Introduction

Rapid economic growth in the GCC countries has led to large and varying financing needs, which, in turn, meet a relatively underdeveloped financial sector with only nascent regulatory institutions. The financial sector is characterized by a lack of bond and derivative markets, difficult access to credit for small and medium enterprises (SMEs), dominance of international banks in the project finance market, and heavily concentrated equity markets in terms of sectors and ownership.

Bahrain, Dubai, Qatar, and Saudi Arabia (with the King Abdullah Financial District) have all started to establish international financial centers which try to remedy some of these shortcomings and try to connect their respective countries more with international capital markets. The goal is to attract foreign capital, know-how, and business and at the same time open up new channels for local funds to invest abroad. This is in line with a development strategy that has been recommended by Frederic Mishkin for emerging markets, but its shortcomings have been revealed in the current global financial crisis. While following a similar development approach, the different financial centers vary considerably with regard to their legal frameworks, degree of realization, and the niche markets they intend to occupy.

This chapter analyzes the different segments of the GCC financial markets and assesses the future development prospects of the four international financial city projects in the region, their complementarities and possible areas of competition. It also critically examines how such centers could contribute to the development of domestic capital markets which, in turn, vitally influence the policy options for GCC monetary authorities as they face a global financial crisis and plan for a GCC monetary union.

1. The Structure of GCC Financial Markets

It is important to take stock of some major characteristics and challenges of GCC financial markets to understand the environment in which the financial center projects in the GCC operate. As evident from other chapters in this book, the GCC capital markets are characterized by a striking under-representation of bond markets as a means of finance. An increase of their relative importance in the overall capital structure of the GCC is certainly warranted, and governments in Qatar and Abu Dhabi have already formulated their intention to develop them further, for example by increasing the issuance of government bonds in order to provide a benchmark yield curve for the corporate bond sector.