GRM 2010 GRM 2011

Abstract Details

 
AUTHOR NAME
 
Family Name:
Sairally
 
First Name:
Salma
 
ABSTRACT OF PAPER
 
Title of Paper:
THE DEVELOPMENT OF DUBAI INTERNATIONAL FINANCIAL CENTRE (DIFC) AND BAHRAIN AS OFFSHORE FINANCIAL CENTRES FOR ISLAMIC FINANCE IN THE GCC: COMPETITIVE POSITION AND CHALLENGES
 
Paper Proposal Text :
Wealth in the Gulf Cooperation Council (GCC) has mostly been fuelled by oil and gas revenues. These petrodollar flows have been increasing over the long term, more so with the rising oil prices. Based on average crude oil prices of USD 70 per barrel, it is estimated that the amount of oil revenue profits of the GCC States will tripple over the next 14 years (Farrell, 2008). How the GCC deploys this increasing wealth is of high interest to the world. Historically, the GCC has relied on the financial markets of the United States and Europe to manage their investments. However, as Western governments are faced with large debts and deficits resulting in a loss of confidence in the financial system, it is reported that more GCC funds are being rechanneled to the Gulf financial centres as well as to other emerging markets with higher growth prospects (Reuters, 2011). In the light of the financial crisis, high net worth investors are also looking for efficient and secure jurisdictions for investing their funds. Countries worldwide are positioning themselves as strategic locations to tap into part of this growing liquidity. The development of Islamic capital markets has been a key strategy for attracting these foreign investments.

In particular, it has been observed that a number of jurisdictions are developing their Islamic capital markets by utilising the efficiency provided by Offshore Financial Centres (OFCs) to structure SharÊÑah compliant products. OFCs are typically jurisdictions with small domestic economies such as Bermuda, the Cayman Islands, Jersey, Guernsey, the British Virgin Islands and Luxembourg, among others, which seek to attract foreign financial capital by offering foreign businesses and high net worth individuals such advantages as: low taxes, political stability, business-friendly laws and regulations, banking secrecy and anonymity (International Monetary Fund, 2000). To attract Islamic financial business, especially from the Arab world, the General Registry of the Cayman Islands Government has introduced since March 2007 an Arabic language facility to enable companies to register and issue other certificates in both English and Arabic (Cayman Islands Financial Services, 2007). The Cayman Islands is particularly used as the jurisdiction of choice for ÎukËk issuances that are developed and marketed in the GCC (Cayman Islands Financial Services, 2007; Elmalki and Tegally, 2010). Other examples of Islamic capital market transactions that OFCs are usually involved in include: for the incorporation of offshore SharÊÑah compliant investment funds, hedge funds, real estate and private equity funds; for registration of personal trusts for estate planning and wealth management purposes; for registration of offshore special purpose vehicles (SPV), for example in ÎukËk structuring; for securitisation structures; and, allied services such as custodial and administration services (Parker, 2007).

Even the GCC has developed a number of separate onshore jurisdictions including Bahrain, Qatar Financial Centre (QFC) and the Dubai International Financial Centre (DIFC), which also have offshore features – such as zero tax, independent regulatory agency, free repatriation of capital and profits, and wide network of tax treaty – to attract offshore businesses. On the Islamic finance front, Bahrain and DIFC are reputed jurisdictions promoting Islamic financial transactions at more competitive costs in terms of regulation and tax when compared to using onshore vehicles. Bahrain has generally been acting as a regional financial centre for the GCC. It has also been supporting the development of Islamic finance by hosting a number of the international regulatory bodies such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the International Islamic Financial Market (IIFM). Meanwhile, the DIFC enacted new regulations in 2008 to enable the creation of Special Purpose Company (SPC) structures in order to facilitate both conventional and Islamic financial transactions and vessel registrations (Dubai International Financial Centre, 2009).

This research focuses on the Islamic financial services offered in the offshore jurisdictions in the GCC, particularly Bahrain and the DIFC. Through a comparative study it sheds light on the competitive advantages and strategies of these two jurisdictions. It also examines the opportunities and challenges faced by Bahrain and the DIFC vis-É-vis other well-established offshore jurisdictions like the Cayman Islands which has been a preferred jurisdiction for Middle East investors. Overall, the paper delineates the lessons learnt from the best practices of leading OFCs to further the development of Islamic capital markets in the GCC region.

References

Cayman Islands Financial Services. (2007, April 19). Arabic Language Facility Enhances. Retrieved October 20, 2011, from http://www.caymanfinance.gov.ky/portal/page?_pageid=1902,4509117&_dad=portal&_schema=PORTAL.

Dubai International Financial Centre. (2009). Guide to Islamic Finance in or from the Dubai International Financial Centre. Retrieved November 15, 2011, from http://labs.xische.com/difc/sites/default/files/DIFCIslamicGuide_0.pdf.

Elmalki, F. and Tegally, S. (2010, May). Meeting Market Challenges. Retrieved November 19, 2011, from Conyers Dill & Pearman: http://www.conyersdill.com/publication-files/149_10_05_31_Meeting_Market_Challenges_IFN.pdf.

Farrell, D. (2008, February 5). Gulf States Must Use Oil Wealth Wisely. Retrieved November 15, 2011, from Bloomberg Business Week: http://www.businessweek.com/globalbiz/content/feb2008/gb2008025_051399.htm.

International Monetary Fund (IMF). (2000, June 23). Offshore Financial Centers, IMF Background Paper. Retrieved October 29, 2011, from http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm

Parker, M. (2007). Offshore Hubs Lure Islamic Finance Business. Retrieved October 20, 2011, from Arab News: http://archive.arabnews.com/?page=6§ion=0&article=98537&d=16&m=7&y=2007.

Reuters (2011). Mid East Money - Crises, New Markets Shift Gulf Petrodollar Flows. Retrieved December 20, 2011, from http://www.guardian.co.uk/business/feedarticle/9991707.

 
 
 

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