The King Abdullah Financial District in Riyadh, Saudi Arabia
BNP Paribas may still have its Middle East and Africa headquarters in Bahrain, but many of its employees there will tell you, at least off the record, that they would like to leave. Their favoured destination? Dubai of course.
BNPP is the last of the global banks to be based in Bahrain’s financial harbour, Manama. Japan’s MUFG is also there, but its main regional office is in Dubai. The other big international institutions are not in Bahrain at all – and their employees only rarely visit. When they do, it is usually to enjoy a brief respite from the Emirati buzz rather than for Bahrain’s intrinsic business appeal.
The French bank’s enduring commitment to the small Gulf state serves as a reminder of a time when Dubai did not yet hold the status of the region’s preeminent financial hub. A time when Abu Dhabi, Beirut, Cairo, Doha, Kuwait City, Manama and even Tehran all tussled for the top spot before a small, deserted emirate took the lead and never let go.
Euromoney has documented every twist and turn in this saga over the past 50 years. It was there in the early 1970s when Beirut seemed like the natural home of Middle East banking; during the two decades that followed, when Bahrain took on that status; and in the 2000s, when Dubai mounted an extraordinary effort to create a financial zone that would eventually become the most successful banking hub the region had yet known.
Already at the start of the 2000s, in the early days of the Dubai International Financial Centre (DIFC), the emirate’s draw seemed near impossible to resist. Between 2002 and 2006, Michel Accad headed Citi’s Middle East and north Africa division from Cairo – the result of a combination of circumstances rather than a considered decision by the bank.
Accad, now chief executive of Al Ahli Bank of Kuwait, recalls feeling removed from the main hive of activity that was Dubai and he made sure to travel there as often as possible.
Michel Accad, Citi
“It was a bit of an accident,” he tells Euromoney of his being based in Egypt.
Asked if he was the only regional head at a big bank based outside Dubai at the time, he laughs and says: “I think so, yes.”
Citi moved its regional headquarters to the DIFC in 2006.
Dubai’s ability to attract the world’s top financial institutions only grew stronger in the years that followed. Today, it hosts not just legacy western banks but all manner of financial institutions from around the world, including Asia’s largest bank by assets, Industrial and Commercial Bank of China, and Africa’s Standard Bank.
Still, there are reasons to believe that the competition for regional dominance is back on. The dramatic fall in the price of oil five years ago made those cities that had lost the fight to Dubai years ago realize once again the importance of a diversified economy, supported by a broad base of banks with deep pockets.
The emergence of new technology, from cryptocurrencies to artificial intelligence, has also upended common conceptions of what it means to be a financial centre, putting innovation ahead of physical size and status.
We need to do much more. I don’t see competition as bad. I want to see the creation of more hubs; I want to see the creation of much more activity- Richard Teng, ADGM
Finally, the realization that the Middle East in general – including Dubai – has enduring deficiencies in various areas of finance has given other regulators hope that there are opportunities for their respective jurisdictions to get ahead, rather than simply follow their Emirati neighbour’s lead.
“We need to do much more,” Richard Teng, the chief regulator of Abu Dhabi’s financial free zone, ADGM, tells Euromoney. “I don’t see competition as bad. I want to see the creation of more hubs; I want to see the creation of much more activity.”
ADGM is certainly working towards that goal, even poaching from the DIFC to achieve it. Its 2014 hire of Jan Bladen, the chief operator of the DIFC’s regulatory authority, to become its executive adviser and programme lead was one such aggressive move.
Other centres, from Egypt to Bahrain, are also fighting hard to make themselves attractive to international finance once again.
This is the story of how Dubai reached the top – and what its rivals are now doing to get some of its business back.
Beirut in the 1960s and early 1970s was not the ideal place for banking. Deposit-taking was meagre, the dollar interbank market was unsophisticated and there was only limited syndication of medium-term loans. It was, even by the standards of the day, a place of limited capability.
But for years, almost every banker would have pointed to Beirut as the region’s most accomplished banking hub. The city’s fun-loving lifestyle and five-star hotels attracted not only Brigitte Bardot and Marlon Brando but hundreds of expatriate financiers too.
There were other reasons behind its attractiveness. Known as ‘the Paris of the Middle East’, it could also lay claim to being the region’s Zurich, as Lebanon’s banking secrecy laws made it a particularly welcoming place for wealth management and private banking.
Bankers could also rely on a broader economy, as Beirut served as a big port for the whole region, connecting Lebanon, Syria, Jordan, Iran and Iraq to the rest of the Mediterranean and beyond.
These factors combined to make Lebanon’s capital a financial hub for the region.
Such was its status that, in a 1976 issue of Euromoney, Klaus Tjaden, Commerzbank’s Middle East representative, called the city “irreplaceable” as a service and information centre for the region. But even a dominant hub can be bested by its neighbours, if they go about it the right way.
‘Where the bankers went after Beirut – and why they will go back’ was the headline of that article, which covered bankers’ exodus from Lebanon during the country’s civil war. But even as Euromoney rooted for the resilience of Beirut, it cited Alan Moore, director-general of the Bahrain Monetary Authority, who subtly undermined his rival: “Beirut was never a major centre for dealing in wholesale money markets,” he said.
These were the early days of the struggle for the top spot in Middle East banking. Bahrain was lining up to take over Beirut’s mantle. But in the mid 1970s, everything still seemed possible – and each city’s claim to dominance was credible in its own way.
Kuwait, a vital commercial centre with vast reserves of oil, and Cairo, a city that boasted some of the best managerial talent in the region, took it in turns through the 1970s of being named “the future financial centre of the Middle East”.
In the UAE, Abu Dhabi already had a large resource-based economy that might have appealed to the financial sector. While Dubai was setting up an important commercial centre and transportation hub, in large part the result of efforts by the enterprising Sheikh Rashid at the start of the decade. Neither was ready to come to prominence yet, but both were in the running.
Even Tehran won the support of Michael von Clemm, executive director at Credit Suisse White Weld in London, in the pages of Euromoney in 1975.
Iran’s deep and varied economy, supportive political climate, increasingly specialized banking sector and skilled management class meant that, compared with “the illiberal policies and/or economic shallowness of its Arab rivals”, von Clemm argued, Tehran stood “every chance of being the region’s most important financial market”.
That put it, he concluded, “in the world league of banking communities”.
Euromoney’s editor at the time, Padraic Fallon, also felt that Iran had the most coherent policies for making the best use of its resources and might therefore be “stealing a march on Cairo and Beirut to turn Teheran into the most sophisticated financial centre in the Middle East”.
That was until Iran’s Islamic revolution four years later, which abruptly ended those plans. Tehran’s financial sector has been more or less isolated from the outside world in the 40 years since.
|The stock exchange in Tehran: not as impressive as first touted|
And then there was Bahrain. At first it did not look like it had the potential to outsmart its rivals. Manama was hardly an attractive place to live for young bankers looking for excitement abroad. More importantly, setting up an offshore banking unit there was expensive in the 1970s. Capital expenditure and operating costs with a staff of just 15 could rise to as much as $1.7 million (equivalent to about $7.7 million today) for the Bahrfirst year.
But Bahrain displayed a number of advantages that Beirut and all of its other rivals lacked: its geographical position at the heart of the Persian Gulf, close to those countries with the greatest oil wealth; a more stable political environment than many of its neighbours; and, crucially, relatively liberal banking regulation, owing in part to the UK’s recent rule over the kingdom.
Such was Bahrain’s rise through the 1970s that it was little surprise when Nemir Kirdar, a protégé of David Rockefeller and former head of Chase Manhattan Bank’s operations in the Persian Gulf, established a new pan-Middle Eastern business in Manama at the start of the following decade.
Investcorp, as it was named, was able to pool capital from hundreds of the Gulf’s wealthiest to invest in projects in the Middle East and the west. It quickly became the largest private-sector investment company in the region – a privately owned parallel to the powerful Gulf Cooperation Council (GCC) formed at around the same time.
The Bahraini royal family, eager to drive the growth of the country’s financial sector as Beirut’s star dimmed, supported the project wholeheartedly.
“It’s the first real investment bank to be set up in the Gulf,” boasted Investcorp chairman Abdul-Rahim al-Atiqi to Euromoney in 1983. It was also the most international of the region’s home-grown financial firms.
I think it will be a catalyst for change in the region’s financial markets
- Andrew Dixon, HSBC Middle East
Over the last two decades of the 20th century, Bahrain asserted itself as the financial heart of the Middle East, through oil’s highs and lows.
In the mid 1970s, around 30 banks had licences to establish themselves in Manama. By the turn of the century, Manama was home to 48 offshore banking units, 32 investment banks (20 of them Islamic), 19 onshore commercial banks, 40 representative offices of international banks, 17 money changers and nine investment advisory firms, making it the most densely packed financial hub in the region.
That was the high point of Bahrain’s dominance.
Dubai, having become an important commercial and transportation hub, was also ready to make an impact in finance. That ambition took shape in 2002, with the foundation of the DIFC, and two years later with the start of its operations. The centre offered a haven for international banking, providing foreign institutions with a special regulatory regime inspired by familiar English law, exempting its members from the local legal regime applicable to domestic banks.
While bankers viewed Bahrain’s regulators favourably, Bahraini laws were not as auspicious to foreign institutions, and a series of popular uprisings there in the 1990s had shaken bankers’ trust in the safety and stability of the country.
The Gate, Dubai
The grandeur of Dubai’s design was what differentiated the emirate from its rivals. While others anguished over the need to provide investable opportunities for local and international money, Dubai moved rapidly, building up a hub for capital markets, insurance, offshore banking and Islamic banking.
To drive the project forward, it went on a charm offensive, attracting top names in international finance, including Ian Hay Davison, former chief executive and deputy chairman of Lloyd’s of London, to head the regulatory council of the proposed centre.
Then came the 2003 World Bank and IMF annual meeting, held for the first and only time in Dubai. That choice would prove momentous for the fast-growing city, as it showcased its potential to visiting businesspeople, bankers and officials.
Fourteen thousand delegates descended on the emirate, which had built a conference centre from scratch to host the panels, two new grand hotels – the Shangri-La and Grand Hyatt – to host the guests and new roads to carry them from one location to another.
“I think it will be a catalyst for change in the region’s financial markets,” Andrew Dixon, then chairman of HSBC Middle East, told Euromoney before the event. He was right.
The new Dubai was born that September. It had retained its authoritarianism – no outdoor protests took place alongside the event – and added to that the sheen and appeal of a modern hospitality and business hub.
Having a regulator tailored to the needs of international banks proved an irresistible pull. The 110 acres of land attributed to the DIFC were soon teeming with thousands of suits.
It was not all plain sailing. In 2004, Hay Davison was dismissed from the DIFC – a story that he first told in detail in the pages of Euromoney the following year.
As he revealed then, powerful elements in Abu Dhabi were unhappy with Dubai’s plans. The Emirati central bank feared that it might lose influence because of the creation of a new and independent financial centre – and regulator – with the power to grant banking licences and supervise its own stock exchange.
Hay Davison revealed further internal struggles, including the indignity of seeing the centre’s chief regulator’s computer seized by Emirati authorities.
“A most foolish act,” he said at the time, “because it makes it most unlikely that the DFSA [the DIFC’s regulatory body] will ever be able to enjoy confidential relations with other regulators around the world.”
He was wrong about that. It took time, but Dubai eventually healed these wounds and retrieved enough international faith in its governance to achieve its ambitions as a financial centre.
Still, Dubai faced other challenges over the years. First among them its real estate crash a decade ago. Euromoney predicted that crisis in October 2008, in a piece that lambasted the emirate’s useless state-sponsored real estate projects, as well as its “deluded and quixotic” financial centre.
When the property bubble finally burst it became clear that as much as a quarter of Dubai banks’ deposits had been extended to the real estate sector – a market whose astronomical prices had been fuelled by years of speculation.
As Euromoney reported at the time: “Dubai’s hallucinatory financial visions are over. In its own way, it is joining the rest of the world in long-overdue crisis and retraction.”
Dubai’s oil-rich neighbour, and political senior, Abu Dhabi, funded Dubai’s way out of the crisis – a humiliation for a city that believed its many business successes, including that in finance, had earned it the respect and envy of its peers.
As one banker said then of Dubai’s hubris: “The model wasn’t wrong, but the concept grew too big, too quickly.”
Dubai survived. According to Shayne Nelson, chief executive of Emirates NBD, it learned from those mistakes.
“If you look back at most of the problems that Dubai government-linked companies had, very few had major problems in the end in Dubai,” he says. “It was all the offshore investments they did. That’s a lesson we have to have: when you know your own market and your own demand, you can move forward.”
Ultimately, however, that crisis made clear that the emirate’s financial miracle was like any other: subject to booms and busts.
Now other cities are once again mounting efforts to build thriving financial centres. Few can realistically hope to take over Dubai’s role as the region’s preeminent hub – for the foreseeable future at least. But Abu Dhabi, Kuwait, Qatar, Saudi Arabia and others have come to the realization that their interests would be better served by hosting foreign banks rather than relying on Dubai.
Although hundreds of bankers and investors fly in to meet their sovereign wealth funds, few stick around. Financiers are happy dealing with the region’s vast oil wealth, but they typically do it out of Dubai and therefore contribute little to the financial life of the broader region.
The dramatic drop in the price of oil five years ago impressed upon complacent local leaders that this situation was no longer tenable. Hence the drastic plans for economic diversification that have sprouted across the Gulf in the years since, with Saudi Arabia, Abu Dhabi and Qatar declaring their intention to radically transform themselves by 2030, and Kuwait by 2035.
Each of these plans includes as a central pillar the development of a financial centre.
They certainly have the funds to build the required infrastructure. Al Maryah Island, the home of Abu Dhabi’s financial free zone, ADGM, is home to a lot of office space. Saudi Arabia’s King Abdullah Financial District has a cluster of skyscrapers that cuts an impressive figure against Riyadh’s otherwise low skyline. Kuwait, meanwhile, has recently rekindled its ambition to build Silk City, a massive new urban development that would also host a financial centre.
But having the infrastructure to house financial institutions in no way guarantees that they will come. Many Gulf officials have realized that specialization is the key to attracting talent. Dubai is the ultimate generalist, but it is not equally strong in every area of business. Finding niche sectors of finance in which they can thrive and developing their particular strengths is the only pathway to reclaim some business from the DIFC.
Bahrain, for example, is still a hub for the local incorporation of mutual funds. It is also a big centre for Islamic banking, home to Al Baraka Bank, Khaleeji Commercial Bank, Kuwait Finance House and many more. It can build on these strengths.
Another one of Bahrain’s strengths is the low cost of setting up shop there, thanks in large part to the fact that foreign banks do not have to rent real estate in a densely crowded financial centre, as in Dubai, but can instead settle anywhere in the country while still benefiting from the same laws.
Dalal Buhejji, a senior financial services manager at Bahrain’s Economic Development Board, tells Euromoney that this cost-effectiveness, combined with Bahrain’s heavy focus on finance – it is the largest private-sector contributor to the economy after oil and gas – make it an ideal place for foreign banks.
“When financial institutions look at expanding to the region,” she says, “Bahrain is always one of the first countries they look at, because there is the right framework for them to establish a presence.”
Others, too, have cards to play. Saudi Arabia, for one, has promised large privatization deals, public listings and debt issues as part of its reform programme. Saudi Aramco’s multi-billion dollar IPO is still on the table, at least in theory. And the kingdom’s debut sovereign bond issuance has broken records for size and investor reception. Foreign bankers have flocked to Riyadh to meet decision-makers there and last year Citi opened an office on the ground.
Speaking of the changes in Saudi Arabia, Richad Soundardjee, Middle East head at Société Générale, tells Euromoney that the oil price fall has made certain jurisdictions more attractive to banking.
“By definition you had very big chunks of the region, and Saudi Arabia is the best example, that literally discovered debt,” he says. “The sovereigns in particular and the sovereign-related entities in Saudi Arabia needed international banks with appetite for the region. That is exactly what we are.”
Abu Dhabi is also making itself more attractive. The combining in 2017 of First Gulf Bank and National Bank of Abu Dhabi, to form First Abu Dhabi Bank, has put the emirate firmly on the map of regional finance.
Thanks to that merger, Abu Dhabi is now home to the second-largest bank by assets in the Middle East – after Qatar National Bank but, crucially, ahead of Dubai’s Emirates NBD. Another planned merger – of Abu Dhabi Commercial Bank with Union National Bank and Al Hilal Bank – will add to Abu Dhabi’s significance in the Gulf’s financial landscape.
Abu Dhabi is also working hard to create bridges with China, whose international trade and infrastructure policies could boost banking activity in the region. The recent visit of the Chinese premier bodes well in that regard, as does the planned establishment of a ‘Belt and Road’ stock exchange in ADGM, which would create a close relationship between Abu Dhabi’s financial centre and Shanghai’s exchange.
Even the more politically troubled landscape of Cairo is showing some signs of rejuvenation. Egypt’s investment banking scene has grown markedly in recent years, with the international expansion of both EFG Hermes and Beltone Financial. Trust in Egypt’s financial sector more broadly has benefited from the central bank’s decision to allow the Egyptian pound to float freely.
Crucially, regulators across the region have come to see financial technology as a means to get ahead.
Since the large incumbent banks are well established in Dubai, burgeoning banking hubs might better spend their energy on attracting digital startups looking for a home. These firms may favour a less expensive city. They may also be less picky about where there are headquartered because they do not necessarily require a bricks-and-mortar presence in every country in which they wish to operate.
Bahrain and Abu Dhabi have made headway in this area, both setting up early regulatory sandboxes that have received a large number of applications from companies in the Gulf and beyond – including those from the UK and Silicon Valley.
ADGM was the first in the region to introduce a regulatory regime in relation to the spot trading of crypto assets – again, an indication of its desire to overtake Dubai in this space.
To succeed in this goal, collaboration may also benefit the smaller financial centres. Late last year Abu Dhabi and Bahrain signed a memorandum of understanding to exchange expertise on financial technology and to improve their respective regulations.
“We are very keen about working together to make sure that the financial services sector across the GCC is thriving,” says Buhejji. “That is even more important now with fintech, because these companies don’t look at one single country, they look at the whole region.”
The more connectivity a financial centre has across the broader region, the more likely it is to attract startups.
However, despite the progress, big challenges still hold the rivals back. Kuwait’s vision of growth is sluggish and many doubt that it can deliver on Silk City, which has been in the works for many years. In 2017, one of the architects of the project told Euromoney that she was unsure if the city would ever see the light of day.
Similarly, Saudi Arabia has been criticized for the slow pace at which it is delivering its objectives; there are delays to privatizations, for example, and concerns over the leadership’s willingness and ability to reform Saudi society as comprehensively as initially stated. King Abdullah Financial District may be up, but it is still a ghost town.
As for Qatar, it may have in QNB the region’s largest bank, with a strong international presence reaching as far as southeast Asia and Africa, but the country’s blockade by its neighbours in the Gulf has largely isolated Doha from the rest of the region’s financial industry. It is unlikely to emerge as much of a hub in these conditions.
Abu Dhabi, meanwhile, still suffers from its proximity to Dubai, while ADGM is still too young to have properly demonstrated its worth.
For now at least, Dubai seems likely to retain the crown. On background, DIFC regulators say they are hardly worried about the competition. They say Dubai is not resting on its laurels but consistently outpacing its competitors, including in fintech.
Richard Teng, ADGM
ENBD’s Nelson, who first visited Dubai in 1998, is very much of that opinion. To illustrate that point, he says that what most surprised him when he joined the Emirati bank from Standard Chartered five years ago was the quality of the technology available. Dubai seems unlikely to fall behind on the latest developments in digital banking.
To its neighbours, Dubai still is the poster child for a successful financial centre. Teng is eager to stress that ADGM’s model is not inspired by the DIFC.
“There are free zones all around the world,” he says, clearly tired of the constant comparisons drawn between Abu Dhabi’s hub and Dubai’s.
But it is hard to see how it couldn’t be. Even ADGM’s size – 114 hectares – is virtually identical to the DIFC’s.
Still, Dubai’s continued dominance does not prevent others from playing an increasingly important role, whether it is in fintech, Asian trade, private banking or Islamic finance.
The Middle East is still heavily reliant on foreign finance. It could do far more to increase home-grown wealth management, stock listings, small and medium-sized enterprise lending, and debt capital market access for local corporates. Many of these products are sourced outside the region; even Dubai has not been able to fully capture these activities.
There is room for much more financing activity in the Middle East. In reality, it doesn’t much matter whether it takes place in Dubai or elsewhere, as long as it takes place in the region.