Dubai – the making of a financial centre

Dubai, similar to Cayman, has
historically relied on the sea as its bloodline to the rest of the world.

In any given evening, one just needs to take a stroll along the Dubai Creek to
see the dhows that carry goods to and from as far away destinations as India
and East Africa just as they did 100 years ago. However, this once sleepy
pearling and fishing village has dramatically transformed itself over the last
three decades to become the top ranked Middle Eastern city as per Mercer’s
Quality of Living index.
Dubai is the second largest in land mass
and has the largest population of the seven emirates comprising the United Arab
Emirates. The UAE is situated in the southeast of the Arabian peninsular, and
borders Oman and Saudi Arabia. The UAE was a British protectorate, but became
independent in 1971. 

Currently, oil reserves within the UAE
are estimated to be the world’s sixth largest and the Emirates possess one of
the most developed economies in Western Asia. The UAE is ‘white listed’ by the
OECD.

Dubai’s rulers realised a number of
years ago that the Emirate had to diversify its economy away from a depleting
oil supply and build on its strengths which included its geographic location
and liberal economic policies. The Dubai government has spent billions of
dollars investing in infrastructure including a modern highway network, a
public transport metro system and on expanding its existing airport. Overpasses
and underpasses have been built on roads where there were once traffic lights
and roundabouts. Sheikh Zayed Road, the main through fare has been expanded to
14 lanes. The Dubai International Airport will be able to accommodate 80
million passengers a year with the completion of its new Concourse 3. 

Dubai is in the logical location for a
modern airline hub as it is positioned midway between the developed western
economies and the emerging economies in the Far East. Dubai’s geographic
location is unique as one can reach all major destinations in the eastern
hemisphere (other than Australia) in 10 hours flight time or less. Dubai’s hub
model has emerged as a serious challenge to the traditional European hubs.
Emirates Airline is the international airline owned by Dubai and is ranked as
one of the leading airlines in the world in terms of service. The airline flies
to over 100 destinations in six continents giving businesses located in Dubai
easy access to a variety of international destinations. Another 85 airlines fly
from Dubai to 130 global destinations. Bringing passengers through Dubai also
helps with tourism traffic as travellers can avail themselves of discounted
hotel rooms during a Dubai stop-over. 

Dubai is also a time zone bridge between
the Far East and Europe; currently the Emirate is 4 hours ahead of London,
England; and five hours behind Tokyo, Japan.

The Dubai government is committed to
being pro-business. There is a well defined legal framework for establishing a
business and clear ownership rules. Foreigners can own up to 49 per cent of a
limited liability company established in Dubai with the remaining 51per cent
owned by a local partner. The rules also allow 100 per cent non-local ownership
for professional companies, branches and representative offices of foreign
companies, and free zone companies. Government control and regulation of
private sector activities is kept to a minimum. There are no direct taxes on corporate
profits, or personal income (except for oil companies and foreign banks). There
are no foreign exchange controls and companies are allowed 100 per cent
repatriation of capital and profits. 

In Dubai there are approximately 25
different free zones with each zone having its own requirements with respect to
minimum office/warehouse space and permitted activities. As noted above, free
zone companies do not require local sponsorship and allow 100 per cent foreign
ownership. Free zone companies are well suited for companies interested in
taking advantage of Dubai as a regional hub for basing their business,
manufacturing, or distribution.

Financial free zones in Dubai are: the
Dubai International Financial Centre, the Dubai Multi Commodities Centre and
the Dubai Gold & Commodities Exchange. The DIFC is different from other
free zones as it has its own unique legal system based on common law (as
opposed to Sharia Law which applies to domestic matters within Dubai) and a
regulatory framework established with a view to creating an international
financial centre. The DIFC has its own independent judicial system which has
exclusive jurisdiction over all civil and commercial matters. The Dubai
Financial Services Authority is an independent risk-based regulator which
grants licenses and regulates the financial activities in the DIFC.

When the DIFC was established in 2004,
the intention was to create a financial centre comparable to New York, London
and Hong Kong. Since its inception it has been careful to avoid comparisons to
offshore jurisdictions such as the Cayman Islands or the British Virgin Islands
despite the Emirate also having no corporate taxation. 

Sukuks and securitisations have
traditionally used offshore companies. Until 2008, the DIFC had been keen only to
allow ‘real’ companies with ‘real’ operations to be domiciled in the DIFC. In
2008, the DIFC introduced Special Purpose Company legislation aimed at
promoting securitisation and structured finance transactions. 

SPCs can be easily structured and
incorporated, while enjoying exemptions from some filing and disclosure rules
relating to conventional companies in DIFC. For example, they are not required
to hold annual shareholder meetings, can be administered by a corporate service
provider and are not required to file annual returns. The activities of the SPC
are limited to financial transactions or to holding vessels. 

The SPCs offer an attractive onshore
alternative to traditional offshore companies while still offering many of the
same benefits such as tax-free status, efficient formation and economic running
costs. As markets recover, SPCs could provide competition to traditional
offshore exempt companies.

In 2010, the DIFC revised its Collective
Investments Funds Regime which included the creation of an exempt fund regime
with lighter regulatory requirements aimed at professional clients who make a
minimum investment of USD 50,000 each. Such a fund is restricted to 100 or
fewer unit holders and cannot be offered to the public. The DIFC aims to be a
key player in the regional fund business. 

With the recent political unrest in
North Africa and the Middle East, Dubai and its fellow emirates stand to
benefit. Dubai has increasingly become important in today’s world as a centre
of finance and commerce, and as a gateway between the western world and
emerging markets to the east. Public protests and uprisings in Bahrain, Egypt,
Libya, Oman, Tunisia and Yemen have highlighted weaknesses in the region’s
political and socio-economic structures. Protests have been sparked by growing
youth unemployment, dysfunctional labour markets, unequal distribution of
wealth and opportunities, and surging food and fuel prices. These protests have
culminated in regime changes in Egypt and Tunisia, and civil war in Libya.

Smaller Gulf States such as Qatar and
United Arab Emirates are generally perceived to be politically stable. Neither
country has experienced protests as their Arab neighbours as both have oil
wealth and small local populations which allows the governments to subsidise
food and fuels costs, and to distribute wealth and opportunity across their
citizenry.

As part of its strategy to expand its
international operations and reach, Cayman National opened its office in Dubai
in January 2009. Cayman National (Dubai) Ltd. is regulated by the DFSA as a
Category 4 firm which allows the company to provide advisory services from the
DIFC. 

Given the world was in global financial
meltdown at that time, it was perhaps not optimal timing, but the decision to
proceed with the launch reflects the Group’s focus on longer term strategy, and
the importance of the middle and far eastern markets to Cayman National’s
international ambitions.

Over the past two years, the operations
have been successful in developing close links not only with fellow Caymanian
firms operating in the region, but also with European and indigenous
professional wealth management businesses. Cayman National (Dubai) markets
Cayman National’s banking, fund administration, trust and corporate and
investment services offered from both our Cayman and Isle of Man offices. 

 

DubaiSM