The global financial crisis saw the demise of several powerful international banking institutions across the world, while the survivors drastically reduced their international operations.
Yet, despite such a severe squeeze on the international financial services industry, and the huge negative publicity that Dubai attracted, there has been no let-up in the number of new international banks starting operations in the Dubai International Financial Centre (DIFC).
"We have not seen any big institution shutting operations here following the crisis," says Abdullah Mohammad Al Awar, Chief Executive Officer, DIFC Authority. "On the contrary, we saw many large international banks opening their offices. Currently we are working on a plan to reduce the cost of doing business from the DIFC."
Even with the collapse of Lehman Brothers in September 2008, the institution's operation in DIFC continued, rebranded under the Nomura nomenclature.
Global-level restructuring saw a certain amount of downsizing, and officials say a few exits were inevitable. Dresdner Bank closed its offices after its merger with Commerzbank, which already had space in the centre.
But despite a few such setbacks, new institutions continue to open business in the DIFC, with a fresh wave of emerging market banks leading the pack. Last month Baring Asset Management (Barings), the international investment management firm, opened a representative office there.
"We are excited about the region. Our new office demonstrates our commitment to these markets and our desire to build on the many valued relationships that we have throughout the region," says Rob Lay, head of Europe, Mena and Alternatives of Barings.
The DIFC's newfound attention to attracting institutions from emerging markets is clearly paying off. "There is an urgent need to refocus the region's economic relations with the emerging markets, especially the Asian giants such as China and India, which are the region's leading trade partners both as importers of oil and exporters of technology and finished goods. This will naturally have an impact [in terms of] growing institutional presence from these countries," says Dr Nasser Al Saidi, Chief Economist, DIFC.
Indian banks and financial services companies were conspicuous by their absence at DIFC in its first few years, but global banking majors rushed to get a foothold in the new regional financial centre. However, during the past two years momentum has picked up. Currently there are more than a dozen Indian institutions, ranging from banks, asset management companies and financial advisory services now operating from the DIFC. Officials are expecting more in the near future.
"Over the past few years, we have sought to enhance our relationships with the financial services sectors of major emerging Asian markets like India. The response has been very encouraging," says Al Awar.
The new emerging market focus of DIFC was highlighted at the inaugural Menasa Forum, a high-level finance and business conference focused on the Middle East, North Africa and South Asia (Menasa) region hosted by the Centre last April.
"The world is seeing a fundamental restructuring of the global economic system. This shift is affecting economies worldwide, but especially those in the Middle East, North Africa and South Asia — a region at the centre of this transformation and one that is well positioned to take advantage of these changes," said Ahmad Humaid Al Tayer, Governor, DIFC.
In addition to the Menasa Forum, the DIFC has been proactively attracting emerging market institutions through seminars and workshops. In October 2009 it organised the India-UAE Partnership forum. Then, at the Russia Calling investment forum in Moscow last month Al Awar called on Russian banks to join up.
A few Russian institutions, including VTB Capital, the investment banking arm of the second-largest state-controlled bank in Russia, are now present at the DIFC. VTB Capital opened its investment banking operations from the centre last June. In a recent interview with Gulf News Yuri Soloviev, VTB Capital's chief executive, said the Dubai office will be a two-way channel for capital flows between the Middle East, Russia and the wider CIS region.
"We have already closed a very successful transaction with the Oman Sovereign Wealth Fund in the Moscow real estate sector, and we are hoping to sign similar deals with Middle East investors," said Soloviev.
In its emerging markets push, the DIFC is attracting more institutions from across Asia, Latin America and Russia. State Bank of India (SBI), the largest banking group in India, has a Category 1 banking licence issued by the regulator, the Dubai Financial Services Authority (DFSA), in December 2006.
"The UAE market consists of a large number of India-based companies and firms managed by Indian professionals. Lots of companies for whom the Indian banks provide credit facilities in India have already started operations in the UAE or are about to start. For all these companies, Indian banks would be the obvious choice," says A. J. Vidyasagar, CEO, SBI, DIFC.
A Category 1 licence enables banks operating in the DIFC to offer a wider range of financial services within the UAE and the region, from arranging investments for retail customers and offering credit to small and medium-sized enterprises to providing trade finance and short-term working capital loans, including Letters of Credit (LC), bank guarantees, term loans and project finance, as well as syndication of credit.
In the absence of new banking licences issued by the UAE Central Bank, many emerging market banks see DIFC as the launch pad for their expansion in the UAE and the region.
"I would not call the DIFC branch a substitute [for an onshore branch], since a full commercial banking licence enables you to increase your reach to a wider segment," says Pankaj Ganjoo, Regional Head, GCC and Africa, ICICI Bank. "However, it has greatly helped in establishing and reinforcing the ICICI brand in the region."
Bankers say the global financial crisis and the subsequent deleveraging by companies have not impacted the demand for finance from UAE and Gulf-based companies.
Most regional banks contracted their lending, and many of them have been focusing on strengthening their balance sheets through active deleveraging and provisioning for impaired assets. Many new entrants see this as an opportunity to acquire some good-quality assets.
Axis Bank (formerly UTI Bank), the third-largest private sector bank in India, expects its financing activity in the region to grow by 30 per cent this year, Srinivasan Varadarajan, Executive Director, told Gulf News in a recent interview.
The Gulf has a huge non-resident Indian (NRI) population, and a large chunk of NRIs belong to the affluent business class. There is also a growing segment of top management executives in the corporate sector. Indian financial institutions provide the best platform for investment opportunities in India.
The UAE is India's second-largest trading partner. Bankers and fund managers say that with the strong economic linkages between the Gulf and India, Indian institutions can no longer afford to ignore the opportunities.
Thus, the financing of traditional trading and commercial opportunities has been supplemented with the more sophisticated financial needs of firms and high-net-worth individuals.
For most Indian banks, the DIFC presence is their first step towards wider regional expansion. "It is a strategic hub, serving as a base for targeting the entire Middle East and Africa region," says K.R. Kamath, Chairman and Managing Director, Punjab National Bank.
Although emerging market institutions have by far formed the large majority among the new entrants to the DIFC, there have been a few high-profile institutions from the West too, such as Scotia Bank from Canada. ABN Amro Private Banking opened its business this year.
DIFC officials say that after a lull in the past two years, they expect more institutions to join the DIFC from next year, while institutions that are already present are expected to expand their operations. International banks such as the Royal Bank of Scotland and Standard Chartered have already confirmed that they are hiring more people.
Given the scale of potential existing right across the Menasa region, that lull may indeed be the precursor to some kind of perfect storm.
The writer is Deputy Business Editor, Gulf News.