Qatar has been one of the fastest growing countries not just in the Middle East region but also in the entire world. While the region has seen steep growth rates during the last decade, thanks to parabolic rise in crude oil prices, Qatar has managed to remain on top of the region through its strong oil and gas reserves. Already the largest supplier of liquid natural gas to the world, Qatar would account for one-third of the global supply by 2010. Qatar has grown at an average of over 15% during the last decade. However the country faces some critical risks to its ambitious growth projections. It is seen that the country draws most of its GDP from oil and gas sectors. The country also has not been able to compete with peers in attracting foreign investments. The government has undertaken a number of measures to address these issues. One such measure is the creation of independent finance centre called Qatar Financial Centre (QFC). QFC has been instituted as an on-shore finance free zone where international financial institutions can set up 100% owned businesses and transact with Qatari as well as off-shore entities. This model has been created imitating similar entities created by Dubai and Bahrain. However QFC distinguishes itself from others in some important ways. The government believes that QFC would act as a tool to stimulate finance sector growth in the country and in turn become an agent of diversification. At present, finance sector account for less than 10% of total GDP of the country. Besides some improvements over the other comparable finance centres, Qatari government also has an important agenda to unite the regulators and create a single regulatory system throughout the country. It is believed that these factors would push QFC to the front of the intense race for finance supremacy among Bahrain, Qatar and Dubai. While Bahrain has an advantage as the earliest starter of the on-shore finance centre model, Dubai has a reputation for highly diversified economy. Qatar is promoting its oil and gas reserves as the differentiator. QFC was created on 1 May 2005 and so is still at its earliest stages. The objective of this report is to analyse the crucial role of QFC, its importance and impact.
2. Crucial role of QFC
The government of Qatar has been promoting QFC as an integral part of Qatar’s future economic prosperity. It is stated that the QFC would continue to grow rapidly over the next few years fuelled by large-scale investment (Qatar Financial Centre, 2009a). It is evident that the government is pinning its hopes on the QFC quite strongly and backing it up with huge investments in infrastructure – hard and soft. The government considers QFC to become an important driver of growth for the Qatari economy in future. The government states that QFC has been created to “to support the development of Qatar and the wider region, develop local and regional markets, and strengthen the links between the energy based economies and global financial markets” (Qatar Financial Centre, 2009a). The reasons for the crucial role that QFC is expected to play in Qatar are multiple. QFC is expected to become a lynch-pin of the government’s highly ambitious diversification policy. On the other hand, QFC is also expected to leverage the growth which the GCC region is expected to undergo in order to gain foreign revenue and service exports for Qatar. These two points, though not spelt out in so many words by the authorities are at the core of the importance attributed to QFC by the government and other authorities in the country. This section analyses these two factors in detail.
2.1 Enabler of Diversification
All of the GCC countries and particularly the three dynamic ones – Qatar, UAE and Bahrain have been embarking on a policy of economic diversification for over a decade. One of the major transformations in the Middle East economies was during 1973-74 period when crude oil prices saw a steep rise. This transformation led to increased government expenditure which in turn resulted in socioeconomic developments and infrastructure investments. However the decline in crude oil prices in 1980s drove home the point that crude oil could be an important resource behind economic development but may not remain so all the time (Peterson, 2009). Since then, the GCC countries have realised the need to diversify their way out of dependence on fossil fuels. For Qatar, the government has been investing significant capital into varied industries to jumpstart the growth of services and manufacturing sectors not dependent on oil and gas sectors (Fasono & Wang, 2002). One of the important tools used by the authorities has been the extended drive for credit to private non-oil and gas businesses through banking channels. QFC forms an integral part of the economic diversification drive of the government. The crucial importance of QFC can be understood from the data presented below. It can be observed that the economic diversification policy undertaken by many GCC countries has not worked in reality.
It is observed that the oil-dependence measured in terms of oil and gas sectors contribution to country’s GDP has grown for every GCC country except Oman. For Qatar, the diversification policy is of greater importance than for any other GCC economy because of the country’s highest degree of oil-dependence. Oil and Gas sectors formed 57.3% of the total GDP in 2006.
From the chart given above, it can be observed that the contribution of Oil and Gas sectors to the GDP of Qatar has only been growing inspite of the massive investments made in developing alternative sectors. In 2008, due to record high oil prices, the Oil and Gas sector GDP was 61.69% of the total GDP. Besides other measures, creation of a world-class infrastructure for the international finance companies to come in and set base in order to tap the opportunities provided by the region in general and the country in particular is considered an important strategy to ensure development of finance sector in the country. This in turn is expected to increase the contribution of non-oil and gas sectors and lead to the decline in the degree of oil-dependence of the nation. Thus QFC is crucial to the overall strategy of the Qatari government.
2.2 Conduit to leverage GCC growth
Middle East is one of the fastest growing regions in the world and the six countries in the GCC are among the leaders in the region. Qatar’s GDP is expected to have grown at a rate of 16.4% during the year 2008 and is projected to grow at 11.5% during 2009 in a real basis.
This massive growth witnessed in the country since 2000 and the healthy growth rate seen in the GCC region has created a wide-spread need for financial services in the region. As the growth rate is expected to be healthy for other countries in the region and the growth rate of Qatar is expected to be 18.5% in 2010, it is believed that the country and the region may see an increased need for financial services. Qatar is already a country with one of the largest per-capita income level in the world. As the growth of the economy accelerates, the private wealth of individuals in the country may also see steep rise. This could give rise to an increase not only in the quantity of financial services demanded but also in the quality of financial services demanded. In order to meet the increased quantitative demand, the government has to ensure that more financial services firms are provided licence and to meet the increased qualitative demand, it should be ensured that international financial services companies with long track record and regulatory compliance in multiple regimes are provided permissions to operate in the country. As these kind of international financial institutions find the domestic corporate law and business services too primitive, there is a need to create a niche space where the international financial institutions could enjoy a set of services of international standards which they are used to and are given adequate freedom to seek and compete for the enlarged pie. The government believes that QFC fulfils this need of international financial institutions and encourages them to set base in the country thereby leveraging the expected steep growth of domestic and regional economies. The government states that “Apart from Qatar itself, the QFC also provides a conduit for financial services providers to access nearly $1 trillion of investment in the rapidly growing financial markets across the GCC as a whole over the next decade” (QFC, 2009a).
Thus the crucial role played by QFC, according to the government of Qatar, is expected to be two-fold – as an enabler of economic diversification policy that is undertaken by the government and as a conduit for international financial institutions and service providers to leverage the growth expected in Qatar and GCC economies.
The last section enumerated the crucial importance of the roles expected to be played by QFC in promoting the Qatari economy. QFC is expected to make direct and indirect contributions to the economy in a number of ways. This section discusses in detail each one of these ways. It is expected that QFC would function as an agent of diversification and attract foreign financial institution into the Qatar domain. It is intended that QFC would create a regulatory regime at par with the international standards and thereby create a level of transparency which is essential for the foreign financial institutions.
3.1 Implement Diversification Strategy
As explained in the previous section, QFC is considered an integral part of the framework through which the government is implementing the diversification policy. Among the peers, Dubai has been the most successful with the diversification strategy. Even though Dubai has relatively smaller portion of its GDP drawn from oil-based businesses, the government has encouraged investments from abroad and from within in sectors such as trade, manufacturing and services. Qatar is quite different from its peers in that it is the largest exporter of natural gas and so is not entirely dependent upon crude oil. However the government’s policy is to reduce the dependence on natural resources including gas. QFC would promote the country’ financial sector through participation from international financial institutions and would increase the contribution of financial sector to the overall GDP of the country. It is believed that this would reduce the oil and gas dependence of the nation.
3.2 Attract Foreign Financial Institutions
Most of the GCC countries including Qatar and UAE have corporate laws that are heavily biased in favour of local population. Majority stake in every company in these countries has to be owned by a local individual or a company. This places serious restrictions on foreign interest in these nations. The only legal way for the foreign financial institutions to operate in these regimes is through joint ventures with local companies. This has hampered the growth of many industries, particularly financial services sector, where the companies are sceptical enough not to forge alliances with unknown companies whose popularity is not at par with the venturing companies. In order to circumvent these provisions in local law, countries such as Qatar, Bahrain and Dubai have created financial free zones – Qatar Financial Centre, Bahrain Financial Harbour and Dubai International Financial Centre respectively to allow reputable financial institutions to set up and be owned by foreign nationals and foreign corporate completely. It is believed that QFC would attract foreign financial institutions because of the liberal foreign ownership policies. The scope for growth in Qatar and GCC is expected to attract financial institutions from abroad. It is seen that companies that are incorporated within a country that is part of GCC is treated preferentially over foreign companies while considering for licences by other countries’ regulatory authorities. Thus the foreign institutions that get incorporated in QFC would gain a local identity which may prove useful to obtain licences and set up base in other fast-growing economies in the region including UAE, Bahrain, Kuwait and Oman.
3.3 Promote Transparency
One of the main reasons for the hesitance of international financial institutions to set up base in Middle East in spite of the explosive growth opportunities is the lack of transparency in the system. While the local legislations are quite different from those usually seen in UK, US or European countries, poor governance and lack of transparency have been major problems for the foreign institutions to overcome in many GCC countries including Qatar. Qatar, UAE and Bahrain all are kingdoms and democracy, if any, is limited to local councils and municipalities. Therefore the foreign institutions face huge political risk. It is possible for any law to be amended or removed by a stroke of pen of the ruler who typically enjoys an overwhelming support from the council of ministers. Besides, the entire process of licensing is stated to be opaque in nature with no clear guidance on the requirements. This has affected the growth and entry of foreign institutions in Qatar. However, QFC has special legislative and judiciary authorities that are structured perfectly in line with the practices commonly found in developed financial markets, which makes it easier for the financial institutions to incorporate and manage. Following graph shows the governance standards in GCC countries according to Saif (2009). It can be observed that all the GCC countries score negative pints on governance and transparency. However Qatar is still better off than Bahrain, Oman and UAE in terms of governance.
Following table shows the ranking of GCC countries in terms of the ease of doing business according to World Bank.
It can be observed that Qatar ranks ahead of Kuwait, UAE and Oman but lags behind Saudi Arabia and Bahrain in the GCC. This shows that appropriate measures such as the constitution of separate regulatory structure and judiciary system for financial services free zone would help to increase the overall level of governance and transparency in the country.
3.4 Regulatory Structure of International Standards
The developed countries with advanced financial markets such as the UK and the US have established strong regulatory structure for financial institutions such as banks, broking houses, insurance companies, and investment houses etc., who deal with clients’ funds on a normal basis. However the regulatory structure in Middle East countries is considered fragile because of the recent origin. The financial markets themselves are nascent and so the regulatory authorities are at the beginning of the learning curve. Therefore the international financial institutions run a huge regulatory risk while doing business in GCC countries as any adverse development on the regulatory front could affect them significantly. QFC alleviates this regulatory risk by ensuring a high quality regulatory infrastructure constructed on the basis of the existing structure in the UK and the US. This has been the trend followed by all the financial free zones in Middle East including the Bahrain Financial Harbour and the Dubai International Financial centre. QFC Regulatory Authority has created deals with regulatory agencies in US and the UK in order to inherit their regulatory structure in QFC. Thorpe, Chairman and CEO of QFC Regulatory Authority, says, “We believe it is important that an institution is being supervised by their home state regulator as they can offer a prudential oversight such as looking at the balance sheet, while we look after everything else” (Aaron, 2007). It is believed that the world class regulatory infrastructure that QFC offers to the international financial institutions would be akin to their home regulatory environment and so would help these financial institutions to get accustomed to the regulatory climate in Qatar. This is expected to be a major contribution of QFC to the country.
QFC is expected to contribute economic diversification to the Qatari economy by attracting foreign financial institutions of Western origin. It is also expected to contribute to the financial sector of the country by promoting transparency and by ensuring that the regulatory environment remains world class, at par with that of the developed financial world.
3.5 Promote ‘Brand Qatar’
Qatar is actively engaged in diversifying its interest away from oil and gas based industries as has already been explained. The government has plans to spend over $130 billion over the next five to seven years in a number of sectors including health, social welfare, education and transport. It is believed that these investments would kick start the emergence of these sectors in the country which would then be followed by capital flow from private sector as well as from abroad into these sectors. Qatar is well-known as the emerging power-house of gas reserves and one of the important players among crude oil suppliers. However, Qatar has not been very successful in attracting foreign investments into non-oil and gas sectors. The following graph shows the comparison between GDP growth rate and rate of change of FDI inflows for all GCC countries along with GCC average.
It can be observed that Qatar has had one of the highest GDP growth rates during the period 2002-2006. The average GDP growth rate of Qatar was 15.5% which was next only to Kuwait whose average GDP growth rate was 18.1%. Inspite of this explosive growth rate Qatar has not been successful in attracting FDI inflows as much as the peers. The GCC average has been a GDP growth rate of 11.22% and an FDI inflow change rate of 101.67% on a yearly basis. However the FDI inflows into Qatar have grown at a below-par rate of 48.28% per year during the seven year period. UAE, on the other hand has attained 215% growth rate in FDI inflows every year during this period inspite of having a GDP growth rate of 9.39% which is much less than the regional average. One of rthe resons for this dichotomy between growth and inflows could be the promotion of brand. UAE, particulalry Dubai has been expending resources carefully in promoting the country as a brand particularly in the developed countries such as the US and the UK. Qatar has recognised the need to promote their country but has not been very successful in implementing the plans. It is believed that QFC would play an important role in promoting Qatar as a preferred investment destination for overseas investors and institutions not just in the finance sector but also in other sectors as well.
4. Impact on the Economy and Nature of Business
Qatar Financial Centre distinguishes itself from other peers in an important way that the businesses incorporated within the QFC are allowed to transact business with clients outside the zone and can also deal in a currency of choice. Because of this feature, it is expected that the growth in QFC would be reflected in the growth of entire financial sector in Qatar. In strictly off-shore financial centres such as Dubai International Financial Capital (DIFC), the members are restricted to do business with only certain classes of high-networth clients and those who are incorporated inside the zone. This places severe restrictions on the businesses and the compulsion to deal only in USD may also hamper the spread of benefits from the growth of DIFC into the mainstream domestic financial sector.
Since inception in 2005, 115 companies have been licensed to carry out permitted activities in QFC (Qatar Financial Centre, 2009b). The permitted activities are classified into regulated and non-regulated activities. The regulated activities include a number of activities wherein the client’s funds are transferred to the service provider in some form. The non regulated activities include professional services such as auditing, management consulting, IT services, legal services etc (Qatar Financial Centre Regulatory Authority, 2009). The firms seeking to indulge in regulated activities need to obtain an authorisation to that effect from the QFC Regulatory Authority. Of the 115 firms licensed to operate in QFC, 68 companies have been authorised to provide regulated services to their clients. The regulated activities include investment banking, investment management, private equity, venture capital, etc. These firms, most of which are well established in multiple regulatory domains around the world attract foreign capital into the country because of the inherent attractiveness and steep growth of the country. Thus they act as conduits for flow of capital into the country as well as the region.
QFC is the most recent financial centre among its peers. No official data is made available on the volume of business transacted by the businesses incorporated in the financial centre. Therefore it is not possible to measure the impact of QFC directly on the economy. On the other hand, it is believed that QFC has played an important role in the growth of financial services industry in the country. The contribution of financial sector to the GDP has been increasing steadily except in the year 2008 when the global financial meltdown caused a decline in the contribution of financial sector to the GDP of Qatar. Following graph shows the contribution of financial sector to the GDP of Qatar.
The contribution of financial sector to the heavily oil-dependent Qatar has grown to double-digit rates recently. It is believed that the QFC would have contributed to atleast some part of this growth in financial services industry which includes banking, insurance and financial intermediation activities. QFC also includes the Qatar Finance and Business Academy (QFBA) which “is a specialised educational academy for the financial sector based in Doha under the auspices of the QFC Authority in partnership with Qatar Foundation (QF)” (Qatar Financial Centre, 2009c). The objective of QFBA is to impact finance knowledge to the human resources within the country and the region so that the country could develop into knowledge based diversified economy. QFBA already has over 300 programmes lined up through the next year (Othman, 2009). These knowledge initiatives are expected to have profound impact on specialised financial services in the country.
5. Learning from other financial centres in emerging economies
QFC is still at its nascent years as less than four years have passed since the creation of the centre. However QFC has learned and incorporated a few major points into the structure taking advantage of its relatively later entry into the financial centre competition in the region. Bahrain has been functioning as an on-shore financial centre for many years as the country has made it easy for the foreign financial institutions including banks to set up companies in the country which leverage their regional incorporation to gain entry to closer and tougher markets such as UAE, Kuwait. DIFC was founded in 2004 and has been more successful in attracting foreign financial institutions primarily due to the more diversified nature of the economy of Dubai (Oxford Analytica, 2005).
5.1 On-Shore Financial Centre
One of the major aspects of QFC that distinguishes itself from its closest rival-DIFC is that QFC is not positioned as a financial free zone but as a business environment. In a financial free zone such as DIFC there are restrictions imposed in terms of scope of operation and regulation. In particular, the firms incorporated in the DIFC are not allowed to do business with firms incorporated outside the centre. This condition is built in so that the firms in financial free zone do not compete directly with the firms incorporated under separate statutes (Wigglesworth, 2006). Besides, the companies in DIFC are essentially required operate from within the DIFC area. This places extra burden in terms of increased cost of operations due to heavy rent for office as DIFC is fast becoming one of the costliest office space in the emirate. As DIFC aims to create a unified international structure, the companies in the zone are required to conduct transactions only in US$. These restrictions and requirements have been considered too rigid and have hampered the growth of the financial centre. QFC has learnt from these experiences of DIFC and other financial centres and has, from the beginning, aimed to create an on-shore financial centre instead of an off-shore centre. This means that the companies in QFC can conduct transactions freely with companies outside the zone. The QFC licensed companies are allowed to operate from anywhere in the country as long as they conform to certain minimum requirements. This ensures that the companies are not tethered to a specific area but operate from places that are comfortable to their budget and operations. The business can be conducted either in the domestic currency, Qatari Riyal or in US Dollar as per the choice of the company. This helps the companies to indulge in both local and overseas transactions.
5.2 Avoidance of Over-regulation
The regulatory structure created by QFC and DIFC have been borrowed from well-known regulatory structures already existing in international financial centres such as London. However it is stated that these agencies have taken the most difficult provisions from the developed economies, in their attempts to create a fool-proof and safest business environment. This is evident from the words of Thorpe, the CEO of QFC who states that “I would term ourselves as ‘experienced plagiarisers’: we have looked at different legislation and regulatory solutions around the globe and have cherry-picked the best ones” (Aaron, 2007). By cherry-picking the best regulations from around the world, QFC, like DIFC, has created a regulatory environment which is quite against the interest of the companies operating in the centre. International Law firm, Simmons & Simmons opines that “”The people who have drafted the regulations have looked at other jurisdictions around the world and have taken the most heavily regulated jurisdictions and applied it rather than recognising we’re are in an emerging market and need to take baby steps” (Business Intelligence Middle East, 2009). The regulatory environments in centres such as London and New York have come to the present stage through a process of evolution which has kept pace with the developments in the financial sector. However, in a country like Qatar where financial services other than banking are at nascent stages, subjecting them to the regulatory requirements of advanced economies could prove to be counter-productive. This is an important lesson that QFC has to learn from DIFC, which has also incorporated tough regulatory requirements which the firms find difficult to comply with.
5.3 Unified Regulator
QFC is regulated by QFC Regulatory Authority that is created by a special order and statute of the Emir of the country, called QFC Law. QFC Regulatory Authority has sweeping power to supervise, licence and regulate all firms within the QFC jurisdiction. This includes banks and insurance companies. Besides, the banks and intermediaries incorporated outside the QFC are regulated directly by agencies that fall under the Qatar Central Bank. This diverging structure has been adopted from the structure created for DIFC. However, unlike the DIFC, the firms in QFC are allowed to operate as on-shore finance companies, which permit them to access the same clients and resources as the other companies licensed by the Central Bank of the country. This creates dichotomy in regulatory structure as the two regulators are known to have different rules and requirements and have varying levels of severity in their approaches. This is an important lesson that has already been learnt but the Qatar government is yet to make any concrete progress on. The government has already recognised the need to unite the regulators under a single authority and implement uniform regulatory procedures. Even though it is stated that “Qatar can be a viable financial centre only if the business climate in its entirety is modernised and placed under an overall authority” (Perumal, 2008), the government has come to realise that the task is difficult to carry out. IMF Staff report on the issue states that unification of regulatory structures could be quite challenging. This is an important lesson that is to be learnt from the complicated structure of the DIFC.
Qatar Financial Centre has been touted as an important development in the economy of Qatar due to a number of crucial roles that the centre is expected to perform – as an enabler of economic diversification and a launch pad for foreign financial institutions into the growing economy of Qatar and the greater region. It is believed that QFC would contribute to the growth of finance sector and the GDP of the country by attracting the interest of foreign financial institutions into the nascent domestic finance sector which contributes less than 10% to the GDP at present. QFC is also expected promote brand Qatar and attract FDI inflows into the finance sector and other sectors in the economy. Besides, it is expected that QFC would elevate the transparency and governance standards of Qatar. QFC is also expected to have a regulatory environment akin to the home regulatory environment in which the target institutions already operate in. So far QFC has attracted 115 members and the short history makes it difficult make any valid judgement on the expected success or failure of QFC. However it is seen that QFC would be required to compete hard for to attain its objective particularly amidst Dubai International Financial Centre and Bahrain Financial Harbour. In order to differentiate itself, QFC has learnt or has to learn a few important points from its peers. QFC has observed the problems associated with being a pure-breed off-shore finance centre and so has been created as an on-shore finance centre right from the beginning. However, being an on-shore centre, its present system of multiple regulators is expected to cause dichotomy and regulatory risk for institutions. Hence, the government is implementing a plan to unite the regulators under a single mandate with assistance from the IMF. QFC has to learn from the frictions seen in DIFC that over-regulation could become a problem considering the nascent nature of finance sector in the country.