UAE Finalises Stock Market Launch
Martin, Josh, The Middle East
The UAE is about to lose its dubious distinction of being the only GCC country without a formal stock exchange. After almost seven years of review, the federal government is putting the final touches on legislation to create a formal national stock market
The United Arab Emirates plans to launch a stock exchange within the next year, raising the number of equity markets operating in the Gulf to seven. The decision marks a policy shift for the Emirates, which had, as recently as three years ago, planned to favour development of an off-shore banking sector. The shift reflects the growing public support for formalised share trading, and the importance such a market could play in the UAE's claim to be the financial as well as transport hub of the Gulf.
The market, expected to be up and running by the first quarter of the year 2000, will take over from an unregulated informal market which has existed since the early 1970s. It will consist of 36 companies with a market capitalisation of around $27 billion larger than all other Gulf markets except that of Saudi Arabia.
The move to formalise the market represents a shift in government policy, which had until recently been favouring the development of off-shore banking. "The increase in the number of companies in the UAE, and the increase in the number of equities being unofficially traded has prompted the government to move first on a stock exchange," says Ahmed Al-Banna, assistant director general of the Dubai Chamber of Commerce and Industry. "It's a means of regulating the securities industry, preventing excessive speculation."
The Emirates Stock Exchange is expected to be an electronic 'floor-less' market. Government planners have concluded that the UAE has the high-tech infrastructure and a well-educated, young, indigenous population well versed in and attuned to the technology involved. Moreover, an electronic bourse could be operated from anywhere, obviating the need for physical trading floors in different parts of the country and the political tussles that would go with it.
Government officials studied electronic exchanges in India, Sri Lanka, Singapore, Turkey and elsewhere, paying particular attention to the Over-the-Counter Exchange of India (OTCEI), NASDAQ (USA) and Tradepoint (UK) as examples of institutions and systems to emulate. Officials concluded, too, that leading international accounting and consultancy firms in the UAE are well geared to give advice on systems, controls and procedures.
"Being the last GCC country to set up a stock exchange has its pluses," notes Suresh Kumar, general manager of Emirates Merchant Bank Limited. "The UAE can avoid the mistakes and the mishaps of other states including the so called Souq Al-Manakh syndrome."
Several thorny issues are still unresolved: setting stricter licensing requirements for brokers (whose numbers grew from four to 16 last year, in addition to some 50 unlicensed traders), determining what kinds of instruments (stocks, bonds, derivatives) will be traded, and determining what, if any, role foreign, non-Arab investors can play.
"There is no question about allowing foreign capital in," notes Mohammed El-Arian, head of emerging markets economic research in the European operations of the Salomon Smith Barney investment bank. "The big issue is what economic and market systems will be put in place."
Initially, the only way foreign, non-Arab investors will participate is through mutual funds (the first of which was set up last year). This was the case in Bahrain and Oman, and is still in Kuwait and Saudi Arabia.
Like the stock markets in neighbouring Arab countries, shares listed on the UAE exchange are likely to be dominated by banks, trading companies, and housing and construction firms. The banking sector alone represents close to 50 per cent of the market capital in the current unofficial exchange.
These companies are dwarfed by the major state-owned entities which many would like to see wholly or partially privatised through equity offerings. …