In the first of a series of features, Banker Middle East takes a look at the latest trend in globalisation: the iconic international financial centre
One of the most common trends in the spread ofglobalisation, alongsidethatof anincreasingly transitional workforce (and accordingly the increased dependence of some economies on overseas workers' remittances), has been the spread of the increasingly ubiquitous international financial centre.
Most of the big international TV channels such as CNN, BBC World, Al Jazeera English, Bloomberg, CNBC, France 24 etc regularly have advertisements which promote the virtues of investing in Dubai, Doha, Poland, Malaysia, India, Korea, Georgia, Scotland and a host of other locations. Business magazines and financial newspapers are likewise being used as an instrument to grab the attention of bankers with expansionary urges. They talk about a luxury lifestyle, beautiful buildings and surroundings and the ideal place to bring the family, about a business- friendly environment and lots of other modern conveniences, as if they can provide a kind of utopian workspace.
The typical international financial centre must have at least one internationally recognisable and iconic building. Dubai has several (Burj al Arab, Burj Khalifa, the DIFC's Gate Building), Riyadh has the Kingdom Tower, Bahrain has the Bahrain Financial Harbour and World Trade Center, Qatar has the Zig Zag Towers, London has probably more than any other (including the 'Gherkin,' St Paul's Cathedral, Big Ben, the Houses of Parliament and Buckingham Palace), New York has almost as many as London (including the Empire State Building, the Statue of Liberty and the Chrysler Building, the Hearst Tower) Malaysia is noted for the Petronas Towers and Shanghai has been churning out its own architectural wonders.
The Chinese centre already has its own iconic building in the form of the Shanghai World Financial Center, a nearly 500 metre high tower, which when it was topped out in 1997, made it the second highest building in the world. It also has the tallest observation deck in the world surpassing even Dubai's 828 metre-high Burj Khalifa.
Some Middle Eastern banks like Doha Bank (with a presence in New York, London, Shanghai, Seoul and Singapore), Blom Bank (with offices in Cyprus, Geneva and London) and Arab Bank (Hong Kong, Shanghai, Geneva and Seoul) are just a small example of the kinds of institutions that have set up shop in some of the more popular locations.
International financial centres (IFCs) are increasingly becoming the 'must have' for almost every country, big or small. Several Gulf States (as noted on page 20) have their own; Tehran would love one (sanctions notwithstanding) and even Cairo, Tripoli and Baghdad are attempting to set up their own.
Kish Island, which is around 20km from the Iranian coast and just across the Gulf from the UAE, was set up by the Iranian Government in the 1990s as a free trade area for international banks and to attract other businesses of that type, as a sort of Jersey/Guernsey in the Gulf.
A number of big international banks (Standard Chartered was allegedly one of them) were thought to be in the process of setting up shop there, possibly attracted by incentives like 15 year tax-exemptions, no limitations on the transfer of foreign currencies and a luxury lifestyle (the New York Times apparently ranks it as the being amongst the world´s 10 most beautiful islands), but international sanctions due to Iran's nuclear proclivities seem to have driven foreign investors away for now. Word coming from Tehran is that a feasibility study to set up an international bourse has been completed and the recommendations have been sent to the capital market authority, but there has been no word of a launch date for the exchange.
The decision by HSBC to move Group Chief Executive Michael Geoghegan from London to Hong Kong in early 2010 raised eyebrows at established financial centres the world over amid fears that some banks had had enough of tax-chasing politicians and onerous regulations and were opting for more investor-friendly locations. HSBC Amanah also relocated its headquarters from London to Dubai.
Scotland is keen to show investors that there is more to the UK's financial services industry than London's Square Mile. Scottish Development International (SDI) recently launched its office in Dubai. Over 86,000 people are employed directly in financial services in Scotland and the SDI says that more than half of the world's top 20 financial organisations (such as JP Morgan, Morgan Stanley, National Australia Group, BNP Paribas, Resolution, Citigroup, Barclays and State Street) have substantial operations in Scotland and the financial services industry accounts for over 10 per cent of Scottish jobs.
One of the more interesting battles amongst emerging market financial centres will be between India and China, or more precisely Mumbai and Shanghai. China has been working hard to turn Shanghai into something to equal, if not beat London at its own game. "I think it may overtake London within five years," Dean Owen of Newedge, a French futures brokerage told the Financial Times. "A strong factor in this is that China has a centralised government that can make policy decisions very quickly compared with the UK. They've set themselves a goal - 2020 - and they'll achieve it. No doubt at all."
One of the better known 21st century international financial centres has been the DIFC (Dubai International Financial Centre). It has been instrumental in turning the once quiet trading port into a hive of economic activity that was the envy of its Middle Eastern neighbours. Dubai's reputation has, however, taken a bit of a knock due to the Dubai World/Nakheel dept debacle. The DIFC says it is the world's fastest growing international financial centre and says it aims to develop the same stature as New York, London and Hong Kong.
"The DIFC focuses on several sectors of financial activity: banking and brokerage (investment banking, corporate banking and private banking); capital markets (equity, debt instruments, derivatives and commodity trading); wealth management (asset management, fund registration and family office); reinsurance and captives; Islamic finance and ancillary services," the centre's website says.
Much of the talk in the Middle East about using international financial centres as a gateway (or stepping stone) to Asia and Europe usually has its proponents talking about the revival of the old Silk Road or a New Silk Road.
The old one included cities such as Damascus (see pages 40-42 of this magazine), Baghdad, the ports of Muscat in Oman, Alexandria in Egypt, Mombasa in Kenya, Tyre in Lebanon, Calcutta in India, Constantinople (Istanbul), Malacca in Malaysia and Guangzhou in China. The new one includes Dubai, Doha, Bahrain, Mumbai, Kuala Lumpur, Shanghai, Hong Kong and Singapore.
"The emergence of new financial centres in Asia and the Middle East and their increased integration has strengthened the foundations for a New Silk Road," Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz told a conference recently.
Some of the Asian financial centres are attempting to become the location of choice, 'the hub,' for Islamic finance, something that Governor Zeti acknowledged when she said that, "Financial centres such as London, France, Hong Kong and Singapore are increasing their efforts to enhance the development of Islamic finance in their financial centres."
Malaysia has been working hard to position itself as a regional Islamic finance centre and could, if emerging market giants like China and India dictate global economic terms, become the global centre for Islamic finance. Malaysia's naturally diverse ethnic mix of Chinese, Indians and Malays means that it has an obvious edge over countries which have to import the kind of expensive human capital it already has as an integral part of its population makeup.
Some of the detractors of emerging market IFCs wonder why anyone would want to set up a business next door to politically unstable countries like Iran, Iraq, Lebanon, Yemen or countries with questionable legal business procedures, when locations like Singapore and Hong Kong seem to have much more transparent regulatory regimes and business laws.
Reports about people like David Proctor, the former Chief Executive of Qatar-based Al-Khaliji bank (who was allegedly prevented from leaving the country for 14 months after an apparent disagreement with his erstwhile employer), have not done much for Middle Eastern IFCs in the eyes of ambitious bankers with an eye on career progression. Euromoney reported that "no charges were ever filed against Proctor in relation to Al-Khaliji, nor have Qatari legal authorities ever confirmed there was an actual investigation."
"It was just incredibly frustrating. I had not done anything wrong and I was never charged with anything. It was Kafkaesque," he told the UK's Sunday Telegraph newspaper in an exclusive interview from Singapore in early May 2010.
"The British Embassy could not do anything. I had not been charged so there was nothing they could do, yet I was still prevented from leaving the country. I was stuck in a studio apartment, driving a borrowed car and just had to wait my time. That was one of the difficult things. I just lived from day to day and waited for whatever was going to happen next."
Meanwhile, the UK's Times newspaper has reported that three British bankers in Bahrain, Alistair MacLeod, Anthony James and Cliff Giddings, "were forced to surrender their passports on July 30 last year" after the collapse of Awal Bank, a subsidiary of Saudi Arabia's Saad Group which has been negotiating with creditors over the repayment of $6.5 billion of loans.
The competition, all the same, is still fierce and is likely to increase as the effects of globalisation turn the international markets into something akin to a global village. The spread of mass mobile communications (such as the internet) has meant that some international financial centres in apparently out of the way locations in places like the Mediterranean and the Caribbean are able to sell themselves as low cost alternatives to big cities like Shanghai and Dubai.
Dublin, Luxembourg, Cyprus, Scotland and Malta are cases in point. Taking on giants like Dubai and Shanghai head-on does not appear to be on their agenda; instead they have been going after the niche, highly specialised fund management and administration areas and in some cases doing it better than more established centres like London or New York.
"The Government [of Malta] is careful not to be seen competing head-on with the dominant jurisdictions in the industry, namely Luxembourg and Dublin, but the fact is that Malta is in an advantageous position following the global financial crisis," said Julie Otto, a Law and Finance Researcher at PKF Malta, an accountancy and business advisor, in an article in Malta's Business Today newspaper.
Cyprus, a member of the European Union since May 2004, likes to point out that it is located at the crossroads of Europe, the Middle East and North Africa. It cites some of the benefits that Cyprus brings to international businesses are a favourable tax regime including a 10 per cent corporation tax; zero per cent tax on the profit from the sale of securities and dividend income and the freedom of movement of foreign currency.
In future editions, Banker Middle East will take a look at what the IFCs are offering to tempt bankers with an eye on the horizon.
© Banker Middle East 2010
