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The Rise and Fall of the Dubai Financial Market



Located just 12 kilometers away from the Dubai International Airport (DXB) on Sheikh Zayed Road, the Dubai Financial Market was conceived as a result of the country’s emergence as a financial icon in the Arabian Gulf.

Officially opened for trading on March 26th, 2000, the DFM has come a long way since its inception, and today lists approximately 60 companies, with a handful being added each year.


 

 

 

 

 

 

 

 

The DMV is one of 3 stock exchanges in the United Arab Emirates (UAE), and one of two in Dubai. Apart from the Dubai Financial Market, the other stock exchanges are the Nasdaq Dubai, and the ADX or Abu Dhabi Securities Exchange.

The Difference between the 3 Stock Exchanges

The youngest of the 3 – the DFM started out as a government owned entity, and then transformed itself into a public offering in November 2006. This controversial move was a huge success despite the fact that only 20% was sold and the remainder 80% still retained by the Government of Dubai.

Next up is the ADX (formerly known as the Abu Dhabi Securities Market), which was established in November, 2000 with the primary goal of trading shares of UAE based companies. Nasdaq Dubai slots in at number 3, and was established in September 2005 and although it originated as a trading hub for international investors, most of its key operational functions such as trading have now been shifted to the Dubai Financial Market (DFM).

There are also several other exchanges in Dubai such as:

  • Dubai Tea Trading Center (DTTC)
  • Dubai Multi Commodities Center (DMCC)
  • Dubai Pearl Exchange (DPE)
  • Dubai Diamond Exchange (DDE)
  • Dubai Mercantile Exchange (DME)
  • Dubai Gold and Commodities Exchange (DGCX)

Regulatory Authorities for the Dubai Financial market

Both the Abu Dhabi Securities Exchange and the Dubai Financial Market are regulated by the Securities and Commodities Authority (SCA), which imposes rules and guidelines that must be strictly complied with by both exchanges. This not only ensures transparency in all aspects, but gives investors the confidence they need to invest in a foreign market.

Furthermore, the SCA is also responsible to impose fines to companies that violate any rules of both exchanges. Unlike the Dubai Financial Market, trading practices are maintained to an international standard by the Dubai Financial Services Authority (DFSA), which is an independent financial agency such as the Securities and Exchange Commission in the United States. It is also good to note that Nasdaq Dubai is an over the counter exchange market, with no trading floor such as those found in the DFM and ADX.

Listed Companies in the Dubai Financial Market:

The DFM today is a public venture with over 150 employees and over 61 listed companies. Most of these companies are based in the UAE, with a fair share of companies from the Middle East and North Africa especially from Kuwait. There are several factors that contribute to the drop in listings compared to the rise in de-listings, with the most significant being the financial crisis in 2008.

Other reasons for withdrawal were the staggering fees associated with membership to the Dubai Financial Market, and the lack of trading of some companies, which led them to de list as they weren’t getting value for their membership fees. The last two companies to join the DFM were Kuwaiti telecommunication company “Hits Telecom” and UAE-based company “Drake & Skull International”, both in 2009.  

Brokers in the Dubai Financial Market:

Just like the decline in companies in the Dubai Financial Market, brokers are a similar tragic episode. The number of brokerage firms has seen a drastic decline from over a 100 in 2008 to mere 50 or so fully operational firms as of 2012.

The main reason for this can be attributed to the significantly low trading volumes, which resulted in low commissions for both investors and brokers and not to mention fierce competition.

Even with this decline in investors and brokers, the United Arab Emirates still manages to boast the most brokerage firms in the GCC (Gulf Cooperation council), 22 in Oman, 14 in Kuwait, 9 in Bahrain and 9 in Qatar.

Revenue of the DFM at a Glance

The main source of revenue of the Dubai Financial market comes from fees and trading commissions and other services provided to investors, with over 80-90% from trading alone. As a result of the recession in 2008, these trading volumes drastically declined, which led to substantial losses in the consecutive years. In terms of numbers, the trading volume dropped by over 85%, which is equivalent to 1 billion dollars of trading volume per day to less than a 100 million.

Regardless of the prices, the Dubai Financial Market gets a commission when shares are bought or sold. This financial gain was valued at AED 1.5- 2 billion per day before the financial crisis, but as a result of the lack of credit globally has plunged to just 100 million or less per day.

The DFM imposed a number of strategies to try and overcome this unfavorable financial weather, and to discourage dependency on the income generated from stock trading, with the most significant one being introducing fees for services that were once provided at no cost whatsoever. Adding to this mayhem, annual listing fees were increased, which accounted for 3% of the total revenue of the DFM.

Pros, Cons and Opportunities for Improvements of the DFM

Strengths:

  • Backed by the Government of Dubai
  • Strong brand presence
  • Low operating costs resulting in a massive margin for revenues
  • No competitors in Dubai

Weaknesses:

  • High turnover of employees
  • Income is solely from trading commissions

Opportunities:

  • Encourage membership of high valued companies such as Emirates which will boost trading volumes
  • Eradicate stringent trading regulations
  • Introduce new technologies such as the iVESTOR Card

Final Thoughts on the Dubai Financial Market:

Although the Dubai Financial Market has suffered massive losses due to the inclement financial weather in recent years, it is not as bad as other global financial exchanges.

In fact and in recent news, the Dubai Financial Market is up 40% this year, making it the world’s best performing stock market preceding Kuwait, Nairobi and Nigeria.

This is a spectacular recovery from the $115 billion debt Dubai witnessed just a few years ago and referring to recent predictions, these numbers are only going to soar!

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