x Abu Dhabi, UAEFriday 21 July 2017

DIFC restructure points to broad financial reform

The DIFC's division into separate property and financial arms should be complemented by further reforms, particularly in the stock exchanges.

Dubai's ambition to be the region's leading financial hub received a major restructuring after the announcement on Tuesday that the Dubai International Financial Centre (DIFC) will be split into two. The DIFC Authority, a government body that runs the centre in downtown Dubai, will see its property portfolio managed by a new entity, the DIFC Properties. The business development and legislation arm will remain called the DIFC Authority, but with a new chief executive.

This is a welcome move. The growth of the DIFC is a vital part of growing the financial-services sector of the city's economy. The property portfolio of the DIFC has always been the most lucrative part of the business. This move will allow the new leadership at the DIFC Authority to concentrate on the financial markets.

The focus of the new Authority must be on trying to create a regulatory environment that moves the balance between risk and profit closer to the ideal. While markets function best when lightly regulated, they nevertheless need both prudent and sufficient levels of supervision. Absent the distraction of managing its own portfolio, the new DIFC Authority will be able to concentrate its energies in this direction.

It is to be hoped the split is the beginning of a broader restructuring of the nation's financial industry. Dubai is already a major regional financial hub; it has the right combination of infrastructure, legal framework and talent (and crucially the ability to attract further talent).

But both the DIFC and the nation could profit from a rearrangement of the investment topography. Chief among needed changes is the consolidation of the three stock exchanges (two in Dubai, one in Abu Dhabi) into one market.

There is some indication that the new leadership may share those views. The new chief executive of the new DIFC Authority will be Jeff Singer, previously head of Nasdaq Dubai, who has made statements in favour of a consolidation of the stock exchanges.

A more efficient equities market would provide better pricing indications for stocks, which would encourage more listings. In turn, more listings would give factory and business owners a better way to realise profits, or what is known as an "exit strategy" that profits from share sales.

There is significant liquidity available in this region and regional investors - who are best placed to understand the specific conditions and companies of the region - would doubtless invest more frequently if they were more investment options. A large stock market with many companies and good regulation would provide that.

The DIFC decision starts this process and can only strengthen the regional and international position of Dubai.