Dubai ups the ante: the opening of a new financial exchange in Dubai's International Financial Centre is attracting enthusiastic international attention.

DESPITE THE PRESENCE OF several stock exchanges in the Gulf, the lack of access to international investment remains a major obstacle to the growth of the non-oil economy in the region. Now, however, the developers of the Dubai International Financial Centre (DIFC) hope their venture will provide a genuinely world class conduit for banking and investment services for the entire Middle East and beyond. At the same time, it is envisaged that the opening of the Dubai International Financial Exchange (DIFX) in the DIFC in September will stimulate the growth of other bourses in the Gulf.

The DIFC, which has been open for a year, is essentially a free trade zone for financial services firms and banks. Over the next three years, the centre hopes to become self funding and to attract 500 companies to set up in the zone. Although firms from around the Middle East are expected to provide the bedrock of the 500, interest from Africa, South Asia and Europe is also anticipated.

Over 60 companies are already operating on the 110-acre DIFC site on the edge of Dubai, where the centre aims to provide services within six main areas: investment, corporate and private banking services; capital markets (equity, debt instruments, derivatives and commodity trading); asset management and fund registration; reinsurance; Islamic finance and back office operations. Companies must apply to the Dubai Financial Services Authority (DFSA) for licences in each sector and, if successful, will benefit from the centre's attractive investment regime.

This includes tax free income or profits for 50 years, no legal requirement to offer part ownership to local companies, no restrictions on foreign exchange or profit repatriation, plus the centre's own legal framework and court system, based on best practice in western jurisdictions. In addition, the decision to develop the DIFC from scratch on a Greenfield site means the centre is able to offer state-of-the-art technology. The international operators that have already signed up to operate at the centre include the UK banks Barclays and Standard Chartered, insurance firm AIG, plus Franklin Templeton and Merrill Lynch in the securities sector. It is expected that at least 60% of firms moving into the free trade zone will be financial services companies.

Many companies have set up local offshoots to operate in the centre. For example, a subsidiary of Swiss legal consultants Ritter Attorneys-at-Law, Swiss International Legal Consultants Limited (SILC), was awarded a licence to provide legal and compliance services to other firms in the centre by the DFSA in July. Another Ritter offshoot, International Legal Consultants, has been operating in Dubai for five years. The managing director of SILC, Urs Stirnimann, commented: "Members of our team have been active in this region for 20 years and are thus able to provide our clients with an unparalleled degree of knowledge and understanding."

While the formation of so many new businesses and subsidiaries could make the centre seem somewhat artificial because of their lack of roots in the region, many of the investors have been active in the UAE over a long period. International accounting firm KPMG, for example, which received its licence to provide ancillary services at the centre in July, has been operating in the UAE for over 30 years. Its offices in Abu Dhabi, Dubai and Sharjah already provide tax, audit and advisory services to a wide range of companies.

The UAE already has two stock markets, in Abu Dhabi and Dubai, the government felt that the DIFC needed its own dedicated bourse. The structure of the DIFX is based on the design of western exchanges such as London and New York, while all transactions will be carried out in US dollars. The chief executive of the DIFX, Steffen Schubert, said: "The DIFX will be unique in this region because of its international standards, which are designed to create confidence in its market."

The government hopes that the DIFX can become the most important stock exchange in the Middle East. Most listings will come from initial public offerings (IPOs) and alternative listings for companies already listed elsewhere. Companies will have to list a minimum of 25% of their share capital and must have fully audited accounts but they will be able to set the issue share price themselves. DIFC's chief business development officer, Aseem Kabesh, commented: "I know that they [DIFX] are working on major IPOs. It is a matter of time. You need to be operational first and then business will come; you can't have everything on day one in an exchange. The launch will take place and everything will kick in after that.

The DIFX hopes to attract many UAE companies to list on the exchange. It held a conference in May to promote the possibility of firms establishing holding companies within the centre in order to gain a listing. The director general of the Dubai International Financial Centre Authority (DIFCA), Omar Bin Sulaiman, argues: "The DIFX is a vitally important project for the whole region, not just Dubai or the UAE. It will create opportunities for many family businesses by giving them, for the first time in the Middle East, access to international investment in a stable, liquid and credible market." In the last step before launching in September, the UK's Standard Chartered bank was unveiled as the clearing bank for the DIFX. Schubert explained: "We selected Standard Chartered for its global expertise in cash management and its vast experience in working within financial exchanges around the world. Standard Chartered will help us create settlement processes of the highest international standards, in which member banks of the DIFX can have complete confidence."

The chief executive of Standard Chartered, UAE, Ray Ferguson, said: "This is a landmark deal for Standard Chartered. We will continue to partner DIFX to help meet its requirements for a successful launch of the exchange and its subsequent successful development. We believe the DIFX has the potential to become the leading stock exchange between Western Europe and East Asia." Standard Chartered has been operating inside the DIFC since shortly after the centre opened last September.

The government hopes that the DIFC and DIFX can play a major role in its efforts to attract much greater foreign direct investment (FDI). Speaking to the World Economic Forum in Jordan in May, Sulaiman said: "Whilst the GCC attracted $1.81bn of FDI in 2003, an improvement of 64% on the previous year, and the wider Arab region attracted more than $7bn, this is still a drop in the ocean when put into the global context. In fact, we as a group of nations are investing significantly more in other countries outside the region than we are receiving. It is now time we made the Middle East a lure for FDI."

He continued by explaining how the DIFC would help bring this about: "We need clear and transparent legal systems, we need to ensure fair and equitable treatment of foreign investors, we must provide better governance. Barriers to trade must be removed, facilitating licensing and eliminating hidden non-tariff barriers. Financial markets play an important role in enhancing the growth effects of FDI and act as a channel for FDI into a country. A major contributor to that influx of FDI is a recognised capital market. An investment community, built and based around a credible stock exchange will greatly enhance both the opportunity for FDI as well as the benefits that FDI will realise for the local economy."

The opening of DIFC and DIFX could not have been better timed, given the current state of the UAE economy. Sustained very high oil prices have boosted revenues for the country, which in turn has triggered a boom in investment and infrastructural development. GDP grew by 7.4% in 2004 and is expected to grow yet more strongly this year, at 12.7%. There should therefore be plenty of money available for long-term investment; the only question is whether DIFX will be able to attract a large slice of that capital.

Despite the ongoing oil boom, it is vital the UAE develops a more balanced economy, with more sophisticated capital markets and more opportunity for local companies to gain international investment. It remains to be seen whether the DIFX will act as a catalyst for the development of other financial markets in the region, or whether it will come to overshadow its potential rivals. However, it seems the DIFC has struck a chord by offering to act as a conduit for the flow of capital both to and from the region, by providing a transparent financial centre with a "secure, liberal but very strictly regulated environment".

To judge by the influx of major names to the centre to date, Dubai appears to be filling a gap in the market. Changing the economic make up of the UAE may take longer than many had hoped but DIFC has already joined the drive to revolutionise financial services in the Gulf.