Dubai aims to become the trading center for Islamic finance, focusing first on banking and sukuk. There are a number of reasons why Dubai is well positioned for this role in a recent Reuters article, as well as some reasons why it faces an uphill struggle.
One reason (and the most difficult to change if it were a disadvantage) is the physical location of Dubai. The article notes: “Located at the centre of the Gulf, it is the main transit point for air traffic between Europe, Asia and Africa and is a more international city than most of the other centres. “ This is more important than it probably gets credit for. Not only is it more international than many other cities in the GCC (which makes it more attractive for foreign banks sending their staff to work), it is situated in a favorable location geographically relative to the other big financial centers. It is four hours ahead of London (three of Western Europe) and four hours behind Hong Kong (five behind Tokyo).
With the exception of New York, its business hours overlap with all of the world’s major financial centers. This financial centers important in Islamic finance outside of the GCC (London, Luxembourg, Kuala Lumpur, Singapore and Hong Kong). This is important particularly in Dubai’s aspiration to become a center for sukuk listing and trading. Of the five recent sukuk issuance that published data on the source of investors geographically (ADIB, QIIB, QIB, Emaar and EIB), on average 28% of the investors were Asian and 19% were European with the remainder from the Middle East (US and UK investors only represented a marginal share).
However, Dubai has not had success attracting listings from many sukuk following the debt crisis which has been put in the rear view mirror by many investors, but which has not entirely been resolved. As a result, there are currently only five sukuk listed on the Dubai Financial Market (DFM). There are issuers that have equity listed on the DFM who have issued sukuk, although the sukuk were not listed on the DFM. Paul McViety, legal director at DLA Piper is quoted in the article explaining that “the majority of issuance has gone through European exchanges".
The article describes further how “Several United Arab Emirates-based firms have listed their shares in Dubai but gone to the London Stock Exchange to list their sukuk because of London's superior reputation for liquidity and regulation.” The second factor—regulation—that may make Dubai’s task harder, particularly for investors who are limited in the amount of their portfolio that can be invested in sukuk not listed on a European exchange. There is an easy solution for this—a dual listing on both DFM and the DFM—but it adds cost and, in the absence of an advantage in terms of liquidity for the DFM, many issuers will instead choose to list only on a European exchange (most commonly the Irish SE, London SE or Luxembourg SE).
The regulatory clarity for investors is also an issue, but for issuers in the GCC region, the choice of listing exchange probably has little marginal impact if the assets-backing the sukuk (if it is an asset-backed sukuk) are located in the GCC. These types of sukuk will, for the time being, be viewed as having significant legal risk because if the issuer defaults on the sukuk, investors will have difficulty taking possession of the underlying assets located in GCC countries.
In this area, Dubai could provide something that would benefit investors that would be harder for a competing financial center like London or Luxembourg: an arbitration system that takes into account the Shari’ah-compliance factor. Malaysia has already put in place the rules for an Islamic arbitration system for financial products, which puts it a few steps ahead of Dubai. However, the Malaysian arbitration system is based on Shari’ah standards developed by one of the two national Shariah Advisory Councils in Malaysia, and may allow some interpretations of Shari’ah that GCC-based investors object to. It does have an exception for another Shari’ah specialist, but that requires mutual agreement of the parties in the dispute.
This flexibility (for example, allowing bay’ al-ina and transactions like bai bithamin ajil that are based on it) does not hamper the market in terms of attracting issuers to list because more conservatively based structures are still permissible, but there are not rules that would limit less widely accepted structures (like BBA). In terms of providing a transparent arbitration standard in terms of what is viewed as Shari’ah-compliant, development of more GCC-focused Shari’ah standards by Dubai may create additional clarity in more conservative Shari’ah standards that could become the base for a competing arbitration system for Islamic financial products.
DFM is developing sukuk standards (currently in draft form [PDF]) that cover both listing and trading, which are described in the article as being “more detailed than other centres' standards, potentially resolving some of the controversies and giving traders and investors more certainty.” Whether these new standards becomes accepted within the market, and whether an arbitration system that incorporates these standards is developed will likely be key in determining the ability of Dubai to attract both listings and greater trading volume in sukuk.