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September 30, 2014

Dubai As An International Finance Center, a SWOT Analysis

By Swati Srivastava

Dubai, the second largest emirate in the UAE, brings to mind an array of luxury dining options, swank hotels, tall buildings and the seven-star Burj Al-Arab. These luxury icons have led to Dubai’s image as one of the most popular tourist destinations of the world. Whether it is about living or finding a job in Dubai, it is a popular destination among expats.
With the launch of the Dubai International Financial Center (DIFC), the city is now classified as an international contender.

International Finance Centre (IFC) - An overview

An IFC is a global city, which includes several globally recognized financial institutions and plays a vital role in capital markets. It is also defined as a jurisdiction or a country that offers various financial services to non-residents on a large scale that is not commensurate with the financing and the size of its domestic economy. The development of financial centers is considered an evolutionary process to build institutional infrastructure and sophisticated humans to promote an ecosystem. Strategically creating an IFC includes the perfect management of demand and supply of financial services. 

IFCs mainly support financial intermediaries, securities firms, brokers, banks, mutual funds, institutional investors, pension funds, and other financial services.

Dubai IFC (DIFC)

As per the Global Financial Centre Index (GFCI) ranking 2013, London, New York, Hong Kong, and Singapore are the top four global IFCs. Singapore serves the ASEAN countries and is recognized as a regional center, while New York and London are classified as international centers. London serves Europe and New York is a national center for the US. 

Source: Longfinance.net
Dubai IFC (DIFC), the tax-free business park was established in 2004. It acts both as a regional and niche center. It serves as a regional center for the MENA region. As a key center, Dubai IFC has created a niche for Islamic Finance. The aim of the DIFC is to promote the growth of financial and related sectors in the UAE economy. DIFC members get advantage of zero tax, no limitation on repatriation of capital, and 100 per cent foreign ownership. Its global clients include reputed banks like Goldman Sachs Group Inc.

Need of IFCs

Financial service is a key business sector that drives economic stability, economic development, standard of living, and poverty alleviation. IFCs contribute to all these in a number of ways:
  • Pooling and mobilizing savings 
  • Monitoring corporate governance  
  • Facilitating financial instruments, services and exchange of goods  
  • Processing and producing information related to potential investments and capital allocation

SWOT Analysis of Dubai’s Success as an IFC

An advanced external-internal analysis can evaluate the strengths, weaknesses, opportunities, and threats involved in the functioning of the DIFC.

The major portion of Dubai’s success can be correlated to the strengths, which include its Government’s progressive projects, leadership, and track record. Dubai also has its geographic advantages. The proximity to the wider region, globally recognized infrastructure, and international lifestyle are the key strengths.

Dubai’s debt burden is the major concern for financial institutions and investors. Moreover, Dubai’s Financial Market Infrastructure forms a critical part of an IFC, which if not managed properly can destabilize its larger financial ecosystem.

Booming tourism and capital inflows in Dubai brings in a huge scope of opportunities. Moreover, the ongoing unrest in the MENA region has presented Dubai with business opportunities with more people having relocated to the region.

The external threats are out of the control of Dubai as an IFC. There is a continuing risk of the global downturn that can bring the global economy back into the recession. If that happens, investment opportunities from Europe would dry up resulting in banks’ restricted access to credit. Considering the indebtedness of Dubai, any restriction in the credit availability can result in putting the government under pressure to restructure its debt. Secondly, though political instability has a lower risk rate in Dubai, there is a prevalent risk of political unrest in the wider region of the Middle East. 

The SWOT analysis indicates that the DIFC should leverage its state-of-the-art infrastructure, geographical advantage, and leadership to capitalize on the growing opportunities in the wider region. 

About the Author: Swati Srivastava is an avid writer with a keen interest in the extensive domain of job search and career counselling. She is Assistant Manager Content at Naukrigulf.com (a part of Infoedge), her articles are published on several reputed job search portals and online career magazine 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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