Rise of the International Financial Center: Can Casablanca Emulate Dubai’s Success? by Jed Halfon and Mohammad Rustom
Rise of the International Financial Center: Can Casablanca Emulate Dubai’s Success?
Knowledge @Wharton U.PENN
The United Arab Emirates brings to mind opulent luxury: the seven-star Burj Al-Arab, swank hotels with an array of fine-dining options, caravans of exotic sports cars cruising along the JBR Walk, and the world’s tallest building at 828 meters — all symbols of progress, wealth, and success.
Each of these icons has contributed to Dubai’s identity and led to it becoming one of the world’s preeminent tourist destinations (ranked #7 on MasterCard’s Q2 2013 Global Destination Cities Index, ahead of major urban metropolises such as Barcelona, Rome, Vienna, and Los Angeles). Yet, there are other measures of economic success — albeit less visible to the unacquainted visitor.
Since its launch in 2004, the Dubai International Financial Centre (DIFC) has grown steadily and is now classified as a global contender, according to the March 2013 Global Financial Centres Index, alongside Beijing and Moscow. This success has not gone unnoticed in Casablanca, which seeks to emulate Dubai’s example in hopes of attracting foreign investment and bulge-bracket financial institutions. Morocco’s largest city will attempt to build the Casablanca Finance City (CFC), the first of its type and scale in North Africa.
What Is an International Financial Center?
An international financial center is defined as a global city that plays a significant role in capital markets and contains a large number of internationally significant financial institutions. Of particular note are those financial centers that are designated as special economic zones, or free zones, in order to incentivize business activity, especially as it relates to the financial sector.
The official mission of the DIFC is “to promote the growth and development of financial services and related sectors within the UAE economy and to provide state-of-the-art infrastructure and competitive services to stakeholders.” To that end, it was established as an “onshore” financial center in 2004 via UAE Federal Decree No. 35. DIFC members benefit from zero tax, 100% foreign ownership, and no restrictions on the repatriation of capital.
The DIFC enjoys independent jurisdiction under the UAE’s constitution, with a legal framework separate from that of the rest of the country.
In the 2011 Economic Activity Survey, released in July 2012 by Nasser Saidi, the center’s chief economist, the DIFC’s growth is clearly evident. Nominal GDP of DIFC entities grew from US$1.8 billion in 2007 to US$3.1 billion in 2011, an increase of 72% despite the global financial crisis. Over the same period, the number of registered entities within the center increased 62%, from 505 to 817. The NASDAQ Dubai, opened in 2005, grew to a market capitalization of US$31 billion as of August 31, 2013, according to Zawya, a subsidiary of Thomson Reuters. While the DIFC has clearly benefited from the UAE’s world-class infrastructure and stable political regime in a region replete with turbulence, there are additional factors at work. Former DIFC Deputy CEO Marwan Lutfi told Global Investor magazine, “The DIFC, with its modern infrastructure, free zone status and self-governing laws and courts, is globally recognized as the preeminent and favored financial center in the region.”
The DIFC enjoys independent jurisdiction under the UAE’s constitution, with a legal framework separate from that of the rest of the country. Based primarily on English common law, as opposed to UAE civil law, the DIFC Courts administer civil and commercial disputes within the financial free zone. In statements made to the International Financial Law Review, Roberta Calarese, DIFC’s chief legal officer, notes that the center has “a very sophisticated insolvency regime in contrast with the UAE whose regime isn’t as well developed.” In addition, the financial free zone has implemented “an efficient legislative process which means [the DIFC is] able to pass legislation that adapts to international standards fairly quickly … in contrast with the more established countries that have a far more complicated legislative process that’s much more lengthy….”
In order to administer its judicial system, the DIFC Courts have assembled an international panel of respected judges, including jurists from the U.K. and Singapore, two countries well-rooted in common law. To bolster its international appeal as a global dispute forum and a center of arbitration, in 2008 the DIFC passed a new law enabling anyone — not just member parties — to bring cases before it. It also opened an arbitration center in conjunction with the London Court of International Arbitration. An example of the independence and integrity of the DIFC Courts, reported by the Khaleej Times in August 2013, involved a member of the Kuwaiti royal family who had his lawsuit dismissed against the Swiss Bank UBS AG due to a lack of corroborative evidence.
In addition to its independent legal framework, the DIFC is governed by an independent regulatory framework under the Dubai Financial Services Authority (DFSA). In August 2013, the European Commission formally declared the DFSA’s audit controls to be of “equivalent status” to those of the eurozone. In a new agreement reached with the European Securities and Markets Authority, companies in the DIFC will be allowed to market alternative investment vehicles, such as private equity and hedge funds, to European investors.
In a statement to the UAE-based The National on August 26, 2013, Jahangir Aka, managing director at SEI Investments, observed that “there are already a number of European hedge fund organizations, who because of the regulatory environment and tax reasons will be looking to set up their operations in the DIFC and use Dubai as a hub. This will accelerate that.” This bodes well for the growth prospects for the DIFC, which had previously shifted its focus to emerging market businesses after the financial crisis. According to Ian Johnston, DFSA CEO, “efforts to improve cross-border opportunities will further facilitate investment flows and will benefit investors and the funds industry.”
Following political progress with economic gains remains the greatest challenge in Morocco, as in much of the Arab world.
Perhaps as an acknowledgment of Dubai’s success with the financial free zone, Abu Dhabi, the capital of the UAE, announced it will establish a free zone to be called the Abu Dhabi Global Market (ADGM), which, it emphasizes, will differ from the DIFC. In an article published in The National on August 29, 2013, lawyers at Allen & Overy, sole legal adviser to the ADGM, noted that Abu Dhabi will fill a “black zone,” when most Asian, European, and Asian markets are closed. In addition, it will specialize in handling physical commodities, tasks not currently handled by the DIFC.
Hopes of the CFC
Other Middle Eastern and North African countries hope to emulate Dubai’s economic success. After 10 years of rule under King Mohammed VI, a 2009 Brookings Institution report called political progress in the Kingdom of Morocco stagnant. The regime, it wrote, appeared to be merely “old wine in new bottles.” Since the Arab Spring, however, the king has held new elections and amended the constitution, largely avoiding much of the political turmoil that has plagued the region. A recent Forbes article credited Morocco’s strategic geographic position and political stability, especially when compared with the rest of North Africa and the Middle East, as key reasons that foreign manufacturers were flocking to Morocco to establish factories — among them Renault, Bombardier Aerospace, and Dell.
While Morocco is generally considered an economic success story, with U.S. Agency for International Development (USAID) representative Matthew Burton noting that USAID is close to graduating Morocco from the program due to its overwhelming success, some economic indicators — such as youth unemployment (about 30%, according to the World Bank) — remain problematic. Following political progress with economic gains remains the greatest challenge in Morocco, as in much of the Arab world. The biggest project aimed at improving the overall economy is the Casablanca Finance City (CFC).
In 2010, the Moroccan Parliament passed Law 44-10, which created the CFC. This new venture spans roughly 100 hectares and will shift the center to the western part of Casablanca. The CFC is managed by the Moroccan Financial Board (MFBoard), a public-private initiative led by Said Ibrahimi, former General Treasurer of Morocco. According to Ibrahimi, the CFC is set to become a business hub for Francophone Africa, an area he called “Greater North West Africa” (GNWA) in a 2012 interview with the Middle East Economic Digest. Membership in the CFC is limited to financial institutions, professional services, and regional or international headquarters. The first phase of the project is expected to be completed in 2014.
The MFBoard has attempted to secure the requisite expertise to establish the strategic priorities and development of the CFC. It currently has partnerships with several international agencies responsible for promoting the financial sector within their respective countries, including TheCityUK, Luxembourg for Finance, and Singapore Cooperation Enterprise. Meanwhile, the CFC project comes on the heels of previous success with a free-trade zone. The Tangier Exportation Free Zone was voted best free-zone port in the world byForeign Direct Investment Magazine in 2012. According to Julianne Furman, CEO of Polydesign Systems, lack of customs duties, proximity to Europe, and less burdensome government regulations are some of the main incentives that attracted Polydesign to this zone. These benefits, along with Morocco’s position as a stepping stone to the rest of North, West, and Central Africa, are expected to drive much of the interest in the CFC.
Employees of companies within the CFC will benefit from reduced personal income tax rates, designated as 20% for a maximum period of five years compared to rates of up to 38% in the rest of the country.
Clifford Chance, a “Magic Circle” law firm, already has offices in Casablanca and has applied for membership in the CFC. In a December 2011 briefing document pertaining to the free zone, the firm notes that Morocco’s ambitious growth plans are complemented by growth plans for neighboring countries, emphasizing the need for a strong financial hub in the region from which to coordinate financial transactions and activity. The benefits of the CFC for companies and employees within this special economic zone will focus significantly on preferential tax rates. Morocco has a corporate tax rate of 30%, a figure that will be reduced to 0% for the first five years under CFC designation, with a subsequent tax rate of 8.75% thereafter. For companies that have established regional or international headquarters in the CFC, the tax rate will be a flat 10%. Employees of companies within the CFC will benefit from reduced personal income tax rates, designated as 20% for a maximum period of five years. This compares to rates of up to 38% in the rest of the country.
Despite providing preferential tax rates similar to the DIFC and ADGM, the CFC will differ in an important regard. While the MFBoard has been tasked with creating the CFC, it will not regulate its members, and no new regulatory body or judicial system will be established. Rather, Morocco will use this opportunity to bring its existing regulatory and legal framework in line with best-practice international standards. Regulation will continue to be monitored by existing authorities, including the Central Bank (Bank Al Maghrib), the capital markets regulator (CDVM), the insurance-sector regulator (DAPS), and the Ministry of Finance. As Hicham Zegrary, head of legal affairs at the MFBoard, noted in a 2012 interview with the International Financial Law Review, one of the most-needed reforms is “to offer investors the opportunity to go to arbitration or mediation when they want,” referring to the judicial system.
From a purely developmental point of view, both the UAE and Morocco have reaped the benefits of stability and appear poised to continue that expansion. While Dubai has already laid significant groundwork and established the leading financial center in the Middle East, the consensus is that Casablanca still has far to go. As of this summer, only 10 institutions had been granted accreditation, including Boston Consulting Group, Invest AD, and leading British law firms Norton Rose Fullbright and Clifford Chance. Of these companies, two were already situated in Morocco before the creation of the financial free zone, thereby not representing new investment. While the CFC and Morocco possess many strategic advantages that should lend support to the international financial center’s success, only the test of time and the implementation capabilities of the MFBoard will determine whether a new and sustainable global financial hub will be created.
This article was written by Jed Halfon and Mohammad Rustom, members of the Lauder Class of 2015.
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