DUBAI, United Arab Emirates, AP – Another land rush is under way in Dubai, but this time those clamoring for a toehold in this boomtown are not homebuyers, but U.S. and international banks.
More than three dozen U.S. and international financial firms have set up offices in this Gulf city’s futuristic new financial district since it began issuing commercial licenses in 2004. Among them are some of the world’s biggest: Morgan Stanley, Merrill Lynch, Credit Suisse and Deutsche Bank.
Several more, including HSBC, Goldman Sachs, Lehman Brothers and Japan’s Sumitomo Mitsui have announced plans to open offices in the 110-acre district, a Vatican-like enclave on the Persian Gulf that is governed by western-style financial laws enforced by its own courts and judges.
Banks are eager to start business even though the district is half-built. Omar bin Sulaiman, governor of the Dubai International Financial Center or DIFC, said the district’s growth had surprised even its Dubai government owners.
Bin Sulaiman and others say that’s a result of searing economic growth in an underserved region.
“This is a market that’s coming of age,” said Georges Makhoul, Morgan Stanley’s Dubai-based head of banking in the Mideast and North Africa. “There are opportunities here wherever you look. There’s been pent-up demand for banking services that weren’t previously available to companies here.”
Morgan Stanley is doubling its 22-person staff in Dubai as it readies to dabble in the booming Islamic finance market, Makhoul said. The New York-based bank also plans smaller branches in neighboring Qatar and Saudi Arabia, he said.
Islamic finance is simply banking and investment that complies with Islamic law, which bans interest. Most Islamic products are similar to conventional ones, except investors receive profit shares rather than interest payments.
Islamic finance, said Makhoul, “is here to stay.”
Morgan Stanley was looking to develop sophisticated Islamic instruments that involve securitization, or borrowing against a company’s future revenue. Makhoul said most Islamic instruments on offer in Dubai, like “sukuk” bonds, were simpler.
The banks join tens of thousands of foreigners — mainly Europeans and Asians — that flocked here to buy luxury homes and apartments after this cosmopolitan city opened its property market in 2002.
To bring in the big banks, the Emirates amended its constitution to declare the country’s commercial law invalid on the DIFC. Instead, laws written by the Dubai Financial Services Authority are enforced here, and disputes settled in the DIFC’s own courts.
Some of the banks crowding into the district have previous Mideast experience, like London-based Standard Chartered, which bought an entire building at DIFC. Others, like Morgan Stanley, Netherlands-based ABN-Amro and Merrill Lynch, are new to the region.
DIFC-based banks are prohibited from doing business in the Emirates currency, the dirham, a move meant to appease local banks worried about local competition. The DIFC’s official currency is the U.S. dollar.
Some banks, like London-based Barclays Capital, Standard Chartered and ABN-Amro straddle both worlds, with local branches abiding by Emirates law doing business in dirhams and a separate DIFC branch.
Bank executives here say a convergence of factors lured them to Dubai. The new district, with its financial regulations based on the familiar code of the U.S. Security and Exchange Commission is one.
There are also opportunities for sophisticated banking in which local banks have little experience, as well as stock markets that didn’t exist a decade ago. The Emirates has three, including the dollar-denominated Dubai International Financial Exchange, or DIFX, headquartered in the DIFC.
But mostly, the banks are here because the energy-rich Gulf is loaded with cash.
“There is just a huge amount of money here,” said DIFX spokesman Mark Fisher. “If you’re an international bank, you can’t afford to overlook this part of the world anymore.”
By contrast, growth of the DIFX has been more disappointing. Only five firms have listed shares on the stock exchange since it opened 10 months ago in a steel-and-glass building shaped like the Arc de Triomphe.
Stock markets that have plummeted since February across the Middle East have scared off listings by companies and bond issuers. Analysts say listings will resume when markets rebound.
In the meantime, banks are offering services once tough to obtain in the Arab world.
Barclays has underwritten corporate bond issues for Dubai-based companies, financed infrastructure projects and underwritten corporate acquisitions, said Cyrus Ardalan, who heads Barclays Capital’s operations in the Mideast, Eastern Europe and Africa.
Most famously, Barclays was an underwriter in Dubai port operator DP World’s purchase this year of Britain’s P&O. That deal was partly scuttled by the U.S. Congress, which voted in March to block DP World from running P&O’s dockside operations in U.S. ports.
With the influx of banks, DIFC looks as if it will quickly eclipse the island kingdom of Bahrain as the Gulf’s banking center. Nearby Qatar, too, has set up a banking center with western-style regulation. Bahrain remains the headquarters for many regional banks.
“There are compelling reasons to have a presence in this region,” Ardalan said. “But Dubai had the vision. They have a clear view of where they want to go and they go for it. They want to be best in class.”