Gulf efforts show realistic future for financial centres
In the Gulf, a measure of international success has been achieved by creating local financial centres. Both international and regional players were welcomed to these centres and it seemed that the era of globalisation and deregulation could do no wrong as the centres in Dubai and Bahrain flourished. Riyadh, with its more insular programme, watched from the sidelines. The rude awakening calls of both last year and this one changed basic assumptions. The search was on for a financial and regulatory framework more suited to local needs.
For a few years it seemed that Dubai and Bahrain would make all the running: the former attracting a large number of financial players lured by globalisation and the ease of doing business in Dubai; the latter attracted institutions that preferred to concentrate on the nearby Saudi market and developing a niche in the growing Islamic finance market. With the announcement by some top global banks that they will resist government pressure and continue to pay substantial bonuses to their star performers, the debate again has begun on the financial and social impact of the banking and wider financial industry.
The sector has important implications for the Gulf countries vying to create international financial centres in their efforts to diversify their energy-based economies. It came then as a shock to learn that no less than the top UK financial regulator backed plans for a multibillion-pound tax on banks as a way to tackle the perceived persistent bonus culture.Lord Turner, the chairman of the Financial Services Authority, described much of the City of London's financial activities as "socially useless" and questioned whether it has grown too large.
At home, the Dubai International Financial Centre (DIFC) seemed the envy of all with its sophisticated marketing, regulatory friendly regime under the Dubai Financial Services Authority (DFSA), as well as the lure of servicing the wider Middle East and Iran. It was helped by its free-zone status and its aim to bridge the "financial space" between western Europe and east Asia. Bahrain decided to challenge Dubai's role and has conceived its own Bahrain Financial Harbour, on a somewhat more modest scale than Dubai.
In its regulatory approach, Bahrain has decided to complement, rather than challenge Dubai head on. Bahrain has adopted a no-nonsense approach and marketed its regulatory oversight as a safe banking environment that boasts of a financially skilled and educated local population, good communications and a recognised Islamic finance niche player rivalling that of Malaysia. Other Gulf States have also decided to throw their financial hats into the ring.
Qatar established the Qatar Financial Centre (QFC) as a financial and business hub to tap into the projected US$140 billion (Dh418.72bn) of Qatari-led investments over the next five years. It seems to have examined the DIFC model well, as the QFC incorporates some its elements, such as the ability to engage in onshore and offshore business, as well as full ownership by foreign companies and full remittance of profits outside Qatar.
Saudi Arabia has decided to develop its own financial centre, the King Abdullah Financial District (KAFD). The first phase is expected to be completed by 2011. After the excesses that preceded the global financial crisis, SAMA's conservative regulatory model was the grudging toast of the region. And so back to the question, is the financial sector socially useless? According to Lord Turner, the answer is simple. After a decade of excess, the sector had become "swollen" and needed to be restrained by a so-called Tobin tax on financial transactions.
The tax was suggested by the US economist James Tobin in the early 1970s, but it never got off the ground as London and New York competed to be the premier financial centre, much like the Gulf rivals are today. Some in the industry might argue that most of the sector's woes stem from overly simplistic financial deregulation, and the apparent obsession with making money by moving money, rather than making real things.
If the financial sector gets back to basics, it is indeed socially useful. And the notion of a Tobin tax is interesting but is unworkable without international agreements. It also will be complicated to implement and unlikely to be accepted by countries keen to protect their own financial centres. Dr Mohamed A Ramady is a former banker and a visiting associate professor of finance and economics at King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia