel comfortablewith a strong regulatory environment and we were very impressed by<strong>the</strong> QFCRA,” says Scott Callander, director, Middle East, at Axa InvestmentManagement. “The logistics of mov<strong>in</strong>g around <strong>the</strong> region arevery good, and by <strong>the</strong> nature and dispersion of our clients we’re nottied to any one city <strong>in</strong> <strong>the</strong> <strong>GCC</strong>.”Qatar has its own highly ambitious programme to build a f<strong>in</strong>ancialcentre, though its aim is ra<strong>the</strong>r different from that of Dubai. Its <strong>in</strong>tentionsare to build a centre that is very much onshore: it wants <strong>in</strong>ternationalf<strong>in</strong>ancial <strong>in</strong>stitutions to establish operations on <strong>the</strong> ground<strong>in</strong> Qatar. In <strong>the</strong> Qatar F<strong>in</strong>ancial Centre’s own words, it wants <strong>the</strong>m toparticipate <strong>in</strong> <strong>the</strong> long term and mutually beneficial partnership withQatar. It is often expla<strong>in</strong>ed <strong>in</strong> terms like <strong>the</strong>se: that Qatar is not primarilyaim<strong>in</strong>g to become a regional f<strong>in</strong>ancial hub, but if its structureenables it to become one, so much <strong>the</strong> better.The legislation to establish <strong>the</strong> QFC was enacted <strong>in</strong> March 2005. Thereare four dist<strong>in</strong>ct components to <strong>the</strong> Qatar model: <strong>the</strong> QFC Authority,which is responsible for commercial strategy and for develop<strong>in</strong>g relationshipswith <strong>the</strong> global f<strong>in</strong>ancial community, among o<strong>the</strong>r groups;<strong>the</strong> QFC Regulatory Authority, which supervises f<strong>in</strong>ancial servicesfirms and f<strong>in</strong>ancial <strong>in</strong>stitutions operat<strong>in</strong>g <strong>in</strong> or from <strong>the</strong> QFC; a civiland commercial court; and a dispute resolution body.Some homegrown <strong>in</strong>stitutions are appear<strong>in</strong>g too. One exampleis Qatar Capital Partners, formed last year with a focus on venturecapital. “The opportunities are huge <strong>in</strong> Qatar,” says Mikko Suonenlathi,general manager at Qatar Capital Partners. “The th<strong>in</strong>gs QFC is driv<strong>in</strong>gare corporate governance and transparency, and I th<strong>in</strong>k that’s exactly<strong>the</strong> right agenda. Once you get to <strong>the</strong> highest possible <strong>in</strong>ternationalstandards it will make it <strong>in</strong>to an even better <strong>in</strong>vestment environment.”Qatar’s regulatory environment is still com<strong>in</strong>g toge<strong>the</strong>r, thoughmuch of <strong>the</strong> most important legislation is now <strong>in</strong> place. For example,<strong>the</strong> regulations for limited partnerships – vital for any privateequity and venture capital bus<strong>in</strong>ess. “That’s a significant step forward,”says Mikko. But every step forward is a new one. “It’s pioneersteps that I’m tak<strong>in</strong>g,” says Mikko. “But with <strong>the</strong> overall environmen<strong>the</strong>re it’s a good time to take those steps. Three years ago it was tooearly; three years later is too late. Now is <strong>the</strong> time to enter anew market.”